Precise contract wordings
The most important points for clear and unambiguous contracts
The reasons for each and every payment delay should be analyzed in detail. Is it just care-lessness of the customer, or a deliberate tactic? The reasons may also, of course, lie in your own company – for instance contract wordings which can be interpreted in different ways. It is often only when matters have escalated into a dispute that suppliers realize how imprecise wordings about conditions of delivery and payment terms in their contracts can be exploited by buyers to pay late or even not at all. Here are the most important points to observe in order to make clearly-worded and unambiguous contract conditions:
- Set the due date for payment unambiguously and always state the calendar date. In this way the customer – assuming it is a company – is automatically in arrears of payment when the date given is passed, and the supplier is entitled to charge late interest.
- State clearly what the position on set-off of payments is, to prevent customers from arbi-trarily asserting counterclaims against your receivables. The best solution is to include a clear wording in the contract stating that customers are only entitled to set off “counterclaims which are undisputed or the subject of an unappealable legal title judgement“. This is an ef-fective way of heading off a popular trick often used by debtors.
- Always agree all forms of retention of title in your contract. In this case you can, if necessary, go to court to force the customer to return unpaid goods or to pay over the proceeds of the sale, mingling or processing of the goods you have delivered. Attention should be paid here to clauses in the customer’s General Terms of Business which may be prejudicial to the supplier’s retention of title.
- Every business which, for instance, repairs a valuable asset can also assert the so-called contractor’s lien, even without an explicitly worded agreement to that effect. A garage is only obliged to return a repaired vehicle to the owner after the latter has paid its bill. It is even entitled to sell the vehicle in order to get the money due to it.
- Building contractors have special privileges. They can, for instance, demand collateral such as a bank guarantee from their customers at any time. It is not necessary for this to be explicitly mentioned in the contract, and the principal has no possibility to exclude this right contractually. The costs of this “builder’s security”, however, must be borne by the contractor.
Even before you sign the contract, you should always carry out a creditworthiness check on the customer. Even big household names can sometimes spring nasty surprises. Besides the enquiry to the insurer and also perhaps a credit report from a reputable credit information agency, it may be useful to speak to the customer directly: how does he see his current busi-ness situation, who are his main competitors?
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Euler Hermes Group
