How using negotiations and alternative dispute solutions can help in debt recovery
Debt recovery is often a delicate balancing act for a business. On the one hand, you must ensure your business is protected from bad debts, but on the other hand you do not want to jeopardise a good business relationship by mishandling a disputed debt.
Taking the wrong action, missing a deadline, or failing to follow the correct pre-action conduct can have a detrimental effect on your ability to collect your debts successfully. These are all common pitfalls that many businesses make in recovering their debts using the legal process, so here is how they can be avoided.
Failure to communicate what is owed and why it is owed clearly
While this should be obvious, if you have not clearly communicated to your debtor what is owed, why, and how to pay, then this can have serious repercussions for debt recovery.
It is essential that your debtor is given the opportunity to pay you, or to say if they dispute the debt and why.
To avoid any mistakes at this stage, your request for payment must include clear details of what sum is owed, what this relates to (appending any invoices or proof), how long it has been outstanding, how payment can be made and noting that you intend to enforce this debt through the courts if payment is not made by a specific date. It is expected to allow a period of at least 14 days, and if this is the first time you have made a demand, then 21 or even 28 days may be more reasonable. Make sure that you send this information to the correct person and at an address where you are sure your letter or email will come to their attention.
Failure on your part to effectively communicate the debt owed to you can prove detrimental later on down the line as an excuse for non-payment. It may also lead to an adverse costs order being made against you if you take the claim to court. Even if you are successful, if you were not clear in setting out what is owed and why, or if your request ends up in the wrong place and does not come to the attention of the correct person, the debtor will argue that they were not given a proper opportunity to settle it before you went to court and incurred costs.
Failing to perform a costs benefit analysis
If your initial letter asking for payment has been ignored, before starting court proceedings to enforce your debt you should consider the additional cost to your business and undertake a costs benefit analysis.
This includes considering the amount of debt that you are seeking to collect, the time required to pursue the collection, and the additional costs involved in the same.
Part of your analysis should be to ascertain through due diligence that your debtor can actually meet any money Judgment made against them, including on costs. If not, no matter how valid your claim is, it may be throwing good money away to pursue it.
Failing to comply with regulations and straying into harassment
It is not hard for debt recovery to turn into a dispute which can become personal. It is important not to let this get out of hand for many reasons. The main one being that it is very unlikely to lead to a quick resolution, but there can be additional legal repercussions.
If you, or a third party you have hired (such as a debt recovery company you have instructed) stray into what could be considered aggressive or harassing behaviour, you may find yourself in trouble. At best, this will distract from what you are trying to achieve and, at worst, it might even have criminal ramifications for you under harassment laws.
Failing to comply with the Pre-Action Protocol for Debt Claims
Before taking a disputed debt to court for a resolution or for enforcement, it is vital that you comply with any recognised pre-action protocol. If you do not, this can result in delays, increased costs, and may lead to you being unable to collect your court costs – or worse, being ordered to pay the costs of your debtor.
These protocols are designed to save court time, by encouraging all parties to resolve their dispute out of court if possible. Only then should the case be taking up court time before a Judge. As a result, if you do not follow the relevant protocols, a Judge is likely to look unfavourably on your case and your position on claiming legal costs.
The Pre-Action Protocol for Debt Claims includes the requirement to set out your case clearly by letter, giving the debtor a specific amount of time to respond before you can move to the next stage of issuing your claim in court.
Not only will this assist you if you end up in court, but a well-drafted pre-action letter will often lead to a negotiation and settlement, and court action can be avoided.
We can advise you on whether or not this particular Protocol will apply in your case, as it sometimes will not.
Missing limitation deadlines
All debt claims must be brought within a certain time period according to law. This is usually six years from the date that the debt could first be enforced, but it can vary. If you fail to bring a claim within this period of time, you will in practice be prevented from doing so at all.
Using ‘Without Prejudice’ incorrectly
‘Without prejudice’ is a term that is used by two parties to allow them to discuss a settlement off the record, without these discussions being brought to the attention of a Judge if talks break down. The use of without prejudice negotiations can be very effective in resolving a dispute with a debtor and obtaining payment and it is vital that this method of engaging is used correctly. You do not want your off-the-record concessions to be used against you later in court as evidence. For example, if you suggest that you would accept a reduction in the full amount, and this suggestion was not made during a without prejudice conversation or communication, this could be disclosed to a court by your debtor as proof that the debt owed is actually lower than you are claiming.
Failing to make good use of alternative resolution methods
Before issuing a claim in court, you must consider other dispute resolution methods that might be better for your situation. These may get your debt paid quicker, and may help you to deal with the other party in a neutral way which can be advantageous if they are someone you want to continue to deal with.
One alternative dispute resolution method is mediation. A mediator is a professional independent third party, who will talk through the issues with both sides, assist in negotiations between them and hopefully help reach a solution agreeable to both parties. This can be more flexible than court, less public, and less aggressive.
Another option is to attend arbitration. An arbitrator is an independent third party, often an expert in a particular field, who will hear both sides of the arguments and then make a ruling. The arbitrator’s decision is legally binding. Again, this has the benefit of being more private than open court, and the timing can be controlled by both parties.
Failure to comply with the terms of your contract
You must check the terms of your contract and exhaust all areas of dispute resolution set out in that contract before you move to court action.
For example, sometimes a contract for goods or services will specify that parties must try arbitration before resorting to court. If you have not suggested this and made efforts to resolve the dispute this way, a court is likely to either stay or even dismiss your case, and you could be penalised with a costs order.
Failure to retain evidence
An essential part of any successful case is to be able to provide evidence as to why your claim is valid. This applies equally when communicating what is owed, as well as when persuading a court that you are owed what you say. If you lose vital evidence, such as contracts, copy invoices or relevant communications, then it will be your word against your opponents, and your position is greatly weakened.
How we can help
We have many years of experience in debt recovery with all types of businesses. We can help you take a claim to court, or act for you in resolving a dispute and collecting the debt using negotiation or alternative dispute solutions. We will advise on the quickest and most cost-effective course of action to ensure your debts are paid.
For further information and assistance, please contact Luke Edwards in the dispute resolution team on 01733 882800 or email [email protected].
Luke Edwards, Solicitor
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