A customer is withholding payment: What are my options?

Grounds for Suspending a Contract if a Customer isn’t Paying For Their Services

In this blog post, I discuss a common problem faced by suppliers when their customers fail to hold up their end of the contract and have stopped paying for services rendered.

Question: “Can I suspend services if a customer isn’t paying?”

Answer:

The first port of call is always to check your contract for express provisions dealing with this scenario. A requirement to pay will usually be drafted into a separate heading or otherwise form part of a list of contractual obligations on the customer, referring in turn to a section dealing with the consequences of a breach of those obligations. Any such clause should set out whether there is an express right to suspend work until sums are repaid.

If there isn’t an express right to suspend provision of services in the contract then you should consider whether one can be implied. With some exceptions aside (for example, construction contracts) such an implied right is not common. Implied terms are an area of commercial law that form the subject matter of entire chapters in law textbooks and the answer will depend entirely upon the business in question and circumstances leading up to the contract.

It might be that a term can be implied where it is customary to a particular trade or where the parties have consistently conducted business on those same terms in numerous other previous dealings. It might be possible to argue such a term should be implied into the contract on the basis it gives business effectiveness to the contract or because the term is so obvious it goes without saying it should have been inserted at the time the contract was made. All of these scenarios are governed by established case law and whether a term can be implied in the circumstances faced will involve a detailed legal analysis of the facts.

Suspending services in the absence of an express right may amount to a breach of contract on the part of the supplier (see further below) and therefore caution should be exercised.

Question: “Alternatively, can I simply terminate the contract for non-payment?”

Answer:

The contract will probably contain a “termination” section (or similar) outlining exactly when an innocent party can end their relationship with the other and whether notice need be given. It is typical to see a provision permitting termination on notice in the event of non-payment by a customer. Note that terminating a contract without giving notice is an option of last resort and you should take advice before exercising it.

Should the contract be silent on ending the contract, it is necessary to consider whether a term can be implied to allow for a termination. Expanding on the points already made above, it is possible for a termination right to be implied by giving “reasonable notice” to the other party where a contract is silent on termination rights altogether.

Question: “What’s the risk to me?”

Answer:

If there’s no express right to suspend the provision of services or terminate in this situation, there’s always a risk the matter could end up in court. Should that happen, the court will analyse the contract as a whole and determine whether a right to suspend or terminate the contract for non payment can be implied into the agreement (see above). In the absence of an express or implied right, the supplier will be in breach of contract and liable to damages. Aside from damages flowing from breach of the agreement itself, the supplier can also be liable for the legal costs of the customer, as well as its own.

Question: “What if I take no action at all?”

Answer:

Non-payment for services might be considered a ‘repudiatory breach’ of a contractual condition by the customer. In commercial law, a ‘condition’ is a major term that goes to the root of the agreement but doesn’t automatically end the contract. The aggrieved party will be faced with two options; accept the breach and terminate the contract or else affirm the contract and keep its terms in existence. A supplier might be seen to have accepted the breach where, for instance, it has refrained from taking action when the customer failed to pay on a number of previous occasions. If having affirmed the contract it then suspends work, the customer might have a claim for breach of contract against the supplier who has failed to provide services under the agreement.

Summary

This is a fundamental and often difficult area of commercial law and, as the above paragraphs set out, could give rise to claims of breach of contract against any supplier who makes the wrong call.

It is crucial that contracts for service are very carefully drafted and tailored to each business in question before a commercial relationship initiates. In our experience, non-payment is often a key issue a supplier wishes to protect against as best as possible. Please contact me to discuss your drafting needs or for advice on how you can safely deal with a failure to pay by customers without incurring an unintentional liability.