How to recover investment costs from your customer

Are you investing in new machinery, software, warehousing capacity or other infrastructure to meet a customer’s specific needs? If so, you may want to recover some or all of that cost from the customer.

In this article, Commercial partner Lucy Pringle explains why drafting a contract in a specific way can provide the necessary framework to reclaim the investment.

Agree a minimum purchase amount

The most common method is to establish a minimum purchase amount with the customer that encompasses the cost of goods or services to be purchased over a specified period, along with the investment cost spread out over that duration. For example:

• Investment cost = £150,000
• Expected yearly revenue from customer = £300,000 for 3 years
• Minimum annual purchase amount = £350,000

Using a ‘liquidated damages’ clause

Failure by the customer to meet the minimum purchase amount gives you a right to bring a breach of contract claim. However, legal principles like the ‘duty to mitigate’ may require you to take reasonable steps to reduce your loss, potentially affecting your ability to recover from the customer.

To address this, the contract should include ‘liquidated damages’ provisions to allow you to claim any shortfall against the minimum purchase amount without the need to prove actual loss. If the customer spends less than the agreed minimum, the contract would give you a right to invoice the customer for the shortfall amount.

Key tips

1. Make sure you structure the right to reclaim any shortfall amount as liquidated damages, because this changes the legal basis of your claim to increase your chance of recovery.
2. Consider whether the liquidated damages amount should cover the full shortfall against the minimum spend commitment (e.g. £350,000 per year for 3 years under the above example) or should be limited to the value of the original investment (e.g. £150,000).
3. If you have incurred financing costs, do you want to recover those too?
4. If you will gain a valuable asset from the arrangement that you can use for other business, do you want to deduct the depreciated value of the asset from the recovery amount?
5. You need to include a clause in the contract providing ‘commercial justification’ for claiming liquidated damages, emphasising the investment made for the customer and the purpose of the shortfall payment in protecting that investment.
6. You should also do some financial checks on the customer before making the investment, to check they have the ability to repay the investment cost.
7. Seeking legal assistance to ensure the contract is properly drafted is recommended.

If you have questions about drafting or negotiating contracts, please contact Lucy Pringle.