How not to terminate for non-payment

Non-payment, or habitual late-payment of invoices by customers can impose real costs on suppliers, and put serious strain on the supplier-customer relationship.  In many cases a supplier will terminate, or threaten to terminate the contractual relationship with the customer unless payment is made.   Although non-payment of invoices can justify termination of a contract, if the contract contains a particular mechanism for termination – such as requiring a written notice threatening termination to be given, and the contract can then be terminated if payment has not been made within X number of days – it is vitally important that that process be scrupulously followed, otherwise the supplier may expose themselves to significant liability.

A 2008 case in the New South Wales Supreme Court Lime Telecom Pty Ltd v Powertel Limited [No 1] [2008] NSWSC 324 is a perfect example of how not to terminate a contract for non-payment.  In that case, Powertel was a telecommunications carrier which supplied telecommunications services to Lime Telecom, which were essential to Lime Telecom’s business.  The contract for those services allowed Powertel to terminate if:

“You [i.e. Lime Telecom] have failed to make a payment by the due date and you fail to make such payment within 5 Business Days of receipt of a notice requiring you to do so…” (Termination Clause)

Lime Telecom had on several occasions failed to pay invoices when due, and had been issued with notices threatening termination, at which point it had made payment.  It appears that Powertel’s management had “become disenchanted” with Lime Telecom’s payment history, and decided to take a hard-line approach.

Unfortunately for Powertel, almost everything that could go wrong with that process did go wrong.

Powertel couldn’t prove the required notice was received

The Termination Clause required that Lime Telecom be given a notice requiring payment within 5 Business Days.  Powertel claimed that this notice was given on 21 May 2007, but the only evidence that it was in fact given was an entry in Powertel’s computer systems, and evidence of procedures which would suggest that, based on the computer records, the notice would have been printed and mailed according to Powertel’s usual business processes.

Lime Telecom denied that this notice was received.  The sworn evidence of Lime Telecom’s business manager, who had the only key to Lime Telecom’s mail box and personally cleared that mail box every day, was that no such notice was received, and if it had been received, Lime Telecom could have and would have paid the overdue amounts to Powertel.

Because Lime denied receiving the notice, and Powertel could not prove it had been received, or posted, or even printed in the first place, the Court accepted Lime Telecom’s argument that it had not received the notice.

Powertel miscalculated the notice period and terminated too early

Although the Termination Clause allowed Powertel to terminate the contract if payment was not made within 5 Business Days of receipt of the required notice, Powertel’s management were of the view that its right to terminate arose 5 Business Days after issue of the required notice.  The Court held that even if the notice had been generated and posted on 21 May 2007, it could not have been received by Lime Telecom sufficiently early to allow Powertel to terminate the contract when it purported to do so (29 May 2007).

Powertel refused to accept payment

Lime Telecom’s unchallenged evidence was that on the 29th and 30th of May it offered Powertel payment in full of all amounts owing, and that it could have and would have made that payment.  Although the judgment does not record the precise terms of Powertel’s response, or the reasons for it, it appears that Powertel refused to accept payment from Lime Telecom, thereby denying it the opportunity to pay the overdue amounts as required by the contract.

The Court held that, were it necessary to do so (in light of its findings that the notice had not been received, and even if it had been received, Powertel terminated the contracts before the required 5 Business Days had elapsed), it would conclude that Powertel could not take advantage of Lime Telecom’s non-payment to terminate the contracts in these circumstances.

The result for Powertel

Powertel was held to have repudiated the contracts with Lime Telecom by purporting to terminate them when it was not entitled to.  Powertel caused very substantial damage to Lime Telecom’s business by cutting off its telecommunications services, and Lime Telecom was subsequently awarded damages of nearly $1.5M – a very costly exercise for Powertel, when Lime Telecom’s monthly charges were less than $50,000.

Learning points

• Terminating a contract is a serious step which should not be taken lightly.  Any processes for termination required by the contract should be scrupulously followed, and each step should also be documented or recorded to provide evidence in case the termination is challenged in future.
• Powertel’s case could have been significantly improved had it sent the required notice by registered post, or also sent copies to Lime Telecom by fax or email, or even had one of its staff print the notice, place it in a stamped and addressed envelope, place the envelope in a mailbox on the footpath, and make diary notes as a record of having done these things.
• Notice periods must be calculated very carefully.  Where there is any doubt, it is better to allow a customer additional time to pay, than to allow them too little.
  You can’t terminate a customer for not paying their bills, if you have refused to accept payment.

Further information

If you need assistance or advice on any contractual issues, or would like advice on your options in relation to non-paying customers, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstance.

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