Be smart but don’t cheat…

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There is a reason why mega successful businesses spend thousands, sometimes millions of pounds/dollars on legal advice. I cannot tell you the number of times that I have almost cried because a client has brought me a problem that could have easily been avoided IF legal advice had been sought in the first place. In the long term, getting proper legal advice could save you so much MONEY and isn’t that what it’s all about – MONEY? You know that saying, what’s worth doing at all is worth doing well…it’s said for a reason! I don’t feel good billing you for my time when it’s for an issue that really shouldn’t have ever become an issue!

Think of it this way, when you have a tooth ache you go to a dentist -you don’t pull out the tooth yourself. When you feel sick you go to a doctor you don’t diagnose yourself. SO, if you need a contract drafted, guess what, you DON’T do it yourself. You go to your lawyer! You should be focusing all your energy into your product/service/idea not struggling to draft a 30 page contract or represent yourself at Court.

So what am I saying? I’m saying be smart BUT don’t cheat.

I am a lawyer and it took me 6 years of training to qualify to be one (a 3 year degree, a 1 year professional practice qualification and a 2 year training contract at an international law firm in the City). You cannot read this blog and become a lawyer BUT you CAN read this blog and become legally smart so that when you seek proper legal advice you are not doing so blindly. You are firing out questions and demanding the best service possible!

It’s quite simple, do things properly at the outset and you will reap the rewards.

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The impossible: force majeure clauses

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Before you read on, please note that this post is not for the faint hearted. This clause is really important in any contract and I’m going to try and give you a full explanation of it.

Force Majeure translates to a “superior or irresistible power” in the beautiful French language.  In English law, it refers to a clause in a contract which protects the parties from their contractual obligations in circumstance where that contract, by no fault ofthe parties, becomes impossible to perform. In such a scenario, the parties will usually have the right to terminate the contract or to suspend the contract, if the impossible circumstances are likely to come to an end within a certain time frame. This is a very useful clause when faced with the effects of acts of God (tornadoes, lightning strikes, floods), governments and regulatory authorities – none of which give a hoot about your contracts!

There are generally three essential elements to an event being determined force majeure:

  • It can occur with or without human intervention.
  • It cannot have reasonably been foreseen by the parties (for example your machine breaking down is foreseeable and so is not a force majeure event).
  • It must have been completely beyond the parties’ control so that they could not have prevented its consequences (for example a riot, like the London riots).

A very basic force majeure clause will look as follows:

A party (affected party) shall not be liable to the other party for any failure to perform the Agreement caused by circumstances outside the reasonable control of the affected party.

What exactly is “circumstances outside the reasonable control of the affected party”? Well the answer is, how long is a piece of string! This is where your lawyer steps in. Over time, lawyers have come up with a list of events which are generally considered to be force majeure events. These events are as follows:

  • Fire, flood or other natural disaster;
  • malicious injury;
  • strikes, lock-outs or other labour troubles;
  • riots;
  • insurrection; and
  • war.

However, please note that the above list is not exhaustive so lawyers have also taken to adding sweep up language to cover anything else that might occur with force majeure characteristics. For example many clauses end their list with “ and any other reason of like nature not the fault of the party in performing the contract”.

The better force majeure clauses oblige the party relying on the force majeure event to do certain things so as to help the contract to survive as far as possible. The relying party must usually promptly notify the other party of the force majeure event. The relying party is then only excused from the contract for the period of the delay caused by the force majeure event. During that time, the relying party must take what steps it can to mitigate the effects of the force majeure event on the contract. In other words, the relying party must do its best to find another way, where possible, to fulfil its contractual obligations. HOWEVER, the period of delay can’t go on forever, so where the force majeure event exceeds a certain timeframe the party entitled to the performance of the relying party may terminate the contract. For example “if any delay exceeds six months, then the party entitled to such performance shall have the option to terminate this Agreement”.  Such force majeure clauses are GRADE A (my own personal labelling)!

