In October 2017 the debt recovery process for businesses owed money by individuals changed significantly.
Previously there was no specific pre court action process for recovering debts, but on 1 October 2017 the Pre-action Protocol for Debt Claims came into force. A Pre-action Protocol sets out the various steps that the court expects both sides to take before commencing legal action. Issuing legal proceedings should always be a last resort, and so both parties need to have ideally first tried to settle their dispute without having to involve the court. Whilst there are already Pre-action Protocols for other types of civil claims such as personal injury, professional negligence and possession claims, certain business debts will also now need to follow a set 'pre legal action' procedure. The Protocol is designed cover businesses claiming repayment of a debt or unpaid invoices from an individual. However the definition of an individual includes sole traders, so the Protocol also applies to business to business debts when a sole trader is involved. There are also a few exceptions where the debt protocol doesn't apply, mainly around claims where there currently is another Pre-action Protocol that exists (such as with mortgage arrears or construction and engineering disputes). The debt recovery protocol.
Part 2.1 of the Pre-Action Protocol outlines its aims, however in summary they are to:
Business to business debt recovery protocol.
While a primary goal of the protocol is to provide additional time and protections to consumers, it actually includes many business to business debts. This is because the protocol considers both consumers and sole traders to be individuals.
What happens if you don't follow the debt protocol?
Failure to comply with the Protocol prior to commencing court proceedings may result in the court imposing sanctions against the creditor or claimant. The sanctions imposed are likely to be in relation to costs.
To quote the Protocol: "If a matter proceeds to litigation, the court will expect the parties to have complied with this Protocol." Debt collection under the pre-action protocol.
Pre action Protocol Reply Form.
If the debtor states that they are looking to gain professional debt advice, the creditor has to permit the debtor reasonable time for them to obtain this advice, at least a further 30 days. This may be longer if the debtor can provide a reasonable explanation as to why it will take additional time to obtain the advice.
If the debtor states on the Reply Form that they need more time to pay the debt, the parties should attempt to reach an agreement for the amount to be settled by instalments. If a payment schedule or agreement cannot be reached, the creditor must confirm in writing why it does not accept the debtor's instalment proposal. Should a partially completed Reply Form be received, the creditor is expected to make contact with the debtor to discuss the content and obtain the further information necessary to understand the debtor's position. A creditor ignoring the debtor's reply and their reasons is not an option. Use of Alternative Dispute Resolution (ADR) in debt claims.
If there is a disagreement about the debt being owed or the exact amount, then the parties should consider mediation or any other forms of dispute resolution rather than commencing court proceedings. This may be a formal process with an ADR provider or may simply take the format of a documented discussion and negotiations.
After these negotiations if an agreement is still not reached, then the creditor should give the debtor notice of at least 14 days of the intention to now commence court proceedings. Debt collection pre action protocol.
The new Protocol creates a more formal and paper heavy procedure for your business to collect overdue invoices, as it requires that additional documentation and time is given to the debtor.
Plus there is always the potential for persistent debtors to use the Protocol to further delay payment. So as a business you need to stay on top of your credit control procedures and issue a Letter of Claim as soon as it is reasonable to do so. Also having a solicitor draft the letter in compliance with the Protocol ensures that you can move quickly to court action should payment not be forthcoming.
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In a perfect world all professional relationships would work out exactly as planned, but sadly we live in the real world and disagreements are never far away. Every year thousands of business disputes happen as customers, manufacturers, suppliers and even local authorities clash over contracts, agreements and payments.
When a dispute occurs, you need to apply rational and objective analysis to make the best decision for your business. This means compiling evidence and gaining advice on the likely strengths and weaknesses of your case, as well as the resources you wish to use to get a favourable result. How to resolve a business dispute.
Resolving a dispute in the correct way will save your business money, and you, a great deal of stress. With this goal in mind we wanted to run down the five key steps in getting a favourable resolution to your business dispute.
1. Review the contract and your position.
To start, you need to assess whether you have a strong case or whether you are likely to be at risk of losing in the long run. To do this, you need to examine exactly what has happened as well as reviewing the relevant documents between the other party and yourself.
Do any legal agreements or contracts exist between you? If so then find the relevant clauses that apply to the issue you are in dispute over to confirm there has been a breach. If you don't have a formal contract or agreement in place, do you have any other written correspondence or evidence of the business relationship? Have you exchanged emails or text messages that show what was required or expected from the parties involved? It could then be that the law suggests there is an implied contract in place from historical actions or transactions. 2. What outcome do you want?
As soon as you know the strength of your case, you should objectively consider the result that you want to achieve or are willing to accept as a compromise.
Business disputes usually involve a breach of contract and the party who suffers a breach is entitled to be placed in the same financial position as if the contract had been fully complied with. Therefore while you may have the right to be compensated for the full amount, you may be willing to accept a lesser figure or other compromise to achieve a resolution. For example, if a customer cancels a contract without providing the required notice as they are selling their business. You may be open to allowing them to end the contract early on the condition that the new owner agrees to pick up your services or enters a similar contract with you. You may also want to consider ongoing relations as part of what outcome you are seeking. Some business owners want to set an example to prevent other customers or suppliers breaking contracts and repeating the situation. Even though taking an uncompromising approach is not advised and may be expensive in time and money. On the flip side, you may have had a good relationship with the other party and so be open to find a more amicable solution and keep working with them. You should always assess the dispute with your 'commercial hat on' and decide what course is best for your ongoing business whilst minimising the associated risks and costs. 3. Assess the opposition.
