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What are the Advantages of Robust Commercial Contracts?

26 July 2023

In the world of business, commercial contracts form the backbone of transactions, defining the rights and obligations of parties involved. While these agreements should provide a framework for smooth operations, issues arise when clients fail to comply or fulfil their payment obligations. Having a written agreement is critical to safeguard against non or late payment.

Key terms which should be included to safeguard against non or late payments are:

1) Requesting payment in advance of the delivery of goods or services.

If you can negotiate this, requesting full or part payment in advance will help protect against a client who fails to pay. It also assists with cash flow.

2) Reducing the period between delivery/provision of services and payment.

3) Staged payments at clearly identifiable milestones.

In certain situations, where there are a number of separately defined goals, set milestones with a payment being made reaching each milestone has many benefits. Aside from cash flow, it also puts you in a better position to get paid as you would have the right to stop providing the services until you are paid. Clarity in drafting the contact is key here to avoid any disputes between the parties regarding whether a milestone has been achieved or not.

4) Guarantees

Having a guarantee provides the supplier with assurance that in the event of non-payment by the client, the guarantor will make the payment. This would probably be most relevant where the risk of not being paid is high, such as anticipated financial difficulties or a prior poor payment history.

5) Interest on late payments

Having a provision in the contract for interest to be charged if payments are made late can help to incentivise a customer to pay on time.

6) Letters of credit

Where goods are being exported, a clause could be included in the contract requiring payment by a letter of credit. This is a contract where a bank agrees to pay the seller of the goods against the presentation of specific documents relating to those goods. These give the seller assurance that they will be paid for supplying the goods.

Every commercial arrangement is likely to carry a level of risk regarding payment, but a well drafted contract can help to significantly reduce these risks moving forward.

To further safeguard your business against non-payment, it’s worth considering incorporating a right to suspend work clause in your commercial contracts. This clause empowers you to halt ongoing services or deliveries if the client fails to fulfil their payment obligations within a specified timeframe.

The right to suspend work clause can have several advantages:

1. Leverage: The ability to suspend work can serve as a powerful negotiation tool to compel clients to resolve payment issues promptly.

2. Risk Mitigation: By suspending work, you minimise the risk of investing additional time, effort, and cost into a project without being paid.

3. Protection of Cash Flow: Suspending work ensures that you do not accumulate excessive unpaid amounts, which can strain your cash flow and hinder your ability to operate effectively.

4. Legal Recourse: Including a right to suspend work clause strengthens your legal position and demonstrates your commitment to enforcing payment terms, should disputes escalate.

Commercial contracts provide a crucial foundation for successful business relationships, ensuring clarity and clearly understood mutual obligations. By incorporating clear payment terms, interest on late payments, and the right to suspend work, you can protect your business interests and encourage clients to meet their payment obligations promptly. It will also put you in the best position to explore payment in the Court if it reached that stage. Proactive contract management reduces the risk of financial strain and promotes a healthy and sustainable business environment.

If you need help with your terms of business or other commercial arrangements, our team of commercial solicitors are here to help you.

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