Being a business owner means that making agreements and signing contracts can be a regular occurrence. These formal agreements protect your business and ensure that suppliers, business partners and even customers uphold their end of the contract.
The clauses these contracts contain form the backbone of a business's operations, covering the supply of goods, delivery of services, timeframes for completion and when payments are due. As such not complying with any of the conditions in a contract will often lead to a dispute.
When a party fails to fulfil the terms and conditions in a written agreement, without a lawful or valid excuse, this is referred to as a breach of contract and you must decide how to deal with the breaking of the agreement.
But before you start filling out the court forms, a first step in dealing with a breach is to formally advise the other party with written notice, known as a 'Letter of Claim' or 'Letter Before Action'.
What is a Letter Before Action?
A Letter Before Action is the starting point of many forms of civil legal proceedings and basically sets out your legal claim. It's important to keep in mind that while a Letter Before Action is the first step in taking formal action, it should be the last step in trying to deal with the issue informally.
Calling in lawyers and involving the court at the first inkling of a problem usually won't be helpful. If an aspect of a contract hasn't been complied with or is outstanding, then a polite (but firm) enquiry to the other party on the reason and how they intend to resolve the should be your first act.
Then if informal discussions don't start the process to resolve the issue, sending a Letter Before Action is often a low-cost route to opening a dialogue with the other side to achieve a resolution.
What should a letter before action contain?
Background and context
The letter should start by referencing the specific contract or agreement that has been breached, when it came into force and what it covers. You shouldn't assume that the person who deals with the letter is aware of the existing business relationship and that an agreement in place.
Circumstances and facts
Briefly explain what has occurred and how it is considered to be a breach of the agreement. Ideally point to a specific obligation or clause in the contract and how this obligation hasn't been met. If the failure has resulted in a loss or damage that can be calculated, then this should also be included.
Remedy and resolution
State how the breach can be remedied and how the matter can be resolved to your satisfaction. This resolution will be down to the type of agreement and specifics of the breach, but could involve immediate payment of an outstanding amount, the return of a supplied product, cancelling of a service/contract or a monetary payment to cover a loss.
Timeframe and response
A reasonable period should be given for the other party to comply or at least acknowledge and respond to the letter. A timeframe of at least 14 days would be a minimum, and you also need to comply with any reasonable requests for additional information.
Consequences and legal action
Finally, the whole point of the Letter Before Action is to set out your claim and place the other party on notice that a failure to act could lead to you starting legal proceedings. This should be stated in the letter along with highlighting that you will also be looking to recover any additional costs that are involved with court action from them as well.
Legal Advice on a Breach of Contract.
Before starting down the path of court action, it's always advisable to seek some initial legal advice. While the breach may be an obvious one, a contract dispute lawyer will be able to advise you on your prospects, how any damages would be calculated and what legal proceedings may cost.
Importantly they can also draft your Letter Before Action ensuring it accurately represents your claim and that it complies with the court's Civil Procedure Rules and Pre-action Protocols.
A well-researched and professionally drafted Letter Before Action is your best chance of achieving an early and cost-effective resolution to a contract dispute, so it's well worth getting a solicitor involved from the outset.
Late paying customers are usually the primary source of business cash flow problems. Research by Siemens Financial Services found that a typical UK SME spends an average of 130 hours a year chasing late payments and unpaid invoices often account for 14% of a small business' annual turnover.
How you manage late payers can have a huge impact on your business, so utilising your legal rights to claim interest and compensation will help mitigate the impact of late paying customers.
When is a payment considered late or overdue?
Usually you will have specified on your invoice when payment should be made by. Often this is 14, 30 or 60 days from the date of the invoice or delivery of the goods and services.
If there is no payment period agreed, then legislation sets a default period of 30 days.
Therefore, in the absence of a set payment period you are able to class a payment as late 30 days after you delivered the goods or service, or 30 days after informing your customer of the debt (whichever is later).
Claiming late payment interest and compensation
All businesses have a statutory right to charge interest on any late payments. This is detailed in the Late Payment of Commercial Debts (Interest) Act 1998 which creates a right to statutory interest in commercial contracts for the supply of goods and services.
Therefore, if you supply goods and services for business purposes and do not have a provision for claiming interest on late payments in your terms of business you can rely on the above Act to claim both interest and compensation. In summary it allows a business to:
The exact amount of compensation that can be claimed varies depending on the value of your invoice:
Do I have to include something on my invoices to claim interest?
No, there is no requirement to inform your business customers at the time of the order or purchase that you will claim interest and compensation for any late payment.
However if you do make customers aware that further charges will be incurred on overdue amounts, either on your invoices, statement of account or Terms and Conditions, it may importantly deter any late payments from occurring in the first place.
