In brief - Identifying terms and conditions on which debt is based is key
As it is often the case that no single document contains the terms and conditions of supply, it will be important to identify those on which the debt is based. A written contract that sets out the relevant terms of trade should allow for interest payments on overdue debts and a reasonable date for payment. Provisions on demand for payments, including those dealing with a liquidated damages clause, should be followed in accordance with the terms of the agreement.
How much is my debt?
In the first article in this series about debt recovery entitled Effective debt recovery starts with identifying your debtor
, we discussed the importance of correctly identifying your debtor. This article looks at quantifying your claim. This may seem like a simple question, but there are many issues that can arise.
For the purposes of this article, we will assume that a debt arose due to the supply of goods or services.
Battle of the forms complicates identifying particular terms and conditions
The easiest situation is where you have a written contract that sets out the relevant terms of trade, you have supplied goods or services to a customer in accordance with written purchase orders and invoices, you have delivery receipts evidencing delivery of the purchased goods, and there is no dispute that might reduce the claim. Of course, we do not live in a perfect world and, in practice, one or more of these things is absent.
Firstly, it is important to identify the particular terms and conditions upon which the debt is based. It is often the case that there is no single document that contains the terms and conditions of the supply. It is not uncommon for a customer to have signed a credit application with standard terms, the purchaser to have issued a purchase order containing the purchaser's standard terms, and for the invoice or bill of lading issued by the supplier to contain further terms, which may or may not be consistent with the standard terms set out in the credit application.
This is known as the "Battle of the Forms", and can lead to significant argument about the specific terms and conditions of a sale. The result will always depend upon the particular circumstances, but as a general rule the last terms provided, following which the delivery was made or accepted, will usually be the accepted terms.
However, this general rule is not automatic. It should also be noted that any discussions between the parties, or the relevant employees of the parties who conduct the actual buying and selling, may amend any standard terms either in total or for a particular transaction. Any of those types of discussions may or may not be reduced to writing in letters or emails.
Terms of trade should provide for interest on failure to pay debt when due
Whether you are entitled to interest on an outstanding amount is determined by the terms of the agreement. If your agreement does not expressly allow you to charge interest on unpaid amounts, then you will not be entitled to recover interest on the debt unless you get a court judgment.
Once you commence legal proceedings for recovery of the debt, and should you proceed to judgment, then a court will make an order for interest to be paid on the debt from the date of demand. This interest is simple interest only. This is a strong argument for ensuring that your standard terms of trade provide for the payment of interest upon failure to pay a debt when due.
Liquidated damages must be a genuine pre-estimate of non-defaulting party's loss to be enforceable
One issue that sometimes arises in quantification of claims is when a contract includes a provision for liquidated damages, usually arising as a result of delay in provision of goods or services, or completion of a project. The idea behind a liquidated damages clause is to simplify enforcement. The remedy for a breach of contract, which is generally caused by a delay, at general law is the damage suffered by the non defaulting party. The liquidated damages clause seeks to quantify that damage, so that the non defaulting party may immediately seek payment of the stated amount rather than having to prove the actual amount of their loss.
In order to be enforceable, liquidated damages must be a genuine pre estimate of the loss suffered by the non defaulting party by reason of the breach, otherwise it will be unenforceable as a penalty. This is an issue that can quickly become complicated. In the first instance, it is usually best to demand payment in accordance with the liquidated damages clause.
Failure to follow demand provisions may render actions for recovering debt invalid
Your contract should provide a date for payment, which is commonly a period of days or weeks following provision of an invoice. If your contract does not contain any time for payment, then the general assumption is that a creditor is entitled to require payment within a reasonable time. "Reasonable time" is a term whose meaning depends upon the particular circumstances. For example, payment of a small trading debt within 14 days would most likely be a reasonable demand, whereas repayment of a large loan may not be reasonable within the same timeframe.
Once you have determined the amount of the debt and that it is payable, you should make a formal demand for payment of the debt in accordance with the terms of the agreement, if the agreement contains any demand provisions. If the agreement contains formal procedures for making a demand, and you do not follow those procedures, then any action that you commence for recovery of the debt may be found to be invalid.
What you can do when your debtor does not pay the amount that you have demanded and the basic court procedures around debt recovery proceedings is the subject of the next article in this series about debt recovery: Debt recovery proceedings: what are the basic Court procedures?
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.