If you own a business that supplies goods or services prior to payment, you will no doubt have encountered a client or two who won’t pay during your time in business.
Unpaid invoices are a very common occurrence, so it’s important to ensure that your business puts adequate controls in place to minimise the risks associated with debt collection.
One way of protecting your business against this type of risk is to have a set of solid, reliable terms and conditions. When terms and conditions of trade are written correctly, they can assist in your debtor control in a number of ways.
Your terms and conditions should clearly set out the terms upon which you expect to be paid for the goods or services being provided. If payment is not required in full prior to delivery of the goods or services, protections need to be put in place to secure payment of the balance.
The terms of trade should also require guarantees to be given by your clients. If the client you are dealing with is not an individual person (for example, your client is a company), the terms and conditions should state that anybody who agrees to the terms on behalf of that entity also agrees to accept personal liability for payment, as well as performance of any other obligations that the entity might have to you. A personal guarantee provides a second option to recover the debt from the individual(s) associated with the debtor if the company itself is in financial trouble.
In addition, we strongly recommend that your terms and conditions of trade state that interest will be applied to late payments and that the client is liable for any costs involved in debt recovery.
If it is goods that you are providing, protection should be obtained through a retention of title clause. This clause should state that although you’ve parted with possession of the goods to your customer, who is entitled to enjoy the use of them, you have the right to repossess the goods if you do not receive the balance owed.
When goods of significant value are being provided to your customer in advance of payment, it is also recommended that you register your interest (i.e. your right to those goods) as a creditor on the Personal Property Securities Register (the ‘PPSR’). Creditors registered on the PPSR are secured and therefore have priority over unsecured creditors in any situation where the priorities of creditors might be called into question. For example, if your customer is put into liquidation and their liquidated assets do not cover all debts, secured creditors registered on the PPSR would generally be paid before any unsecured creditors.
Ensuring your terms and conditions are valid
It is one thing to have sound terms and conditions of trade in place, but ensuring that your customers are bound by them is another.
There are several ways to secure the validity of your terms and conditions, including:
- Having the terms and conditions physically signed
- Stating on your quotes that acceptance of a quote is deemed acceptance of the terms and conditions
- Requiring the customer to select a ‘tick box’ acknowledgement that they have read and accepted your terms and conditions (commonly used for online transactions)
If you are unable to prove that a customer has accepted your terms and conditions, any enforcement action that you might be required to take to recover debt will be compromised.
When your clients know that they are bound by terms and conditions of trade, this is often enough to deter any thoughts they might have of not paying your invoices. However, if you find yourself in a situation where a client can’t or won’t pay an invoice, there are various options available to you for recovery.
If the outstanding invoice relates to the provision of goods and your terms and conditions include a retention of title clause, one option is to have the relevant goods repossessed.
Alternatively, if you would prefer not to repossess the goods or if the debt relates to the provision of services, you could bring a claim for the outstanding debt in court. Such a process will cost your business money, in both lawyers’ fees and court expenses, but you should be able to recover some or all of those costs from the debtor if your claim is successful and your terms state that the client is liable for debt recovery costs.
If the amount of debt is relatively small, it might be more appropriate to use a debt collection agency rather than bringing a claim in court. As long as you have sound terms and conditions outlining your client’s liability for debt collection costs, you should be able to recover the debt quickly and minimise any expense to your business.
Seeking legal assistance
Armstrong Murray’s experienced team can help you with all aspects of your legal requirements relating to debtor control.
Our commercial lawyers can assist you with the preparation of terms and conditions of trade (or review your existing terms), while our litigation lawyers can help with the debt collection process and provide advice in relation to enforcement.
P/ 09 489 9102
Andrew’s work primarily focuses on Commercial and Company Law and Commercial Leasing. Andrew’s clients appreciate his keen interest in assisting them with the unique issues involved in running a family-owned business, commercial structuring and aligned advice.
Andrew was appointed as a partner at Armstrong Murray in 2019.
P/ 09 489 9102
Jessica was admitted to the bar in August 2018 after graduating with a Bachelor of Laws (Hons) and Bachelor of Arts at the University of Auckland.
She enjoys the diversity of her role as a junior solicitor, working alongside each of the firm’s solicitors and learning from them as they navigate complex issues within their specific areas of practice.
Note: This post is brief and general in nature. You should not treat it as legal advice and should seek professional advice before taking any action in relation to the matters dealt with in this post. Armstrong Murray accepts no liability for losses suffered by any person or organisation who may rely directly or indirectly on this post.