How to improve your contractual rights to be paid

The economic picture has started to improve, with modest GDP growth in the first half of 2024.  However, the enormous strains on business finances over the past four years have caused insolvency rates to rise sharply this year.

According to The Insolvency Service’s latest figures, company insolvencies in June 2024 were the third highest since monthly records started in 2020. Administrations in June 2024 were 22% higher than in June 2023, and the number of CVAs was 64% higher in June 2024 than June 2023.

The combined financial pressures caused by Covid, supply chain disruption, salary rises, an energy crisis, the Ukraine war, high interest rates and spiked inflation have finally exhausted balance sheets for some. Businesses therefore need to be on high alert for signs of customer financial distress, and ensure their contracts contain the best possible payment protection.

This is particularly the case as the little-known Corporate Insolvency and Governance Act 2020 (CIGA) is likely to be deployed more as business failures increase. CIGA prevents suppliers from terminating contracts for the supply of goods or services simply because a company goes into an insolvency process. The protection also prevents a supplier from doing ‘any other thing’ based upon the company going into insolvency proceedings (e.g. changing payment terms). Contracts therefore need to be ‘CIGA-proofed’.

What should customer contracts include?

Ensure your customer contracts contain these valuable protections to guard against non-payment:

• Retention of title rights – This will help you to recover stock if you lose faith that you will be paid. The rights should be drafted on an ‘all monies’ basis, and ensure they are up to date for CIGA. Keep an overview of any stock levels held by customers (volumes, types and locations), to facilitate the enforcement of retention of title rights if necessary.
• Suspend further deliveries/performance – The ability to withhold deliveries of goods or suspend services is often the most powerful tool in ensuring payments are brought up to date.
• Vary credit terms – If invoices are not paid on time or credit scores drop, it is valuable to have a contractual right to reduce credit limits, shorten payment terms or move to payment/part-payment in advance, in order to manage your exposure.
• Interest on late payments – Ensure you either have a contractual right to claim interest at an agreed rate or check that the Late Payment of Commercial Debts (Interest) Act 1998 applies to your contract to give you a statutory right to claim interest on overdue sums.
• Termination rights – Contracts often contain rights to terminate for breach of contract, but you should ensure that these set a short remedy period for non-payment, to avoid losing your termination right under CIGA if the customer becomes insolvent.
• Financial information – Include a right to be provided with information about the customer’s financial position and attend regular meetings to review and discuss if you have concerns.
• Separate orders – Structure the contract as a series of separate contracts under a framework structure, so that each order is treated as a separate contract that you are free to accept or decline. This may help avoid the obligation to continue to supply under CIGA.

Practical steps to take

Financial due diligence should be repeated regularly, particularly for key customers. Actively monitor payment performance, since a failure to pay or delay in paying invoices is usually the first sign of financial difficulties. Keep an eye on your credit exposure to each customer and compare to the levels of credit insurance held.

If you are not satisfied with a customer’s credit status, insist on payment prior to dispatch/performance, or obtain another form of protection such as a letter of credit, parent company guarantee or bank guarantee.

Any contracts drafted before 2020 (and many drafted since) are unlikely to contain drafting that properly protects suppliers against non-payment, given the introduction of CIGA. With insolvency rates rising fast, non-payment by customers will be an increasing issue. Suppliers of goods and services should get key contracts and standard terms checked to ensure their protection is maximised and up to date for CIGA.

Finally, if a customer shows signs of financial distress, suppliers must be prepared to act swiftly. Once a customer enters an insolvency process, the supplier’s rights to act become severely curtailed because of CIGA.

If you have questions or concerns about your customer contracts, please contact Lucy Pringle.