Are there any instances when you can't claim interest on debts?
Business to Business transactions only
Importantly interest and compensation under the Act can only be claimed on commercial contracts (B2B) and not on consumer contracts (B2C).
If there is a genuine dispute as to whether the customer owes the invoice amount, then you will be unable to add further charges until the dispute has been resolved and the amount owed clarified. Therefore, it is always better to enter a dialogue with customers as early as possible as to why they are disputing the debt and haven't paid.
Whilst it is your legal right to charge compensation and interest on any overdue commercial debts, you may also want to consider the impact on future business with the customer. If you've had a good trading history with them up until recently, you may wish to contact them by telephone to make sure they are fully aware of the overdue debt before writing to them to advise of the interest charges.
How to claim compensation and interest on overdue invoices
Once a payment is overdue all you need to do to claim the interest and compensation is write to your customer detailing:
It would also be helpful to refer to the Late Payment of Commercial Debts (Interest) Act 1998 as the basis for your calculations in case your customer is unfamiliar with the entitlement.
Finally, keep a copy of the letter as it will provide useful evidence in the event you need to begin court action to recover the debt in the future.
Late Payment Eligibility ChecklistWhen you can claim under the Late Payment of Commercial Debts Act
What if a customer refuses to pay the interest or invoice?
If the charges that have been added are the only reason for none payment, you may wish to take a commercial view on the debt.
For example, if your unpaid invoice is £9,000 but your customer is refusing to pay the additional £70.00 late commercial payment compensation, you may wish to forgo the compensation entailment in favour of recovering the outstanding invoice amount quickly.
But if payment isn't forthcoming even after advising your customer of the accruing daily interest, then your next step is to start the process of pursuing the debt through the courts.
At this point it would be beneficial to contact a solicitor to advise on what debt recovery options are available to your business and the most cost effective way to recover the monies owed. This usually involves first sending the debtor a formal Letter Before Action which will again detail the amount owed, the interest and compensation due and inform that if payment is not forthcoming court proceedings will be issued without further notice. Interest will still continue to be charged during the court process as well as additional amounts being able to be claimed to contribute to your legal costs.
Whilst hopefully the combination of chasing, advising of interest accruement and a solicitor Letter Before Action will result in swift payment, you need to keep in mind that any court claim must be started within six years of the last date a payment was made or when the debt was acknowledged.
Unfortunately, in most businesses the word "discipline" carries negative connotations, with most employees and managers instantly associating it with misbehaviour, misconduct and mistakes. This can easily lead employees to think that a disciplinary procedure is only there to punish and dismiss them.
While there's no denying that having a formal process in place protects your business in the event that misconduct action has to be taken against an employee, but establishing a Disciplinary Policy doesn’t have to be done in a negative light.
Discipline [noun] - 'the practice of training people to obey rules or a code of behaviour'
Disciplinary procedures should be used to ensure that your employees are aware of the business rules and the performance standards that are expected from everyone in the company.
Publishing these rules, standards and procedures in a written Disciplinary Policy is the first step in ensuring this message is communicated clearly.
Employer legal obligations
First things first, all employers need to provide a new member of staff with a 'written statement of employment particulars' within the first two months of their employment.
Often this is covered off by a Contract of Employment signed and agreed before the employee starts, but it doesn't have to be. It can also be a more simpler statement detailing the job description, hours of work, holiday entitlement, salary etc.
However, regardless what document is provided to the employee, it needs to detail the disciplinary process or at the very least where it can be found.
The Disciplinary Procedure or Policy itself should follow the Acas Code of Practice which sets out criteria for a reasonable process that both employees and employers should follow. Much of this will be commonsense such as allowing an employee to be accompanied, providing minutes of meetings and giving the right to appeal any decision.
If an employer's procedure doesn't comply with the Acas Code of Practice (or a procedure isn't followed at all) they could be ordered to pay additional compensation to an employee should an employment tribunal ever need to become involved.
Advantages of a disciplinary policy
Secondly business owners and HR need to present a company disciplinary procedure as a positive tool for effective performance management.
When implemented correctly, the policy's primary function should be as a way of adjusting employee behaviour to aid performance and improve employee alignment with the business goals. Informal discussions and coaching needs to be the first step and at the forefront of the policy, clearly emphasised over a last resort of using sanctions and penalties.
Writing a disciplinary procedure
Hopefully you're convinced of the merits of implementing a disciplinary policy and procedure in your business; and if you already have one in place, the benefit of regularly reviewing it to ensure it covers both your employer obligations/protections as well as focusing on performance improvement.
If a disciplinary policy is written correctly, communicated clearly and implemented effectively, your business will greatly reduce the risk of employment law issues, and most importantly, create a transparent working environment for your team to thrive in.
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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