Often businesses neglect to think of the other side in a dispute, but it can be valuable knowing their position and what they want or don't want to happen. For example:
4. Consider the cost of a contract dispute.
With all the above in mind, you need to weigh up your options and how much each course of action will cost in time and money.
Your case prospects will factor into this, as with a strong case going all the way to court may be the best option. Additional costs like the court issue fee, hearing fee etc. can be recovered as part of your claim when you win. While on weaker cases or those that are very complex, making a compromised offer for a quick settlement may be more efficient. Legal representation will also incur a cost, so it's important to discuss fees with your solicitor when considering legal action. Having all the potential legal and court costs in mind will allow you to make an informed decision when looking at what you may recover through litigation or are willing to offer/accept as a compromise. 5. Have a business dispute strategy.
Once you have combined your own research with legal advice, you can plan an approach that gives your business the best chance of achieving its desired outcome.
You may then decide that an informal chat with the other party outlining your findings may bring about an agreement. Alternatively you may wish to instruct a solicitor to write a Letter Before Action, outlining your claim and giving notice to your opponent that if a settlement isn't made in a defined timeframe court proceedings will be commenced against them. When it comes to disputes, a court hearing is often a last resort as there are many other solutions that are generally found before it gets to this point. Even if court proceedings are issued, settlements are usually achieved before an actual day in court is reached. While you should always have a strategy and budget in mind, don't rule out altering this plan as the situation develops. Mediation, negotiation or compromise should only ever be ruled out after you have considered them thoroughly. Each dispute is unique and the optimum way to resolve them is via careful and early analysis of the situation and prospects. This is why there is no substitute to taking legal advice on your dispute as early as possible. Need advice on handling a contract dispute?Business Dispute Advice
In business many people struggle when asked to review a contract or an agreement that has been presented to them. After all when finalising a deal or new business relationship, you are more likely to be focusing on the logistics and implementation of the actual deal than the wording of the contract.
However quickly glancing at a contract and just signing it to 'get the ball rolling' should be done at your peril. Getting professional legal help with the document is your safest option, but if you're in the early stages of going through an agreement we wanted to share a few contract review tips on how to read a contract like a lawyer. Contract review process.
A contract is simply a written agreement between two or more parties to do (or not to do) a particular action. When correctly drafted and signed, a contract becomes a legally binding agreement that both parties must comply with.
The most important aspect of any contract is to precisely articulate the arrangement that has been agreed between the parties, ensuring it is in line with current law and legislation. The remainder of the contract should then document how any foreseeable scenarios will be dealt with for the duration of the agreement. Such as implementation, timings, payment, failures, amendments, disputes and termination. With this in mind it's time to begin the process of a detailed read through to understand the key clauses and look for anything that’s ambiguous or absent. Definitions in contracts.
The major terminology or wording used should be specifically defined, either in the body of the contract or in the case of a lengthy document in a dedicated 'Definitions' section. Disputes often arise if a term isn't clearly documented and is just left for each party to interpret. For example, common terms such as:
Do you have a contract that requires a legal review?Business Contract ReviewIdentifying parties to a contract.
The individuals or businesses that are entering into the agreement should be clearly defined. If only the name of a business or individual is documented, it may be considered ambiguous should you ever need to enforce the contract.
In the case of a limited company make sure their registered office and company number is recorded which precisely identifies them. With individuals detail their trading name (if a sole trader), address and date of birth. Duration, termination and renewal.
The duration that an agreement covers or remains in force is an important clause to consider. While the parties may not want to be bound to an arrangement forever, they also may not want to be entering into a new contract every few months. Therefore, each party needs to consider what is a reasonable period for the contract to cover and how any extension or termination is dealt with.
Indemnity clause and limitation of liability.
Indemnity is when a party agrees to protect and compensate another party from losses that may occur in the event of a specific breach or negligence. For example, a retailer may seek indemnity from a manufacturer in the event the products supplied are defective and a claim is made against them by a consumer.
A limitation of liability clause is used to restrict the amount a party pays in the event another party suffers a loss due to the contract. Without this term, a party may be liable for an unlimited amount of damages and financial compensation. Both these clauses require careful and clear drafting if they are to successfully manage the risks posed by a contract whilst not impacting a party's statutory rights. Governing law, jurisdiction and dispute resolution clauses.
There's little point in carefully drafting a legal document without specifying the law and jurisdiction under which it falls.
You may think this is only important when dealing with international agreements, however this isn't the case. The UK alone has three legal jurisdictions (England and Wales, Scotland and Northern Ireland) each of which has their own distinct legislation. A contract should clearly define which legal system it operates under and the court any dispute will be handled in. On the subject of disputes, court action should always be a last resort, so it is also worthwhile to consider dispute resolution options as part of the agreement. A simple alternative dispute resolution clause that requires all parties must first undertake negotiation or mediation in an attempt to resolve an issue can save both time and money should a disagreement ever arise.
Legal document checking.
If you are presented with a contract prepared by another party or their solicitors, there really is no substitute for getting your own independent legal advice on its content.
Likewise if you have been using the same contract or terms of business for several years, how confident are you that it still stands up to the latest legislation? Instructing a solicitor to review and advise on the contract should be seriously considered. Many will be able to offer a fixed fee service and by acting with your best interests in mind, tailor a review to focus on the risks you may be exposed to. |
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