Contractors, suppliers, and service providers are falling prey to another symptom of the economic recession – slow pay or no pay contract parties. The Wall Street Journal1 reports that this trend is costing good companies millions of dollars, and seriously threatening their financial viability. Large companies are paying invoices at an ever slowing pace – 60, 90, even 120 days late – forcing good companies to finance the cost of this delay by paying costly interest that they can ill afford on ever-shrinking lines of credit.
The strong desire to continue existing business prevents many companies from enforcing their legitimate contract rights to full, timely payment or payment of service charges with late fees. Since the statute of limitations for collecting claims that are part of a written contract is 15 years in most jurisdictions, time is on the side of the contractors, suppliers and service providers. (We’ll call this group “suppliers” for the rest of the article.) Rather than write-off the no pay accounts, once the relationship has ended, suppliers have ample time to file suit to assert their rights.
Properly drafted documentation may preserve a supplier’s rights to seek service charges after the business relationship ends, even where invoices were fully paid, but paid late without service charges.
When suppliers accept late payments, they run the risk of “waiving” their legal rights. Basically, a legal “waiver” occurs when a party, by acting or even failing to act, indicates it will not take steps to fully enforce its legal rights. See Am. Gen. Home Equity, Inc. v. Kestel, 253 S.W.3d 543, 553-54 (Ky. 2008). Various court cases have held that the acceptance of late or insufficient payments can be considered waiver. In the Kentucky case of Paducah Hosiery Mills v. Proctor & Schwartz, 210 Ky. 806, 814-15 (1925), Kentucky’s highest court determined that a hosiery company had waived its rights under a contractual warranty because it kept malfunctioning pieces of machinery, rather than turn them over to the manufacturer in a timely manner. Id. at 806, 808-15. By extension, the Court’s decision implies that continuing to accept late payments or otherwise insufficient payments would act as a waiver of a company’s right to be paid timely and in full, just as continuing to use the machinery waived Paducah Hosiery’s rights under the warranty.
This conclusion is supported by Continental Ins. Co. v. Stratton, 185 Ky. 523 (1927). The Court determined that an insurance company’s acceptance of late premium payments in two consecutive years did not constitute waiver. Id. at 527. The Court felt the insurance company had not “establish[ed] a custom of accepting installments after they are due.” In sum, waiver through acceptance of late or insufficient payment seems possible, but only if the acceptance of such payments is more than “singular.” So, acceptance of late or insufficient payments can be waiver when accepted regularly or even continually.
Acceptance of late payments does not seem to constitute waiver when agreements contain clauses saying that acceptance of late payments will not constitute waiver. See Catron v. Citizen Union Bank, 229 S.W.3d 54, 57-8 (Ky. Ct. App. 2006). These contract provisions will be discussed in more detail later.
Cases from outside Kentucky also indicate that acceptance of late payments may constitute waiver. See In re Kreuger, 192 F. 3d 733 (7th Cir. 1999)(Acceptance of late payments could be considered waiver if a party knew of its legal rights and that its acceptance of late payment or something less than satisfactory payment indicated clearly its intent not to enforce its full rights under the law.); Intervisual Communs. v. Volkert, 975 F. Supp. 1092, 1101 (N.D. Ill. 1997) (quoting Lang v Parks, 19 Ill. 2d 223, 226 (1960)) (“[r]egular acceptance of late payments” can constitute waiver.); and Cassidy Podell Lynch, Inc. v. Snydergeneral Corp., 944 F.2d 1131 (3rd Cir. 1991)(Where, though the parties had a “net 30” agreement, payments were “consistently made approximately ninety days after shipment,” acquiescence in this course of performance amounted to a waiver of the thirty-day payment term.)
What happens when one contracting party offers something less than an agreed to payment yet claims that the payment is “full satisfaction.” For example, in Estates v. McKinney, 354 S.W.3d 144, 146-7 (Ky. Ct. App. 2011), one contracting party, “Town and Country,” was supposed to pay the other, “Success,” $20,000 after a merger agreement between the two fell apart. Instead, Town and Country sent a check for $18,500 along with a letter that disputed that Town and Country owed Success any more money. Id. at 147. Success took the payment, but maintained – it sent Town and Country a letter of its own – that the payment was not full satisfaction. Id.
Kentucky law holds that “accord and satisfaction” dictates that a claim will be discharged if the person the claim is made against can demonstrate that they tendered an instrument to the claimant as a full payment, that the amount “was unliquidated or subject to bona fide dispute,” and that the “claimant obtained payment of the instrument.” Id. (quoting KRS 355.3-311(1)). Kentucky courts have interpreted “bona fide” to mean “good faith.” Id. at 148 (quoting Meade v. Richardson Fuel, Inc., 166 S.W.3d 55, n.7 (Ky. Ct. App. 2005)). In Estates, the court concluded that there was a dispute in good faith concerning the remaining $1,500. The fact that Success did not reject the instrument tendered in full satisfaction, nor did it accept but later repay the amount within a 90 day statutory period, meant that Success had accepted the payment as full satisfaction, thereby discharging its claim, which is really a form of legal waiver, though the term “waiver” is not expressly used in the opinion. Id. at 148-9 (citing KRS 355.311(3)(b); Morgan v. Crawford, 106 S.W.3d 480, 482 (Ky. Ct. App. 2003)).
In sum, case law in Kentucky and elsewhere indicates the acceptance of late payments can be considered waiver, at least in certain situations. Relevant case law, however, offers strategies for avoiding problematic situations.
