Going to court is rightly considered to be the option of last resort when settling a late payment dispute.

We caught up with David Walker from Cashflow Rescue to find out how suppliers can avoid it and still get a positive outcome. Here’s what he had to say.

 

PPD: What would you say are the pros and cons of settling out of court (vs going to court)?

DW: Going to court is always risky. There is no such thing as a rock solid case that you are guaranteed to win. So, if you can settle out of court and reach an agreement you’re happy with, this is always the best option.

However, reaching a settlement usually requires that you compromise what you are asking for and accept a lower amount. But you have to make a decision, is a smaller amount now better than the chance of a higher amount later?

Don’t just think of the settlement amount, think of the opportunity cost. Going to court is going to take time and effort. Could that be better spent in other areas of your business?

 

PPD: How does the small claims mediation service fit into the process?

DW: This is a free service offered to anyone who is involved in a small claim (i.e., one under £10,000).

After your client has filed a defence to your claim, the court will write to both parties asking them to complete a directions questionnaire. This helps the court set the timetable for getting the case to trial.

One of the questions on this form is whether you’re prepared to try mediation. It’s not compulsory, but I always say yes, even if you don’t think your client will agree.

You’ve got nothing to lose by trying mediation and you may get a good result. Also, if you don’t try mediation and you go to court the judge will probably look less favourably on you. Therefore, agreeing to mediation helps you keep the moral high ground over your client.

 

PPD: How does the small claim mediation service work?

DW: If both parties agree to mediation a date will be set by the mediator. The mediator will then call each party in turn and listen to their arguments.

The mediator will go back and forth between the parties trying to help them reach a settlement. You won’t actually speak directly to your client.

The mediator is not a judge so will not determine the outcome or make a decision. They will help you see the strengths and weaknesses of your case and will put forward offers or counter offers on your behalf.

If a settlement is reached they will then help you prepare a settlement agreement which is a binding contract confirming the terms you have agreed.

 

PPD: It seems like this could be a long and drawn out process. How long does it typically take to get a mediator appointed and to complete the mediation process?

DW: For the small claims process it is relatively quick.

The defendant has up to 28 days to file a defence to your claim (they can ask for longer if needed but 28 days is standard).

Once this has been filed the directions questionnaire is sent out by the court. Depending on the workloads of the court this could take a couple of weeks and they will give you a deadline, normally another couple of weeks, for completing it.

When both parties have filed their directions questionnaires and agreed to mediation, a telephone appointment will be arranged for a time convenient to both parties. On the day of the mediation, the mediator will call each party in turn to hear their arguments and explain what the other party is saying.

The mediator will then go back and forth between the parties dealing with all of the arguments and counter-arguments until a settlement has been reached or until it becomes clear that a settlement is out of reach. This process generally goes on for an hour or so.

With larger claims, the parties organise it themselves so you can arrange a mediation appointment whenever you like.

The mediation itself can also last much longer. A full day is not unusual.

 

PPD: What are the do’s and don’t in conducting a settlement negotiation?

DW: The biggest thing to remember is to be prepared. Know your case inside out. Accept that there may be some holes in your case, but think about how you can deal with them.

For example, you might accept that the service was late by a day or two, but what was the effect of this? Was it inconvenient for your client, or did they lose sales? If they lost sales you will probably have to compromise more than if it was simply an inconvenience.

Anticipate what arguments your client may put forward and have an answer ready for them.

Think about what evidence you have to back up your arguments.

Also remember that settlement negotiations are a two way process. Make sure you listen to what your client is saying. You can learn a great deal about the strengths and weaknesses or their case, even if you don’t actually reach a settlement.

 

PPD: Is there a lower or upper limit to the outstanding debt amount that restricts the use of the mediation service or makes it a pointless exercise?

DW: For the small claims mediation service, your claim has to be allocated to the small claims track in the court system. That means it will be less than £10,000. For all other claims, the courts encourage the parties to consider all forms of settlement, including mediation but it’s not a free service.

