The choice between payment in arrears and payment in arrears structures the financial relationship between a supplier and its customer. Far from being a mere calendar detail, this method defines the distribution of risk, the balance of cash flow and the possible remedies in the event of a dispute. Understanding the difference between these two concepts is the first step, but the question of their complex legal implications is essential if you are to protect your transactions and anticipate disputes. This article details these mechanisms, the context in which they apply and, above all, the strategies for protection and recovery in the event of default.
What is payment in arrears?
Payment in arrears is the most common form of post-delivery commercial relationship. It establishes a logical sequence in which trust is placed in the supplier, who must first fulfil his obligations before being able to demand financial consideration.
Definition and mechanism
Payment in arrears means that payment for a service or delivery of goods is only due once the service or delivery has been completed. The customer pays for a service already rendered or a good already received. This approach benefits the debtor, who has the opportunity to check the conformity and quality of the service before paying the invoice. For the creditor, on the other hand, it means a potentially risky cash flow gap, as the creditor has to bear all the production or fulfilment costs in advance, with the risk of late payment or non-payment. For a in-depth management of legal payment risksIt is essential to anticipate these challenges. Understanding thelegal framework for payment charges is crucial for the creditor.
Concrete examples of application
This practice is widespread in many sectors where the service must be validated before payment:
- Salary: This is the most emblematic example. Employees work for a given period (usually a month) and only receive their pay at the end of that period, in arrears. This system also applies to a retirement pension, which is paid after the period has elapsed.
- Services : A consultant, lawyer or craftsman generally invoices his fees once the assignment has been completed and approved by the customer. The service provider therefore advances all the costs associated with the assignment.
- The supply of goods between companies : A company that delivers raw materials issues an invoice payable after delivery, often with a payment term of 30 or 60 days.
Understanding payment in arrears
Payment in arrears reverses the logic of time and the distribution of risk. It is an advance payment demanded by the creditor to guarantee his income and cash flow even before he has committed to the entire service.
Definition and principle of prepayment
A payment is said to be in arrears when it must be made at the beginning of the period for a future service or use. The customer pays in advance for the service or good he is about to receive. This method transfers the risk to the customer, who must trust the supplier to perform its obligations in the future. For the creditor, it is a powerful financial guarantee that eliminates the risk of non-payment and stabilises his cash flow, enabling him to advance the funds to cover the costs to be incurred for the service.
Common uses
Payment in arrears is preferred in contracts with successive performance or when the reservation of a service is necessary:
- Rents : In a lease for residential or commercial premises, rent is almost always payable in arrears, i.e. at the beginning of the month for the coming month. This ensures that the landlord receives the rental income before occupation of the premises for the new period has begun. This practice differs from the guarantee deposit, which is paid when the contract is signed to cover any shortcomings, and which is only returned once the inventory of fixtures has been checked on departure. For more complex situations, it is important to know the legal consequences of non-paymentincluding the acceleration of payment. Managing these flows may involve specific features of seizures on rent claims.
- Subscriptions : When a person decides to subscribe to this type of offer (telephony, internet, software, insurance), the payment is made at the beginning of the period (usually a monthly payment) for the period to come, which guarantees the supplier predictability of income.
- Reservation contracts : In the tourism or events sector, payment of a deposit or the full price is often required at the time of booking to protect against cancellations.
Comparison table: term due vs. term to mature, which option should you choose?
The choice between these two payment methods depends on the sector of activity, the nature of the service and the relationship of trust between the parties. A summary table shows the implications for each player.
| Criteria | Payment in arrears | Payment in arrears |
| Time of payment | After completion of the service/delivery | Before completion of the service / enjoyment |
| Main advantage for the creditor (supplier, lessor) | Establishing a relationship of trust with the customer | Secure cash flow, no risk of non-payment |
| Main disadvantage for the creditor | Risk of non-payment, cash flow mismatch | Can deter wary customers |
| Main advantage for the debtor (customer, tenant) | Payment after verification of compliance | Guarantees the reservation of a service or good |
| Main disadvantage for the debtor | No major risk, except that of being relaunched | Risk of non-delivery or non-compliant service |
| Preferred sectors | Services, B2B, salaries | Property rental, subscriptions, insurance |
Summary of advantages and disadvantages for creditors and debtors
For the creditor, the term to maturity is a guarantee of financial peace of mind, protecting his cash flow and guarding against payment default. On the other hand, the term to maturity, although more risky, can be a commercial argument to gain the trust of a customer who pays only after being satisfied. The balance of power is therefore different.
For the debtor, payment in arrears is the most protective method: he only pays for what has been properly performed. Conversely, payment in arrears involves a cash advance and a transfer of risk. If the supplier fails to deliver or the service is defective, the customer will have to take steps to obtain reimbursement.
Implications for financing: the case of factoring
Factoring is a financing solution that enables a company to sell its issued invoices to a specialised company (the "factor") to obtain an immediate cash advance. The choice of payment term has a direct impact on the eligibility of invoices for this type of financing. Factoring companies almost exclusively favour invoices paid in arrears, as the service has already been performed and the goods delivered. This eliminates the risk of commercial disputes (non-conformity, poorly executed service), making collection more secure. An invoice that has fallen due, representing a receivable on a future service, is considered too risky and is rarely accepted. The question of factoring only arises for a service that has been fully completed. Factoring is therefore a financial product almost exclusively reserved for receivables in arrears. However, the complexity increases when you consider the impact of insolvency proceedings on term receivables.