Most importantly, when negotiating contracts, suppliers must include terms to prevent acceptance of late payments from being considered waiver. Catron reminds us that when the course of dealing between parties goes against a written agreement, it is the writing that will hold sway. 229 S.W.3d 54, 57. Suppliers will be best protected if they can negotiate non-waiver clauses into their agreements. Such non-waiver clauses would indicate that a party accepting a late payment does not waive its right to future timely payments. Analogous examples are provided by various cases dealing with late mortgage payments. See, e.g., Price v. First Fed. Sav. Bank, 822 S.W.2d 422, 424 (Ky. App. 1992); McCool v. Decatur County Bank of Greensburg, 480 N.E.2d 596 (Ind. Ct. App., 1985); First Federal Savings & Loan As’’n of Gary v. Stone, 467 N.E.2d 1226 (Ind. Ct. App., 1984); and Postal Savings & Loan Ass’n v. Freel, 10 Kan. App. 2d 286, 698 P.2d 382 (1984). The general theme from these cases is that when contracting parties insert a non-waiver clause, that clause will be dispositive and parties will be able to accept late payments without waiving their overall right to full and timely payments.
A non-waiver clause of that type was also dispositive in K.B. Oil Co. v. Ford Motor Credit Co., 811 F.2d 310 (6th Cir. 1987). The case dealt with whether or not Ford Motor Credit Company’s acceptance of late payments constituted a waiver of its right to repossess various trucks. Id. at 311-12. The contract between the litigants provided that “‘the creditor’s acceptance of any late payment or late charge does not excuse the Buyer’s [K.B. Oil’s] default or mean that the Buyer can keep making payments after they are due.’” Id. at 312. Under the agreement, Ford Motor Credit Company had not waived its rights because the contract clearly stated that acceptance of late payments would not constitute waiver or excusal of default. This case demonstrates just how key careful contracting can be in these situations. If suppliers can negotiate non-waiver clauses into their contracts with larger businesses, they will do much to protect themselves from financial bullying.
For example, a non-waiver clause could be written as follows:
It is expressly agreed by the parties that acceptance by X (supplier) of any payment less than full and timely payment shall not constitute or be deemed a waiver of the right of X to receive such full and timely payments in the future nor a waiver of the right of X to recover outstanding payments and charges at a later date. Any waiver by X of any of the contractual obligations owed to X under this agreement shall not at any time thereafter constitute or be considered a waiver of any of the terms or conditions of this agreement, except as otherwise expressly waived by X.
Suppliers must also be wary of communications that could be construed as an implicit waiver. In the previously mentioned case of Cassidy Podell Lynch, though Snyder was deemed to have waived its contractual rights because of its acceptance of late payments, the court noted that it could still notify its contracting partner that it would no longer accept late payments, thereby returning to the original agreement. 944 F.2d 1131, 1147. The Third Circuit believed that with proper notification, a party that had been accepting late payments could rebuke any future waivers for executory agreements, but still would not be able to recover for past unsatisfactory payments because those had already been waived via acceptance. Id.
It seems that the best option for suppliers would be to simply not accept late payments. If, however, suppliers must accept late payments, those payments should be accepted with an affirmative statement – perhaps incorporated in an invoice – that the payment is unsatisfactory and that the recipient still expects full payment (including any late fees) and that the acceptance of partial payment is in no way a waiver of the party’s right to full compensation. Since waiver requires an express or implied abandonment of a legal right, such affirmative, documented statements of a desire to be paid in full and on time would hopefully preserve a party’s legal rights and keep alive the option of using lawsuits ex post to fully recover what one is owed. An example of such language that could be included in an invoice is as follows:
The acceptance by X (supplier) of this late payment does not constitute a waiver of X’s legal right to receive late fees and service charges, nor is it a waiver of X’s right to receive full and timely payment in the future. X’s acceptance of this late or otherwise insufficient payment is not a waiver of any of the express terms of the original agreement, except as otherwise expressly waived.
In the event that a contracting party sends unsatisfactory payment with some type of affirmative statement that the payment is in fact full satisfaction, suppliers that seek full compensation should refuse to accept the payment. If for some reason it is necessary to accept the payment, however, then suppliers must be cognizant of statutory deadlines in their respective states of operation. For example, as previously mentioned, Kentucky law provides a 90 day window to return, in full, the payment received. Suppliers must be mindful of such deadlines as failure to comply with them will result in legal waiver.
Acceptance of late payments or otherwise insufficient payments can constitute waiver. The best option would be to simply refuse any late payments and to treat any such payment as a breach of contract. Where the option of refusing late or insufficient payments is not available, suppliers should send written notice that any acceptance of late payment does not constitute waiver, and that the acceptor still expects full payment (including late fees) and that payments from thenceforth should be made timely. When a contracting party offers payment as “full satisfaction,” suppliers must remember that if they wish to keep their rights to full payment, they must reject such payment or accept it and refund it within 90 days (or other relevant statutory period). Such steps will preserve rights to full, timely payment and future claims against slow pay customers.
1Angus Loten, Big Customers Are Taking Longer to Pay, Wall Street Journal, June 7, 2012, at B7.
By Elizabeth L. Thompson and Hunter J. Kendrick, Stites & Harbison Attorneys, PLLC
Liz Thompson is a Member of the firm based in its Lexington office. Her practice focuses on the representation of substantial claimants, purchasers of assets, creditors’ committees and debtors in Chapter 11 bankruptcies, commercial litigation and representation of lenders in loan restructurings and work-outs. She joined the firm in 1995, recently served on its Management Committee, is head of its Creditors’ Rights & Bankruptcy Service Group and developed and facilitates its associate mentoring program.
Hunter J. Kendrick is a Summer Association in the firm’s Lexington office during the summer of 2012.