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 and statutory rights to claim interest and compensation will help mitigate the impact of late paying customers.
When is an invoice considered overdue?
Usually you will have specified on your invoice, order or contract terms 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 or 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 services, or 30 days after informing your customer of the debt (whichever is later).
Charging interest on overdue invoices in the UK.
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 (the Act) 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 overdue payments in your terms and conditions, 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 in my terms or 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 late payments inline with the Act.
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 serve to deter any late payments from occurring in the first place.
When does the late payment of commercial debts act apply?
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).
Undisputed debts only
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.
Consumer Credit and Security exclusions
There are a few types of contracts that are excluded in the Act (section 2), specifically Consumer Credit Agreements and contracts that function via a mortgage, pledge or other type of security.
Customer relations consideration
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 and compensation additions.
How to claim compensation and interest on unpaid invoices.
Once a payment is overdue all you need to do to claim the interest and compensation is write to your customer detailing the:
If you are a VAT registered business, note that VAT should not be added to the compensation charge.
You may also be want 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 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.
Legal Advice and Action
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.
If you are a salon owner, tattoo artist or aesthetic practitioner that has been presented with a formal injury claim it can be a worrying time. Even the most reputable and experienced practitioners can still be subject to a compensation claim if a customer feels that you are responsible for them being injured after a treatment or procedure.
Fortunately, this is what your business insurance is for, and your policy should provide legal representation to respond and deal with the claim. However, insurance for businesses that perform cosmetic procedures is far from straightforward, with many standard public liability insurance policies excluding on-body treatments.
So, if you now find yourself having to consider and deal with a cosmetic injury claim, it can be helpful to know about some of the common defences that may be raised.
Contributory negligence is a legal argument that states that a person who is injured has themself also contributed to the damage that was inflicted or at the least to the severity of the injuries. So, if the injured claimant did not take reasonable care for their own safety, they may not seek full damages from the defendant.
For example, if a client undergoes a non-surgical cosmetic procedure and alleges that they are injured as a result of the aesthetic practitioner's negligence. But the customer also failed to follow the provided aftercare instructions which would mitigate the risk of any adverse reaction. The practitioner may be able to argue that the customer was contributory negligent for the injury that was ultimately sustained.
If successfully proven, contributory negligence can result in a percentage decrease on any compensation that is awarded.
Assumption of Risk.
Assumption of risk is another legal defence that basically asserts that a person who voluntarily takes a risk may not be able to recover damages if they are injured as a result of taking that risk.
For example, if a customer is advised that a procedure carries an increased risk, such as a piercing or tattoo in an unusual area and is subsequently injured. A defendant may be able to argue that the claimant knew, assumed, and voluntarily took the risk that the potential injury may occur.
This defence is known as 'Volenti non fit injuria' which is Latin and translates as 'to a willing person, injury is not done'.
Lack of Duty.
Lack of duty can be raised if a person does not owe a duty of care to another person, so essentially there is no legal responsibility between the two parties. If a defendant does not have a professional relationship with the claimant, they may not owe them a duty of care and therefore may not be liable for any injuries that the claimant suffers.
For example, if a client is injured during an eyebrow tinting procedure and brings a claim against the salon owner. If the salon owner simply rents out space to the beauty therapist that performed the procedure, they may not be considered to have a professional relationship with the injured person and be able to argue that they did not owe a duty of care to them.
While any building owner must still ensure the safety of visitors to their premises (under The Occupiers Liability Act), if this defence is successful the claimant may choose to redirect their claim to a party that owed them a duty of care for the procedure. Such as the self-employed practitioner that they contracted with and actually performed the procedure or treatment.
Legal Advice on Defendant Cosmetic Injury Claims.
If you are a business owner or practitioner that has received a Claim Notification Form or Letter of Claim from a law firm, you should seek your own independent representation as soon as possible. You should also retain all documentary evidence relating to the incident such as patch test results, consent form, pre-appointment questionnaire and details of any products or equipment that were used in the procedure.
Addressing allegations of negligence and establishing fault (liability) are not straightforward matters and specialist legal advice should be obtained before responding.
A solicitor that specialises in defending cosmetic injury claims will be able to consider the specific circumstances around the alleged incident and advise you appropriately on the potential defences and your liability position.
Applications for pre-action disclosure can be common in personal injury claims where a party (most often the Claimant) seeks specific information from the opposing party (the Defendant).
If you have received a pre-action disclosure application ('PAD') in relation to a personal injury that has been alleged against you or your business, usually your insurer will be dealing with the claim and so will have appointed legal representation. Your solicitors should therefore respond on your behalf to comply with the process.
However, if you do not have insurance to cover the claim or solicitors acting for you, it is important to understand the basis for the application and respond as soon as possible.
Pre-Action Disclosure Application on a Personal Injury Claim.
PAD's are usually issued by a Claimant's solicitor when the Defendant has been unresponsive or has refused to provide information that has been requested.
A solicitor acting for a Claimant can request copies of all relevant information relating to the alleged incident that led to the injury that the Defendant possesses or that is in their control. This information is then used to assist them in evaluating the prospects and liability of any claim.
The legal basis and procedure for the disclosure of documents is detailed in section 7 of the Pre-Action Protocol for Personal Injury Claims and section 31.16 of the Civil Procedure Rules.
Depending on the type of claim (accident at work, dog bite etc.) the evidence that can reasonably requested may include:
A PAD should not be the first correspondence you will receive regarding a claim, as a Letter of Claim or Claim Notification Form is usually sent beforehand. This will have detailed the specific allegations of the claim and often requests that the additional information is provided or at least preserved (i.e., CCTV footage not be deleted).
If this information isn’t forthcoming, then the Claimant's solicitor may write again threatening an application for pre-action disclosure and putting you on notice that you will be liable for the costs incurred if an application must be made to the Court.
You should seek legal advice as soon as possible to comply with the request and to avoid having to pay these additional costs.
What is included in a Pre-Action Disclosure Application?
When a PAD is made, the documentation you receive can consist of the Application Notice, a Witness Statement, Order/Draft Order, copies of previous disclosure requests, and sometimes a notification to attend a hearing.
The Witness Statement will detail the attempts the Claimant's legal representatives have made to obtain the documents, the exact documents that are being requested and why these should be disclosed.
The Order (or Draft Order) will state what timeframe the documents should be provided in and the costs the Claimant is now entitled to receive from you as a result of having to make the application.
Responding to a Pre-Action Disclosure Application?
It is advisable to obtain legal advice to deal with the threat of a PAD or the application itself. It is a formal legal document that has been made to the Court and should be treated seriously.
A Defendant personal injury solicitor will then be able to advise on the validity of the application, assist in complying with the Order and arrange representation at any application hearing (should one be required).
Failure to fully comply or respond to the application and subsequent Order can result in the Claimant's solicitor seeking a Penal Notice, which warns a Defendant that they may face further sanctions which could be as serious as imprisonment or other punishment that is permitted under the law.
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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