Risks, disputes and legal remedies in the event of non-payment
Non-payment of a due date is the major risk associated with term debts. Beyond simple reminders, the law offers creditors powerful tools to punish defaulting debtors, provided that the contract has been properly drafted.
Forfeiture of the term: a formidable sanction for the debtor
The forfeiture of the term is a contractual clause that constitutes a severe sanction in the event of non-compliance with due dates, and is particularly used in credit contracts. When it is invoked, the entire debt becomes immediately due and payable. In other words, a single non-payment can transform an instalment debt (such as a mortgage) into a debt payable in cash. Its application is subject to strict conditions:
- An express clause: Acceleration must be explicitly provided for in the contract (loan, lease, etc.).
- Failure to comply : The debtor must not have paid one or more instalments by the agreed date.
- A formal notice : The creditor must send the debtor a formal notice to pay, which has remained without effect.
Once these conditions have been met, the creditor can demand immediate payment of the entire outstanding principal, together with any late-payment interest and penalties. This is an essential lever for encouraging payment or taking legal action against the entire debt.
Other creditor remedies: from formal notice to legal action
Before considering more restrictive measures, the classic debt collection procedure begins with an amicable phase (telephone reminder, simple letter). If this fails, the procedure becomes more formal:
- Formal notice : Sent by recorded delivery letter with acknowledgement of receipt, it is an essential legal prerequisite and starts accruing interest from the date of receipt at the correct address.
- Simplified collection procedures: If the claim is not seriously disputable, the creditor can resort to an injunction to pay procedure, which is quicker and less costly than a traditional lawsuit.
- Summons for payment : If the debtor disputes the debt or if the simplified procedures fail, the creditor must take the matter to the appropriate court to obtain a judgment and settle the dispute.
Forced collection of term debts: focus on seizure of assets for collection
When a creditor has a writ of execution (a judgement or notarial deed), he or she can resort to compulsory enforcement to obtain payment. Attachment is particularly effective for claims that are to be enforced successively, such as rent or subscriptions.
The principle of seizure of rent and subscriptions
Attachment enables a creditor (the distrainor) to obtain payment directly from a third party who owes money to his own debtor (the garnishee). In the case of rent, the creditor of a landlord can have the rent seized directly from the tenant, which corresponds to a seizure of his rental debt. The bailiff serves the seizure deed on the tenant, who is then obliged to pay his rent not to his landlord, but to the seizing creditor, until the debt is settled.
Incipient claim versus contingent claim: the key to seizability of future terms
The special feature of an attachment order against a debt that is to be enforced successively lies in its ability to cover future instalments. This is made possible by a subtle but fundamental legal distinction:
- The debt in the making : A claim arising from a contract in progress, such as rent from a lease, is considered to be "certain in principle", even if the payment has not yet been made. Even if the future monthly instalments are not yet due, their existence has already been established. The debt is "in the making" and can therefore be seized for its future terms.
- The contingent claim : Conversely, a claim that depends on a future and uncertain event cannot be seized. For example, commission on a sale that has not yet taken place is a purely contingent claim.
This distinction legally justifies the seizure of accrued rent or subscription fees, offering the creditor a guarantee of continuous payment on the debtor's future financial flows. In the event of a dispute, the enforcement judge has the final say.
Impact of insolvency proceedings on forward payments
The opening of safeguard, reorganisation or liquidation proceedings in favour of the debtor, sometimes following a bankruptcy filing, changes the rules of the game. The priority becomes the survival of the business or the organisation of the distribution of assets among creditors, with direct consequences for future claims.
Term claims: declaration and stay of proceedings
The opening of insolvency proceedings results in the immediate cessation of individual proceedings in respect of all claims arising prior to that date. A creditor may no longer bring an action for payment or seizure. They are obliged to declare their claims as liabilities of the proceedings within the statutory time limits. This obligation applies even if the claim is not yet due. Late filing of this declaration may result in the claim being extinguished, depriving the creditor of any chance of being paid.
Specific case of rents and subscriptions (subsequent receivables)
A key distinction must be made in the case of contracts with successive performance, such as leases or subscriptions. Rents or royalties due for the period after the opening judgment are not treated as prior debts. They are considered as "deserving subsequent debts", necessary for the continuation of the company's activity. As such, they receive preferential treatment and must be paid on their normal due date. If the company in difficulty does not pay these subsequent rents or subscriptions, the lessor or supplier may request termination of the contract to allow the recovery of its property or the discontinuation of the service, and may ask for the last unpaid rent.
Conclusion: How can you secure your transactions?
The choice between payment in arrears and payment in arrears is a trade-off between trust and risk. Payment in arrears protects the customer, while payment in arrears protects the supplier. The best solution depends on the context, but there are mechanisms to balance the relationship:
- Down payment : It represents a happy medium, covering part of the supplier's initial costs without requiring the customer to pay in full in advance. It differs from a guarantee deposit, which is not a partial payment but a sum retained to cover future damages.
- Guarantees : A bank guarantee, an earmarked deposit or a first demand guarantee can secure a debt in arrears.
- Contractual clarity : A well-drafted contract, setting out the terms of payment, penalties for late payment and including an acceleration clause, is the best protection. It's an option that should never be overlooked.
When faced with an unpaid debt or a complex situation, responsiveness is essential. Whether it's a question of implementing an acceleration clause, considering a seizure or navigating the intricacies of insolvency proceedings, anticipation is the key to protecting your rights and your cash flow. When in doubt, it is always advisable to contact a specialist lawyer in order to secure your transactions and anticipate potential disputes.
Sources
- Civil Code
- Commercial code
- Code of civil enforcement procedures
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