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Don’t let the piggy bank run dry – use your contract to protect your business

BBC News reported this week that a pig farmer in North Wales is owed nearly £17,000 by a business which went into administration in October.

The farmer had a contract with the company to supply them with rare and traditional breeds of pig on an exclusive basis. Following the administration it's unlikely that the farmer will be paid in full for the products he supplied.

This is not an uncommon scenario. It echoes the position many subcontractors found themselves in earlier this year following the collapse of Carillion.

When negotiating a supply contract, the seller should anticipate situations where the buyer will be unable to pay. There are a number of legal options that can be considered:

  • One of the simplest ways to protect against non-payment is to require the customer to make full payment in advance. This can often be resisted by larger customers, who may require a period of days to pay following supply.
  • You could seek to include a retention of title clause in the contract, which gives you priority over the customer's secured and unsecured creditors. These clauses do come with risks and are not always effective.
  • You may want to incorporate provisions that kick-in when specific events occur, giving you the right to terminate the contract, suspend future deliveries of goods and cancel any existing orders.
  • For larger contracts, you could consider the customer's creditworthiness and include financial stability tests which allow you to take action should you become aware of a material adverse change to their financial position.
  • You may wish to take security against your goods. Although more commonplace in works arrangements, a parent company guarantee, bond (at a cost) or other security such as a cash deposit, can provide useful sources from which to recover any unpaid sums.
  • You could also look at taking out credit insurance for protection against non-payment due to insolvency or protected defaults of your customer.

There are also other practical steps you can usefully take to limit the harm that you suffer if you find yourself with an insolvent customer, such as keeping on top of credit control.

Whatever provisions you seek to put in place to protect against non-payment, a well-drafted contract with your customer is the essential foundation.

If you have any questions about your supply contract, please get in touch with our Commercial Team on 029 2048 2288 or emailus@acuitylegal.co.uk.

You can also read our article on key questions on the liquidation process here.

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