Hiring a mediator can be expensive, so I tend to only go down this route for really high value claims, otherwise it’s just not cost effective.

 

PPD: What happens if the mediation breaks down?

DW: If you don’t reach a settlement during the mediation, your claim will continue to trial where the outcome will be decided by a judge. As I said before, the mediator won’t decide the outcome, they can only help the parties reach a settlement they’re both happy with.

 

PPD: Is it possible to bail out at this stage or will claimants have to go to trial having started down the mediation route and subsequently failed?

DW: If it is clear that the mediation is not working out and a settlement is not going to be reached the mediation can end at anytime. Either party can bring it to a close. At that point, the claims continues towards trial as before but if the claimant has decided that enough is enough it is possible to bring all proceedings to a halt.

A word of warning though, if the claimant does halt legal proceedings before going to court they may be liable for both their costs and those of the defendant.

 

PPD: Is mediation expensive?

DW: It can be.

The small claims mediation service is free, but if you have to hire a mediator it can be expensive.

With higher value claims both parties will probably be represented by solicitors, who will also attend the mediation so costs can soon escalate. However, those expenses can be good value if the mediation leads to a settlement you are happy with.

 

PPD: Are there any other out of court settlement processes that you would recommend aside from mediation?

DW: You can try arbitration. This is different to mediation because the arbitrator will actually make a decision on the outcome. The parties agree beforehand to accept any decision the arbitrator makes. Arbitration is good where, for example, specialist knowledge of an industry is required.

Another benefit of arbitration is that it can be kept completely confidential. Court proceedings are public so the outcome is public knowledge. If you want your dispute and the result to be kept behind closed doors, arbitration is a serious consideration. However, like meditation, it can be expensive.

Aside from that, I would say speak to your client. Take the time to meet them if possible. Get a coffee, talk through the issues and see what result you can achieve.

Clearly, while you are trying to reach a settlement, you must keep commercial reality in mind. There is a big difference between what you do when chasing for payment of an outstanding invoice for a few hundred pounds and trying to resolve a much larger and complicated dispute.

For unpaid invoices, whilst it is important to try to settle the dispute, don’t be afraid to push your claim towards court as quickly as you can. I find that the more prepared you are to go to court, the less likely you will find you have to.

 

PPD: What about tactics like diving straight in with a letter of claim, a letter before action or even a draft winding up petition?

DW: After you have exhausted your credit control procedure, your next step should be a letter of claim. This is the same as a letter before action.

A letter of claim should set out all of the details of what you are claiming and why. If your client still disputes the payment they should then send a full response explaining why they don’t believe they should pay.

A letter of claim is often thought of as a final step before starting legal action, but I often find that it leads to at least another round of correspondence as arguments and counter-arguments are raised.

After sending the letter of claim and dealing with any following correspondence you then have a choice, you can either start legal proceedings through the court or if the debt is undisputed and your client is simply refusing to pay you can send a statutory demand (I’ll come back to this in a bit).

Once court proceedings have been started you can consider mediation through the small claims mediation service or independently if the claim is valued above the small claims limit. There is no reason why you couldn’t consider mediation or arbitration before court proceedings are started, but for a debt claim it would be rare.

Another alternative is to drop the claim. You will have reached the end of the pre-action stage and this is the time when many people decide they no longer want to commit any more time and energy to the dispute.

 

PPD: So, you mentioned sending a statutory demand, why would you do that rather than drafting a winding up petition?

DW: A statutory demand is a final step before a winding up petition is drafted and served on the client. It is a single form and there are no fees to pay. However, you can only send it in certain circumstances.

First the debt must be undisputed. If it is a disputed debt, even if the reasons for disputing it would never win in court, you cannot serve a statutory demand. Next, if the client is a company, the outstanding debt must be over £750 and if they are an individual the debt must be over £5000.

