EOW Reflections: Respect is stronger than weapons

A court case caught my eye this week. It’s rare that we get court decisions about late payments so excuse my excitement.

In November last year, a court ruled that XXXX needed to have had the right to terminate its contract with its customer (YYYY) after a first late payment, to be able to terminate after the second late payment. This wasn’t the case because although a first payment had been late it was paid within the agreed grace period. The High Court Judge said XXXX had therefore been wrong to terminate the contract after the second late payment. I’m not arguing with that as I haven’t seen the contract.

It’s the second part of the judgement that got me worked up. The judge said XXXX had “a battery of weapons available to them to protect their cashflow position. Those weapons include a right to suspend the works, the payment of statutory interest, and the right to refer disputes to adjudication.”

XXXX appealed. The Court of Appeal found in their favour. The Judge in the Appeal Court said: “While they (the battery of weapons) may ameliorate the position to some extent, none provides a satisfactory and immediate solution to the typical case of late payment: each involves a measure of delay and, in the case of suspension or resorting to adjudication, additional cost and uncertainty for the contractor in pursuing them.”A Judge who gets it. Any delay in payment, additional cost and uncertainty can be existential to a small business.

Suspending work rather than terminating the contract could get results. One party would say ‘pay up and we’ll restart’. The other could say ‘restart and we’ll pay’ so there’s a negotiation to be had. One small business owner told me this morning she’d suspended work but that led to an impasse, and they had to go to adjudication. She got paid following the adjudication decision and she also managed to negotiate better payment terms for the rest of the work. The job is finished, and she’s got all her money, but trust has gone, and she’ll never work for that client again.

Adjudication takes time and money. Unless there’s a set process within a particular sector it can take time to find the right adjudicator, get suitable dates for everyone and it’s not an inexpensive process. Most business owners we’ve talked to have pulled out as they can’t afford the time and money. I’ve been in a situation where the party that didn’t get the outcome they wanted refused to pay. That was good money after bad. Everyone has to abide by the decision for it to be successful. The cost and uncertainty the Appeal Court Judge pointed to, puts many people off, and a small business may not be able to carry on operating while waiting for a decision. Time is of the essence when a small business isn’t getting paid.

The payment of statutory interest is a ‘weapon’ small businesses can use. You can charge interest for every day that an invoice is overdue beyond the agreed date. One business owner told me yesterday that immediately he threatened to charge interest the customer paid the original invoice, about 4 months late. The small business owner in this case refused to do any more work for that client, but many need that future work and won’t invoice for interest owed because they’re fearful the client will go elsewhere.

I hear it said frequently: borrow to cover the gap, use invoice financing, invoice for interest and compensation, suspend work, go to adjudication, take them to court.

All of these weapons might prove effective for bigger businesses with deeper pockets and the capacity in the team to do the work involved. When it’s your business and you’re the person trying to carry on business as usual as well as tackle something as daunting as chasing up payments, while worrying about whether or not you will get work in future from that big customer it’s a different ball game.

Bigger businesses need to support the businesses in their supply chains. It’s the right thing to do but we’re also in a skills and labour shortage. If those small firms aren’t there or won’t work with you next time you need their talent and expertise, you could find your customers deserting you. We all need each other in this business world if we want a strong sustainable, resilient economy. Size should never outrank respect and fair payment behaviour.