Let’s consider an illustration of a GRADE A force majeure clause.

  1. Happy Fruits Ltd and Love Fruits Ltd are in a contract for the sale and purchase of fruits. Happy Fruits Ltd sells fruit to Love Fruits Ltd.
  2. Under the contract, Happy Fruits Ltd must provide Loves Fruits Ltd with a case of tomatoes by X date.
  3. Before X date, a flood occurs making the delivery of the tomatoes impossible.
  4. The contract contains a GRADE A force majeure clause, therefore as soon as Happy Fruits Ltd learns that the flood is preventing the delivery of the tomatoes to Love Fruits Ltd by X date, it must notify Love Fruits Ltd of the flood in writing, stating a “force majeure event”.
  5. Happy Fruits Ltd must then attempt to mitigate the effects of the flood on its delivery to Love Fruits Ltd. For example, it must try to supply the tomatoes to Love Fruits Ltd from another branch not affected by the flood, or from another supplier with similar produce.
  6. If Happy Fruits Ltd cannot mitigate in the manner above, it must at the very least strive to deliver the case of tomatoes at the next available opportunity. So for example, if the flood passes a day after X date and all modes of transport go back to normal, Happy Fruits Ltd must do its best to deliver the tomatoes to Love Fruits Ltd on that date.
  7. If Happy Fruits Ltd fails to deliver at the next available opportunity or to reasonably mitigate against the impact of the flood on its contractual obligations, Love Fruits Ltd could have a claim for damages under the contract. That’s right. Even though the flood has nothing to do with Happy Fruits Ltd, Happy Fruits Ltd may still be on the hook. However, Happy Fruits Ltd only has to do what it can reasonably do. In English law, reasonably is pretty broad and forgiving. This is why this type of force majeure clause is Grade A, it offers just enough protection AND wriggle room to both parties.
  8. If the effects of the flood surpass the force majeure cut off point then Love Fruits Ltd may terminate the contract.

Hopefully you followed that! Basically each and every business contract should have one of these clauses in them! You just never know what might happen out of your control that may prevent you from performing your side of the contract. In such a scenario, you do not want to be contractually liable for anything. In recent years, a new force majeure event has sadly come to the forefront – acts of terrorism, the effects of which are devastating. Get your lawyer to review your contracts to ensure that you are adequately protected.

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HOW TO … chase debts!

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The most important thing when you own your own business is ensuring that you get PAID. Late payments and outstanding debts disrupt cash flow which can literally kill a business. This post is all about a) preventing late payment and b) chasing up late payment. The goal should always be to never have clients owing you BUT if they do, as they occasionally will, it’s all about getting that debt settled as amicably as possible.

Prevention

Ideally you do not want to be chasing up a late payment therefore prevention is better than cure. You can protect your cash flow by making it extremely difficult for a client to make a late payment. You basically need to be honest and upfront at the outset, so that there can be no doubt as to what you are expecting to be paid and by when.  Take note of the following tips:

