Every business owner encounters customers who refuse to pay for work done. Nine times out of ten, you can solve it on your own. But for a stubborn few, discussing it rationally does not work. Trying to negotiate a solution does not work. What can a small business owner do? Simple - check your contract, and call your lawyer.
Here are a few ideas to keep in mind so that you-and your lawyer - will have better leverage to persuade the customer to pay a valid bill.
1. Hire a lawyer to write a good contract, and to enforce it if needed. Most often, you will recover more than your lawyer’s fees, and more than you would have gotten without your lawyer’s help. At minimum, a letter from a lawyer gets the attention of a customer who is ignoring you.
2. With or without a lawyer, make sure you have a written contract. Do not rely on a handshake or oral agreement. When the relationship breaks down, you will both remember things differently. You can also include clauses in the written contract that may protect you later on.
3. Consider whether to include an “attorney’s fees “clause. An attorney’s fee clause usually indicates the prevailing party will be entitled to recover their attorney’s fees if there is a dispute over the contract. This means the “loser” has to pay the attorney fees charged by the “winner’s” lawyer. This can significantly raise the stakes for the customer who refuses to pay a valid invoice. But beware –if your customer is in the right, and you end up as the “losing” party, you may have to pay the customer’s attorney’s fees (even if you try to have the attorney’s fee clause favor you alone, Washington law says it still works to the benefit of the prevailing party. No one-sided advantage allowed). Because of this, an attorney's fee clause forces both sides to seriously evaluate their positions. It is a powerful device that often gives that extra incentive to settle their dispute.
Why is it so powerful? Because parties often decide it is better for them to cut a deal and limit their losses rather than risk being liable for the disputed amount plus two sets of lawyers.
4. Work with your lawyer. You delegate your tax work to an accountant; legal issues are just as complex and are likewise often best handled by a professional. Your lawyer has the training and insight to find the cases and statutes that apply, and can help you navigate a frustrating situation.
Example: Homeowners built a new house. Their designer envisioned a unique built-in cabinet and prepared a design. A specialty fabricator was hired to execute and install the design. A contract was written up between the Homeowners and the fabricator – with an attorney’s fee clause included - and the Homeowners made a down payment. For a while, the project seemed to move along well.
But before the piece was completed, the Homeowners stopped the work and refused to pay the fabricator for work done so far. Inquiry got little response other than “it doesn’t look like what we expected”. Explanation of why the piece could not be judged in its unfinished state fell on deaf ears. The Homeowners simply refused to pay.
So the fabricator got her lawyer involved. The lawyer wrote to the Homeowners pointing out they were in breach of contract and what the consequences are of that. The Homeowners called their own lawyer. The two lawyers discussed the facts, the relevant legal standards, and the looming attorney fees clause. Result? Homeowners paid nearly the entire disputed bill.
In the end, even after paying her lawyer, the fabricator recovered more than she was able to get on her own from the customers who tried to ignore her valid invoice. Moral of the story - a written contract and a lawyer are valuable investments in your bottom line.