So you have closed a sale to supply certain goods/services over a period of 6 months to a customer. Price has been agreed and payment was to be in 6 equal monthly instalments. Well done.
Unfortunately, despite supplying the goods/services for 3 months without complaints, the customer managed only to pay the 1st instalment. When asked, he kept giving excuses and promised to pay the next month. But the money never came. When pressed further, he added there were some problems with your goods/services and says he is investigating and may claim compensation.
It is now apparent to you that this customer is not going to pay you. And his complaint of defects is just another way to try to reduce the amount payable. Must you continue supplying the goods/services? After all, there are 3 more months of service/goods which you know the customer needs for his business.
The difficulty however is that unless your contract contains a term allowing you to stop supplying the contracted goods/services, the only way for you to cease performance of the contract is to terminate the contract. Validly.
There are 4 situations where you can validly terminate a contract:
a. Contract provision gives you a right to do so
b. The other party, by his words or conduct, renounces the contract and indicates he will not perform
c. The other party breaches a “condition” of the contract
d. The other party commits a fundamental breach of the contract which resulted in you being deprived of substantially the whole benefit of the contract
A decision to terminate a contract is not to be taken lightly. If you terminate your contract without a valid basis, and stop supplying the goods/services, you will yourself be in breach of your obligations. Your customer may in turn claim compensation from you if he suffers loss as a result of your non-supply of goods/services to his business. Depending on your customer’s trade and extent of his reliance on your goods/services for the business, the claim can be substantial.
So it is always sensible for business-owners to provide for a contractual right to terminate the contract in the event of non-payment. Or better still, provide for a right to suspend the supply of goods/services if payment is not received within X days of payment due date. And whilst you are at it, you might as well also provide for a discretion on your part to levy late interest. No harm ; )
A final “teachable” point is this: always try to document your commercial relationships in the form of a well drafted contract. Prepare a template which covers most commercial risks and tell your sales team to use it for each order so you don’t need to worry that you will put in a bind by unsavoury customers. The cost of crafting a good template is not high and if amortised over hundreds of future sales (since you can use the template multiple times), is quite worth the investment.
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Disclaimer: While the information in this note is correct to the best of the author’s knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as legal advice or a substitute for specific professional advice for any particular course of action. Should you intend to rely on the contents of this note, please seek legal advice applicable to your specific situation.