The new Pre-Action Protocol for Debt Claims does little to help creditors – it merely gives debtors more scope for delay

The rules governing pre-action conduct introduced by the Civil Procedure Rules have been an integral part of our civil justice system for nearly 20 years, with protocols mandating pre-action conduct for a variety of types of dispute ranging from construction disputes to defamation. The Ministry of Justice has now seen fit to introduce a pre-action protocol for simple money claims. 

Any business, including sole traders and public bodies, wishing to pursue monies owed by an individual or a sole trader on or after 1 October 2017 will be expected to comply with the Pre-Action Protocol for Debt Claims before being allowed to take a claim through the courts. Similarly, the “debtor” will also be expected to follow the protocol in their response. As with existing pre-action protocols, either party may be penalised by the courts for non-compliance if the dispute ends up in litigation. 

The aims, as with other pre-action protocols, are laudable, namely early engagement and communication between parties and looking for resolution or alternative dispute strategies to avoid disproportionate and costly litigation. However, in an industry where late payment can be crippling for  many businesses, does this protocol make things any easier for those owed money? I have my doubts. 

The protocol does not apply to business-to-business debt – it applies to debt claims against individuals and sole traders. These can be the most difficult debts to recover, not least because individuals are not subject to corporate governance requirements or the statutory reporting requirements recently imposed on large companies. 

Individuals often do not have the same commercial drivers to pay their debts in a timely fashion so as to maintain business relations. In my experience individuals can be the most entrenched litigators, as their approach is often dictated by points of principle – “I will not pay you a penny more!” – rather than by sound business rationale or common sense.  

The Protocol does not apply to business-to-business debt – it applies to debt claims against individuals and sole traders. These can be the most difficult debts to recover 

The new protocol requires a compliant “letter of claim”, which should be clearly dated and should include specific information including the value of the debt, any interest claimed and details of the contract under which the debt is pursued. The letter should also include details of how the debt can be paid. Various templates are to be provided for completion by the debtor.

The debtor has 30 days to respond; if there is no response, court proceedings can be issued. There are a number of ways a determined debtor can further delay payment – it can seek further information from the creditor, who is obliged to provide that information. The debtor is then afforded another 30 days to respond. It can state it is seeking debt advice, in which case a reasonable period has to be allowed for this to happen, and in cases where a reply is submitted by the debtor, the creditor cannot issue court proceedings for 30 days from the date of the reply.

So a recalcitrant debtor could wait for 30 days before seeking further information, then wait a further 30 days to reply, whereupon another 30 days must pass before the creditor can issue proceedings.

There is also a requirement to give 14 days’ notice of intention to start court proceedings – and if this is not incorporated within the above process, it could add a further 14 days to the whole process before proceedings can be issued. It should be noted that in the event that settlement is agreed and the debtor subsequently defaults, the creditor must send a new letter of claim, essentially starting the whole process again. 

The potential to delay recovery of debts by 90 days or more is something creditors need to consider when looking to chase debtors. It will be of particular concern for small to medium-sized businesses, where cash flow may be adversely affected by late payment.

Businesses should review their payment terms and credit control procedures to accommodate the prolonged timescale in the event of non-payment. Full supporting information for the debt, including a copy or details of the contract, should be kept and ought to be provided with the letter of claim to avoid a request for information. 

The difficulty with the protocol is that it presupposes there is a dispute regarding payment or a valid reason for non-payment, so it guides parties towards compromising claims for payment, agreeing payment by instalments or taking the claim through alternative dispute resolution. What it does not cater for, in my view, are those invoices that are simply ignored or put to the bottom of the pile – where the impact of a court claim can often provoke immediate payment. 

Is it possible to side-step the new protocol? Unfortunately it is still not possible to adjudicate under the Construction Act against residential occupiers, so that route to fast-track recovery is not available. However, creditors may be better served by using the existing  Pre-Action Protocol for Construction and Engineering Disputes, where that is applicable. This provides the ability to issue proceedings as early as 14 days (as opposed to

30 days) where there is no acknowledgement and affords more control over the process to the creditor. Businesses should also pay close attention to the dispute resolution clause in their contracts and seek to impose, by contract, their choice of dispute resolution process – be that, for example, an ability to adjudicate or to impose a low-cost arbitration requirement on claims up to a certain value. Some forward thinking is required for those businesses that routinely do business with individuals.