Effective contracts help protect a business

Ed Husband is a partner and head of litigation and recoveries at law firm VWV Ed Husband is a partner and head of litigation and recoveries at law firm VWV

The first few months of 2018 have seen the financial demise of three high profile businesses - Carillion, Maplin and Toys R Us. In addition, administrators from KPMG have been appointed over Oyster Marine Holdings and Oyster Marine, writes Ed Husband.

Even in a business that appears financially sounds, things can deteriorate very quickly so it’s important to have an effective contract in place to protect a business from the beginning of the legal relationship.

Effective payment terms: is your bargaining position strong enough to require payment before delivery of your product or service, either in whole or in part? If not, ensure that your credit terms are short and effectively policed.

Rights in the event of non-payment: charging interest for late payment should be a given, but what about your right to terminate the contract or withhold services or payment?


Insolvency events

In what circumstances can you bring the legal relationship to an end? As well as for non-payment or breach of the contract, provision should be made for other insolvency events, such as liquidation or administration.

Retention of title: these clauses have long been included in standard contractual terms and can operate effectively to enable you to recover your goods provided that they are properly incorporated, worded right and enforced promptly in the event of non-payment.

Your contractual terms should prevail as a customer's terms will invariably favour them. Equally, changes to insolvency legislation and processes mean that many older contracts are often simply not fit for purpose.

Of course, there is a limit to what can be achieved in documentation and if practicable any party entering into a commercial contract should ensure that a proper credit control system is in place.

Financial position

Where the sub-contractor or supplier has concerns as to the financial position of the company they should consider reducing the period and/or amount of credit allowed, obtaining alternative forms of security such as a bank guarantee or letter of credit and taking out credit insurance.

It is equally important to act promptly to enforce your contractual rights as when a company goes into compulsory liquidation or administration, any existing legal proceedings are suspended and a creditor cannot begin new legal proceedings against the company unless a court gives permission.

However, some contractual rights can still be enforced without needing to start court proceedings. For example, if you have taken security to secure a debt, you will stand first in line to recover any monies out of the insolvency.

Mutual debts

If there are mutual debts owed between you and the insolvent company, these will be automatically set off in either a liquidation or administration. This will mean that any monies you owe can be set off in full rather than you only receive a small dividend.

And lastly, the ROT rights mentioned earlier will survive insolvency, meaning that you will retain ownership of your goods and be entitled to recover them. If a liquidator or administrator sells those goods, he or she can be personally liable to compensate you. However, insolvency practitioners will scrutinise such ROT clauses very carefully, so it’s important to get robust professional advice when faced with this situation to maximise your prospects of a successful recovery.

Ed Husband is a partner and head of litigation and recoveries at law firm VWV.

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