  1. Make sure that your clients know and understand your payment terms. Display your terms clearly in every invoice and explain how (“payment can be made by BACS transfer/SWIFT/Paypal etc”) and when (“payment is due by X date”) payment should be made. The idea is to make it as EASY as possible for your clients to pay you. You should also include information as to any late payment penalties i.e. “if your payment is more than one day late we will charge interest at a daily rate of X%”. If I know you are going to charge me interest at a daily rate of X%, I’m most likely to pay you on time. The invoice should be a one stop shop of how and when to pay, and the consequences for late payment. This is the basic starting point to getting paid and preventing client debt. If your invoices do not do this, REVISE them.
  2. Double check the details.  Your invoice details should be perfect, quoting all the information the customer needs to identify it. Include your reference code and THEIR reference code. Give a good description of the work/product that the invoice relates to. You do not want a late payment to be YOUR fault so just make sure that all the details are correct.
  3. Send your invoices out promptly. If you want your clients to pay you on time, you better invoice them on time. If you invoice me a day or week late, I’ll take that to mean that I can pay you a day or week late and then some!
  4. Do some credit checks. You should credit check all new significant clients as part of your due diligence (due what? read this), but proceed with caution. A client may be new and have no credit history, or they might have done really well in the past five years but are now on the verge of going bust. Carry out your general due diligence and use your judgment – is it likely that this company/person can afford my services/product?
  5. Make them pay a deposit. The deposit method of payment is great for damage limitation with late paying clients. If you are going to ask for deposits, make the booking of your product or services conditional upon receipt of the deposit payment up front. No deposit, no deal. After a certain point in time make that deposit non-refundable too.  The deposit provisions should be stated in the actual contractual agreement between the parties as the deposit happens at the start BEFORE the invoice which is issued after the provision of the services or product.

Chasing for payment

No business is perfect. Even your best clients can let invoices become overdue. Chasing and securing payment of an overdue invoice is a fine art in the world of business as you never want to offend a client. However, your company is entitled to the money, so don’t shy away from collecting what is due to you. Even charities hound their loyal supporters for donations!  At this point, it is all about having a uniform procedure based on a series of gradually more urgent reminders, followed by putting the matter in the hands of a debt-collector or solicitor if all else fails (absolute last resort). Here are some tips:

  1. Know when your invoices are overdue and act immediately. In some industries it is easier and more acceptable to just pick up the phone and ask “hey where’s my money?”. However if you are dealing with a new client or are operating within a more formal industry, you should write a letter of reminder stating (politely but firmly) that your invoice is now overdue and please make immediate payment. You should send this letter by email or fax followed by a hard copy in the post. This way you get the reminder to the forgetful client asap whilst providing them with a hard copy for their records. I would recommend a  letter of reminder regardless of industry norms because I’m a cautious lawyer and I believe in leaving paper trails in instances like this. In order for your reminder to have an impact, it needs to be prompt so keep a calendar of all invoice due dates and keep an eye on them. Send your reminder the day after late payment or your company’s grace period. Allow seven days for a reply.
  2. If there is no reply within seven days, send the invoice again. Send it by recorded delivery to ensure it has been received and keep your receipt as evidence that you sent it.
  3. If you still do not receive a response, make a phone call to find out what the problem is. Your client may have accounting issues or queries that it needs help with. Find out the reason for the non-payment and help them out. Negotiate if you have to and try to extract a promise of payment.  ALSO use this phone call to find out if the customer has a regular weekly or monthly pay run and find out the day on which this is done. Keep calling until you receive payment, especially two or three days before the pay run. This is where chasing payment becomes a fine art. You need to tread a fine line between harassing the client too much and keeping the pressure up. It’s best to keep up a persistent chase! “Hey Bob How are you? Pay me please”, “Hey Sheila, I’m great thanks. Spoke to Bob the other day…pay me please”.
  4. If the pay run date passes and you still do not receive payment, consider turning up in person to collect it. Of course this is not desirable and it is not even possible in some instances. This is the last resort before the ABSOLUTE last resort.
  5. If you have tried all of the above steps and you have still not received payment, you need to consult your lawyer. There is nothing like a letter from a lawyer to scare the crap out of a client. The letter should threaten to take legal action to recover the debt or to start bankruptcy or winding-up proceedings (depending on how much you are owed, in the UK, you can end a company if they haven’t paid you – read this). The letter could also threaten to use a debt collection agency. Keep a copy of all correspondence and accept that if you are at this stage, you have lost that client forever. Not so bad as a client is only worth it if they value you and they show that they value you when they PAY you.

The legal/debt collector route is your absolute last resort, but don’t be afraid to use it. However if you get to this stage, ask your solicitor’s advice and evaluate how far you should sensibly go to collect the debt before cutting your losses.

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