The key terms to include in a written contract and how to deal with late payers
- 12 Apr 2023
- Markel Direct
When contract work is successful, it benefits both you as the freelancer and your client. But when a contract goes wrong, everyone suffers, especially if you don’t get paid as a result.
In the article, Mark Rankin, Partner and Head of Civil Litigation at Markel Law, gives his top tips on building a robust contract that can help to protect you from a legal point of view if something goes wrong during the course of the project. He will also provide some advice on dealing with late paying clients, based on the work he does resolving these issues for business professionals.
Why is having a written contract for every project important?
One area where mistakes are commonly made is in failing to ensure that the contract is set out clearly in writing. That could be a total failure to get anything in writing, or it might be that only some of the terms that have been agreed on are committed to writing.
While contracts don’t have to be in writing and an oral contract is just as enforceable, unless it is written down, there is potential for ambiguity. Legal issues arise in those grey areas where there is room for more than one interpretation of the party’s intentions. That grey area is reduced if expectations are set down in writing. Of course, it is inevitable that two commercial parties will approach any hazy expectations or ambiguities within a project in a way that most suits their own interests.
With this in mind, clear expectations are key to a successful project and the best way of ensuring these are in place is to set out each party’s rights and obligations as clearly as possible in writing before any work begins. If it’s not in writing then you run the risk of the other side denying that a term was agreed, at which point you are asking a Judge to decide which version of events they prefer. In that case, a lawyer will always advise you that there is a risk, no matter how sure you are that the other side are not telling the truth (or “misremembering” to use words that Judges prefer).
The written contract doesn’t need to be war and peace. In fact, as long as it covers the important points, a document written in plain English and with the terms kept as simple as possible is often best. Template contracts are available to IPSE members in the resources hub that you can use as a starting point and tailor to your own specific needs.
Even if you have a personal or long-standing business relationship with the client, having a written contract is still just as important. A large number of the disputes we see are between former friends or close business associates. A written contract should be seen as a way of preserving a good relationship and limiting the risk of a falling out, not as a sign that you don’t trust the other party.
What are the key terms you need to include in a written contract?
How much time are you expected to dedicate to the project? Is there a minimum number of hours you have to work daily, weekly or monthly? Are there core hours you have to be online, or do you have complete flexibility as to what time of day, and what days, you work? Even if you think you have agreed on these terms verbally, it is worth getting them confirmed in writing.
What are you delivering?
Where necessary, make sure that the specification has been properly scoped and that both parties know and agree on those areas where elaboration is going to be required further down the line.
How are you to deliver the services?
How often do they want you to be on site? Are you allowed to be on site when it suits your personal circumstances, or do you have to get their prior permission to come in?
What are the delivery dates?
Is this a hard deadline or is it aspirational? In legal terms, “is time for delivery of the essence?”. If it is, then that means that if you miss the deadline, even if only by a few minutes, you are in material breach of the contract and the other side can terminate and claim damages, which may be extensive. You don’t want time for delivery of your work to be of the essence if you can help it.
How and when will you be paid?
What do you need to give your client for payment to be processed? Is there an automated system you have to use? Is there a time limit by which you have to submit timesheets or expenses?
If you are delivering a project, try to include milestone payments as you go. Putting in place a series of milestones will minimise your exposure to something going wrong and payment being withheld later in the project. Try to ensure that the milestones are fully within your control. For example, the milestone should be linked to when you deliver something for user acceptance testing, rather than when the customer signs it as being accepted. Where the milestone is subjective (or even worse, objective but based on actions to be taken by the client), you are in danger of not being paid on time, or potentially at all. This is why it’s best to have objective triggers that are entirely within your control whenever you can.
For more guidance on milestone payments, read our article ‘The importance of including milestone payments in your freelance contracts’ here.
What if I don’t have time to put together a written contract?
If there is an urgency to get going with a project and it is perceived that putting a contract in place will just delay things, send a short email to the client with bullet points setting out what you consider think you have agreed to do, how and by when. If the client comes back simply saying ‘agree’ then you’ve got a solid agreement right there that you can rely on. Even if they don’t respond, but continue to engage you, you have a strong argument to say your email was agreed even through their silence.
What can I do if a contract goes wrong and I’m not paid on time?
No-one goes into a contract expecting that it will fail, but to maximise your prospects of payment it is important to give thought to how it might come to an end earlier than intended.
Key things to think about are what will your client have to do to trigger your right to suspend or terminate the contract? Equally, what will you need to be mindful of avoiding so as not to give them the right to terminate early?
A good way of approaching this is to give some thought to a particular project, how it could go wrong and, in those circumstances, who should have what rights as a result.
Some of these will be the same for any given project. For example, if you aren’t paid for a particular period then unless you have a clause to say that you can down tools, then to avoid being in breach of the contract yourself, you may be required to continue working without any guarantee as to when (or if) you will be paid.
If you aren’t paid on time, is there any additional recompense for this, such as interest or late payment charges? It may help to know that the default position at law, where you are engaging with a business is that you are entitled to interest at 8% and a fixed amount per overdue invoice. The amount varies based on the value of the invoice, but will range between £40 and £100.
Amount of debt
What you can charge
Up to £999.99
£1,000 to £9,999.99
£10,000 or more
Other scenarios may be more project specific, like if there is a particular output that you are delivering and there is a dispute about the quality of your work, how should that dispute be dealt with? For example, should a third party be appointed to decide who is right? Should you be paid for any undisputed work, or can they withhold payment for that as well (in legal terms, is there a right of set off)?
Also, does the client have a right to terminate at will? If so, what is the notice period? Is the notice period offered going to be enough for you to find replacement work? Even if you aren’t able to renegotiate them, understanding what your client’s standard terms say about these things could be vital to your cashflow.
They say a leopard never changes it spots and that is generally true of bad payers. If a business starts to fall behind then it is difficult for it to catch up. Think about withdrawing credit, or reducing payment terms if they start to fall behind. Even the threat of this, or of a suspension, might be enough to prompt a payment.
About the author
Mark Rankin is a Partner and Head of Civil Litigation at Markel Law. Mark has over 12 years’ experience defending claims against professionals of all sizes and of advising them on recovering unpaid fees, as well as non-contentious issues. Mark’s practice has a particular focus on those operating in the technology and media sectors.
About Markel Direct
Markel are an award-winning insurer of contractors, freelancers, self-employed professionals and micro businesses. They have over 25,000 customers in the UK and their hassle-free website offers instant cover online, including professional indemnity, public liability and more.
IPSE members enjoy a 10% discount* on business insurance from Markel Direct. Get a quote here.
*IPSE 10% member discount terms and conditions
The discount will be applied to the net policy premium before insurance premium tax is applied. All quotations provided will be subject to meeting underwriting and claims criteria acceptance. All cover will be subject to full policy terms and conditions which are available upon request.
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