What can be done about customers withholding payment?

What can be done about customers withholding payment?

Unfortunately, customers withholding payment for services, is a fundamental and difficult problem faced by many suppliers. It is an area of commercial law that needs to be understood by the supplier, as making the wrong call could result in claims of breach of contract by the customer.

There are some safeguards in place to guarantee that suppliers are not left without any leverage if this kind of situation arises.

Suspending the services

A supplier may wish to suspend performance of a contract where a customer is in breach of its payment obligations. The first action to be taken in this case should be to look at the contract to recognise any express provisions put into place. A formal contract not only enables suppliers to record exactly what they will do for a customer, it also gives them an opportunity to state how important matters like method and timing of payment or settling disputes will be handled, for protection of their business. A formal contract will also ensure a smooth transition at the end of the contract period which can avoid a costly and time consuming litigation.

Within contracts, there will usually be a section centering on the customer’s requirement to pay and the consequences of breaching those obligations. This section should set out whether there is a right to suspend services until the sum is repaid. The contract should ensure that it adequately deals with the practical consequences of a suspension, how long the contract can be suspended for before termination may occur and what happens if services are to resume following suspension.

However, if a contract doesn’t include a right of suspending the service in this situation, there could be consideration of implying one. ‘Implied’ is used to describe an agreement or term which is not reduced to writing, but is created on the basis of the behaviour of, or the original intention of, the parties involved.

Terminating the contract

Within a contract there will normally be a section concerning termination of a contract upon the happening of certain events. A well worded termination clause can include whether notice needs to be given and is usually a last resort option for the supplier if the payment is not being received.

Possible risks

Having no express right to suspend the services can often result in the matter being taken to court. In this case, the court would analyse whether suspension or termination can be implied to the contract.

It is clear that contracts for service are paramount and should be drafted with care and precision. They need to be specific for each business before commencing a commercial relationship, otherwise problems stated above are likely to arise. Suppliers should recognise that non-payment is key issue that they should be protected against as much as possible.

A smaller cost at the outset in getting your contractual relationship formalised can be far cheaper in the long run than if you have to pursue a customer through court without a written agreement.

If you would like anymore information regarding customers withholding payment, how you can safely deal with this issue or drafting of contracts then contact our Corporate & Commercial team on 01283 526200. 

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