If you can send the statutory demand it is very effective because the client will know that the next step is for the company to be wound up or the individual made bankrupt. If they don’t want this to happen, because they are running a profitable business, they will usually pay up pretty fast.

If they don’t pay up you can then prepare a winding up petition, but there will be fees that you have to pay.

If the client hasn’t paid up after the letter of claim and the statutory demand, you have to question if they ever will. If they are insolvent and simply do not have the funds to pay you will most likely end up with nothing if you are an unsecured creditor (as most suppliers are).

This is then a commercial decision. Are you acting in the best interests of your company by pursuing this any further? If you are a director of a company and are answering to other shareholders, not just yourself, you have to consider this very carefully indeed.

 

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights. David set up Cashflow Rescue as a low cost legal alternative for small businesses with debt recovery problems.

Ringing a customer to find out why an invoice hasn’t been paid can be difficult.

Fortunately The Prompt Payment Directory has been discussing just this with David Walker from Cashflow Rescue. Here’s what David had to say.

 

PPD: At what stage during the credit control process do you advise picking up the phone?

DW: I’m a big fan of communication to resolve disputes so I would say pick up the phone at the earliest opportunity. However, you have to be realistic, especially in a busy credit control department so you may not have the time to speak personally to each client as soon as their invoice is overdue. Therefore, I would probably send a first reminder letter and then if this didn’t lead to payment, speak to them to find out why payment hasn’t been made.

Alternatively, if you have a good relationship with your clients and you have regular, ongoing work, you can mention it in one of your calls. It doesn’t have to be a specific call to deal with the late payment.

 

PPD: What are the most important preparations to be made in advance of this kind of call?

DW: You need to have all the information to hand to be able to answer any questions from your client. Clearly, this is going to be different for different businesses, but you should always know when the invoice was sent out, when it became due, and how much is outstanding. Again, depending on the size and nature of your business you might be aware of, for example, how and when the service was provided, if there were any problems along the way, how they were resolved etc. Basically, you need to be able to anticipate what your client may say to delay the payment and have a response ready. Having to say “I’ll find out and get back to you” will only delay payment further.

 

PPD: In your experience what tone of voice do you find is most effective in delivering results?

DW: I usually start off friendly and try to build some rapport. A bit of small talk is fine, but we’re all busy so you have to keep this business-like. Always be assertive, but not aggressive – there’s a big difference!

 

PPD: What is the best way to manage the conversation if the person you are calling adopts a combative stance?

DW: First of all, don’t fight back! Understand why your client is feeling like this. They’re probably stressed and on the defensive, fighting 101 other fires in their business. You need to keep your emotions out of this and remember what outcome you want – i.e., your invoice to be paid. Listen to them and then respond with logic and reasoning, rather than emotion.

 

PPD: How should you respond if the person you are calling requests that the conversation be postponed for an hour or a day on account of “an urgent task or meeting” that they must first attend to?

DW: If you have to postpone a meeting, try to get a commitment and a time and date in the diary for the re-scheduled meeting. Then confirm this in an email.

 

PPD: What should you absolutely not say on a call such as this?

DW: I never ask “if this is a good time”. It’s a good time for you and if it isn’t a good time for your client, they will no doubt tell you. If they know you’re calling to ask for money and you ask “is this a good time” it’s too easy for them to say “no” and that they’re busy.

The other thing to remember is never to be embarrassed to ask for payment! So, don’t apologise for having to raise this issue, your client should be apologising to you!

 

PPD: How might the approach differ approach if it’s a second or third call?

DW: With each call you are going to be taking a tougher and tougher stance with your client. You should be eliminating any excuses for non-payment with each call and so by the third call you will probably be threatening legal action. However, don’t make empty threats. If you threaten legal action you must follow through or you will not be taken seriously in the future.

 

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights. David set up Cashflow Rescue as a low cost legal alternative for small businesses with debt recovery problems.