Enterprises often suffer unnecessary financial losses due to inadequate agreements. In the present economic climate, inability to recover payments or unforeseen losses can spell the end for small businesses. It would serve businesses well to avoid such losses. In this article we will look at Customer Contracts, and how it can assist businesses to improve or manage cash flow and losses by means of important commercial contractual provisions.
Payment Provisions:
This is one of the most important clauses in a commercial agreement. If carefully drafted, this clause can minimise disputes on payment dates, rights available upon payment failure and optimise recovery of overdue amounts.
1. Acceleration: If a business has extended payment terms of 30 – 90 days, it should be sure to include an acceleration clause in the agreement. This clause provides that, should any amount that is due and payable not be paid on time, then all amounts owing, but not yet due, will become immediately due and payable. In the absence of this clause, a business may be forced to wait for the full invoice maturity period before recovering all amounts owing. Such a delay in being able to claim payment may prejudice a recovery claim and result in extended cash shortfalls.
2. Invoice Disputes: Businesses must ensure that their contracts clearly set out the procedure for disputed invoices and the dispute resolution process. To avoid blanket non-payment by customers, the agreement should clearly provide that disputed invoices must be specified with reasons and that non-disputed invoices will be paid timeously. A poorly structured dispute provision can leave a supplier out-of-pocket until the matter is resolved in court, which can easily translate to years of waiting and cash flow pressure.
3. Suspension of Services: Depending on the nature of the services provided, it may assist a business to provide a contractual remedy that entitles the business to cease the provision of services in the event of non-payment or some other form of material breach. This is a powerful clause that allows businesses to plug the gap and stop the incurrence of further expenses on non-paying customers, without breaching the contract. In addition, it would serve as a strong deterrent against non-payment by customers who rely on the services provided.
4. Early Payment Discounts: More than merely punishing bad conduct, business can improve cash flow by incentivising good conduct. One method is to offer early payment discounts to customers. For example, where invoices are payable 30 days after statement, a business may offer a discount of 2% on invoices paid within 10 days from statement and 1% or 0.5% on invoices paid within 20 days. This clause benefits the customer by offering the opportunity of a discounted total cost (which can translate to massive savings over a year), whereas businesses greatly increase the chances of early payment and improved cash flow. However, these clauses must be carefully considered to ensure financial viability and avoid dispute on when discounts accrue.
Limitation of Liability:
Another critical category of clauses are those which limit liability of the parties, as businesses can be held liable to their customers for losses flowing from breach of contract, negligence or misconduct. While this is not unjust, the value of the customer contract may not always justify the risk assumed by the supplier.
Therefore, businesses should ensure that customer contracts contain appropriate limits on what their liability to customers will be for breach of contract, negligence, etc. In most industries, it is standard for a supplier’s liability to be capped to the total fees paid over a 6 – 18 months period.
However, there are many variations to limitation clauses and there can be certain categories of loss which contain different limits. Caution must be exercised, since it may not be possible to limit liability for certain categories of loss, depending on whether wilful misconduct is involved or whether the Consumer Protection Act or other legislation applies.
Well drafted limitation of liability clauses can protect businesses against unnecessary or excessive liabilities. Without clear limitation clauses, liability is limitless and so is the potential impact on cash flow.
Conclusion
While this is not an exhaustive list, the provisions above can assist businesses to ensure efficient inflows of cash and limit unpredictable and unlimited outflow of cash.
Management should ensure that all customer contract, service agreements and standard terms of service are reviewed and amended as necessary to ensure that they have the necessary contractual mechanisms to optimise cashflow.
Each businesses circumstances are unique and therefore it is advisable to consult with an attorney or legal services provider prior to implementing any information or contractual provisions mentioned in this article.
