The following article was published in the May 2010 edition of the Royal Institution of Chartered Surveyors Business magazine.

You may consider that securing a decent commission in these times where the construction industry is in deep recession is the hard bit. Of course managing the work and successfully delivering the project is also extremely demanding. Now it comes to the easy part; raising an invoice and receiving payment! Snag is, the debtor fails to pay. How do you then secure monies when a debtor, for whatever reason, has decided it is not paying?

No doubt you have properly drafted Terms and Conditions in place – well done. It covers important aspects such as payment periods, final date for payment and interest on late monies received. But what you now need is guidance on how to secure the outstanding monies from the client with speed and at minimal cost.

Having made several attempts via telephone to persuade the debtor to settle the debt, you should then write. The letter should set out the facts including how the debt was incurred, when payment should have been made and the consequences of failing to pay. In addition, copies of the relevant paperwork should also accompany the letter including the invoice.

If payment is still not received, a Letter Before Action is forwarded. This should be succinct as possible and set out the steps which may be taken if payment is not received by a set dead line; however, do not threaten anything if you do not intend to follow it up.

If payment continues to elude, you will have to start tightening those thumb screws – and you have several options – although at this stage, it is wise to make credit enquiries of the debtor, to ensure you will not throw good money after bad.

Letter of Claim
Associated with the Pre-Action Protocol (“the Protocol”) of the Civil Procedure Rules (“CPR”), it is good practice to formally set out your claim, copy all relevant documents and request that the debtor sets out the reason for non payment and provide evidence.

This letter does not have to refer to litigation, but is nonetheless on record as following the procedure required under the CPR. It will also make a good reference when instigating any future proceedings, whether through the courts or some other form of tribunal.

Statutory Demand
If the debt is not contested and is over £750, a statutory demand is an inexpensive and extremely effective tool to persuade the debtor to settle the debt.

A statutory demand can be issued directly by the creditor and it costs little to serve. However, you must ensure that you do everything that is reasonable to bring the demand to the debtor’s attention, ideally personal service. Once issued, you can follow it up 21 days later with a bankruptcy (individual) or winding up (company) petition.

There is nothing else that concentrates the mind of the debtor more than the threat of being wound up. And in most cases, a petition is never needed.

Statutory Adjudication
If the debtor disputes the sum, under section 104(2) of the Housing Grants, Construction and Regeneration Act (“HGCRA”), you are entitled to refer the dispute to adjudication.

All professionals associated with the construction industry should be familiar with adjudication under the HGCRA, and could potentially serve as an excellent and perhaps economical way to settle a dispute (albeit temporarily), but most importantly to be able to secure the outstanding monies.

Third Party Collection
A third party, such as a solicitor or debt collection agency could be an option for your company. Some solicitors specialise in debt collection and can issue powerful letters.

If using an agency, make sure that they are registered with the Credit Services Association (“CSA”) and this can be checked simply by visiting the CSA website.

Using a third party for debt collection can, in some instances, reap rewards and be relatively cost effective (debt collection agencies will typically charge 8% – 10% of the monies secured). However, you must ensure that you have an element of control of how contact is made as anything other than being professional yet firm, could have the reverse effect and permanently sour relations. Remember that it is you who is instructing and paying the third party, not the other way round.

Mediation
Over the past 10 years or so, the mediation of construction disputes have grown enormously, not least because of the requirement to seek alternative methods of resolving disputes under the Protocol.

Mediation however will only work if both parties genuinely wish to settle a dispute and where the debtor is just looking for excuses to avoid payment, such a process will be fruitless.

In addition, unless the debtor is prepared to agree that any agreement reached at the conclusion of the mediation is binding, any agreement reached in the mediation can be subsequently reneged upon.

Court
The more ‘traditional’ way of settling disputes and obtaining a judgement, which can then be enforced by bailiffs, or for debts over £600 which are registered at the High Court, can be enforced by Enforcement Officers as they have a higher success rate than bailiffs.

Either the threat of court proceedings or actually issuing a Claim Form is sometimes all that is needed to get a debtor to pay up, especially where there is no real defence – or even applying for summary judgement (below).

If you do obtain a judgement, this could affect the debtors’ modus operandi, as the judgement is registered on the Register of Judgments, Orders and Fines. Banks, building societies and credit companies will use the information on the Register and could adversely affect business relationships with the debtors’ suppliers or potential customers.

Summary Judgement
You can only apply for once a Claim Form has been served and the defendant has returned its acknowledgement of service or defence. Such an application under CPR 24 can be a cost effective and speedy process. However, the key to a successful application is to persuade the court that the defendant has no real prospect of success.

If the Debtor is from the European Union
If the debtor is overseas but based in the European Union, there are now ways you can recover debts from a party which resides in a different member state from your practice, known as a ‘cross-border’ claim.

The European Order for Payment (“EOP”) procedure is a relatively simple and quick process to recover uncontested debts in a cross border claim. The procedure, introduced in 2008 (and created under Regulation 1896/2006 of December 2006), operates on the basis of standard forms and processes across all EU member states, and does not require the use of solicitors. If you were to receive an order for an uncontested debt in your favour, this is then automatically enforceable in every EU country.

There is also now a European Small Claims Procedure (“ESCP”), effective as from January 2009, and is a procedure for where claims do not exceed €2,000.

Leaflet EX725 from the HMCS website explains the processes in greater detail both the EOP and ESCP.

An European Enforcement Order (EEO), is the method for enforcement of your uncontested judgement in the EU.

© Michael P. Gerard MSc, PGDipLaw, PGDipBar, FCIOB, MCIArb, MAE

Author background

Michael is a Barrister, Chartered Builder, Registered Adjudicator & Accredited Expert in quantum and planning matters. He is Managing Director of Michael Gerard & Co www.michael-gerard.co.uk, a company of chartered building consultants and quantity surveyors who provide a specialised service in the areas of construction law, quantum, programming, business recovery and insolvency support to the construction industry.