How to quantify debt collection claims

Quantifying your claim may seem simple, but there are many issues that can arise. Here’s how small business owners can avoid these issues.

Let’s assume that a debt arose due to the supply of goods or services.

In a perfect world, you would have a written contract setting out the relevant terms of trade, your customer would have been supplied in accordance with written purchase orders and invoices, you would have delivery receipts, and there would be no dispute that might reduce the claim.

In practice, one or more of these things is often absent.

It’s important to identify the particular terms and conditions upon which the debt is based, but there may be no single document that contains the terms and conditions of the supply; it’s not uncommon for a customer to have signed a credit application with standard terms, the purchaser to have issued a purchase order containing the purchaser’s standard terms, and for the supplier’s invoice or bill of lading to contain further inconsistent terms.

To resolve this ‘battle of the forms’, the last terms provided, following which the delivery was made or accepted, will usually be the accepted terms.

However, any discussions between the parties, or the parties’ relevant employees who conduct the actual buying and selling, may amend any standard terms, either in total or for a particular transaction.

Interest and liquidated damages

If your agreement does not expressly allow you to charge interest on unpaid amounts, you will not be entitled to recover interest unless you get a court judgment.

In the absence of a contractual right to interest, a court will make an order for simple interest only to be paid on the debt from the date of demand.

This is a strong argument for including payment of interest in your standard terms of trade.

A provision for liquidated damages in a contract is meant to simplify enforcement if there has been a breach of contract, such as a delay in provision of goods or services or completion of a project.

The liquidated damages clause seeks to quantify the damage suffered by the non-defaulting party, so that they may immediately seek payment of the stated amount, rather than having to prove the actual amount of their loss.

Liquidated damages must be a genuine pre-estimate of the loss suffered by reason of the breach, otherwise it will be unenforceable as a penalty.

This is an issue that can quickly become complicated. In the first instance, it is usually best to demand payment in accordance with the liquidated damages clause.

Due date for payment demands

Your contract should provide a date for payment. Without it, a creditor is generally assumed to be entitled to require payment within a ‘reasonable time’.

What this means depends upon the particular circumstances.

For example, payment of a small trading debt within 14 days would most likely be a reasonable demand, whereas repayment of a large loan may not be reasonable within the same time frame.

Once you have determined the amount of the debt and that it is payable, you should make a formal demand for payment of the debt in accordance with the terms of the agreement, if it contains any demand provisions.

If the agreement contains formal procedures for making a demand and you do not follow those procedures, then any action that you commence for recovery of the debt may be found to be invalid.

Damien Butler is a partner in the restructuring and insolvency team at Colin Biggers & Paisley.

promoted stories