You’ve done all this work for a client and now you find yourself chasing down your client for payment. If you worry about ever finding yourself in this situation, then listen to this episode. Here’s what you’ll learn:
- What to do after you client fails to pay you
- The differences between litigation (including small claims court), mediation, arbitration and the pros/cons of each
- The questions to ask yourself before you draft a dispute resolution clause in your contract
LISTEN TO THE EPISODE
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HERE’S THE TRANSCRIPT OF THIS EPISODE
[Intro Music] This is Office Talk with Annette Stepanian.
Hey, hey, hey, Annette here and I’m back with another legal quickie episode. In this episode, I want to answer the question, what do you do when a client won’t pay you.
So let’s assume you’ve done all of the hard work, you’ve delivered the project to your client, you’ve performed whatever service it was that you’re going to perform for that client. And now you find yourself chasing down your client to pay the balance of their invoice. First, I hope you have a contract in place that outlines the payment terms. So there is no confusion about what the client is expected to pay you. And vice versa.
What I would recommend is to reach out to them, send your client a cordial but firm letter outlining the terms of your contract and their responsibility to pay you. So put a copy of the contract or any invoices and whatnot and other supporting documents. And state a deadline for receiving that payment.
Now remember, sometimes a client may withhold payment, because they’re dissatisfied with the service that you provided. And so this could be a really good opportunity for you to address their concerns and provide a better customer service for them or try and fix whatever that issue is.
If you’re making little progress, you know, you’ve given them enough time to pay, you’ve tried to address their concerns, and they’re still avoiding payment, what I want you to do is take a look at your contract. Most contracts will have a section called dispute resolution or something to that effect. And that part of the contract goes into what happens in the event that there’s a dispute between the parties.
Now there are three main ways in which disputes are resolved: mediation, arbitration and litigation. Before drafting this clause in your own contract, I want you guys to do your research and think carefully about the time, cost and rights associated with each of these dispute resolution mechanisms.
So I’m going to go through each of them kind of give you a high level pros and cons of each, so you can better understand what they are and why you might want to pick one over the other. And then I’m going to sum it up with some questions that you should ask yourself when deciding on the proper dispute resolution clause that you should include in your contract.
So first up, mediation. Mediation involves the parties meeting with an agreed upon neutral third party who’s called the mediator. So the mediator is not a decision-making authority. So they do not judge the case. They do not issue a ruling. They’re really there to facilitate a conversation between you and the other party, so that you both arrive at a mutually agreeable solution.
The good thing about mediation is that it is a less formal process. YYou’re usually not represented by a lawyer, which also means that it’s a lot cheaper. you can hire a mediator, usually for a few hundreds dollars for a day, and you don’t have to pay for legal fees and all that good stuff. Mediation also proceeds a lot faster than going to court. It can be scheduled as it suits your needs and based on your own schedule. And you don’t have to wait for your day in court. However, one of the downsides of mediation is that because the mediator is not in a position to make a decision -remember, they’re just there to facilitate a conversation – your efforts might be completely futile if the parties become deadlocked, or let’s say one party is completely stubborn and doesn’t want to compromise. And so you might end up going through mediation and not actually reaching a resolution.
Now, the next dispute resolution mechanism is arbitration. I like to think of arbitration as private court. So you have an arbitrator, usually the parties will select and agree upon an arbitrator, who’s usually a retired judge or lawyer with very specialized knowledge about that topic in dispute. So the arbitrator will review the case presented by the parties and actually issue a decision much like a judge would. So you don’t have that concern with mediation where the mediator is not really making a decision. Here, the arbitrator has that authority to make that decision. The good thing about arbitration is it is a much more simplified process than going to court in terms of the procedural and evidentiary rules. And the arbitrator has a lot of flexibility in determining how they’re going to govern the process.
Now, I want you to take a look at your contracts and see what does it say if it does have an arbitration clause? Is the arbitration considered to be binding, which means that it’s irreversible? Or non binding, which means that the decision can be reversed. You could agree upon this in advance in your contracts.
So in your contract, you can say the parties will agree to resolve disputes via binding arbitration – which means that once you guys go to arbitration, whatever the arbitrator rules, that will be the final decision.
Again, arbitration is a lot cheaper than going to court in terms of time and money, and energy. However, arbitration can be more expensive than mediation. It can cost a few thousand dollars a day to pay for the arbitrators time. If you’re hiring lawyers you have to also factor that in, so it can really add up.
So depending on the amount in dispute, usually in your business, what ends up happening with some folks is, let’s say they are owed maybe $500, or $1,000, which I know seems like a lot. But then when you’re faced with an arbitration provision, you’re like, well, it’s gonna cost me $3,000, to take it to arbitration. Once you do that cost benefit analysis, sometimes it’s not worth it, right? Because you’re gonna have to spend $3,000, to potentially get back $1,000 that was owed to you. So for a lot of small businesses, arbitration can be kind of a tricky. You really need to know your business and determine what makes sense for you in terms of the costs that are involved in pursuing arbitration.
And finally, litigation. So we are all familiar with litigation. We see it on all those lawyer TV shows. Unfortunately, they make it look a lot more exciting and sexy than it really is. litigation can be very expensive, and it can be very, very time consuming. Because the courts generally are very backlogged. And so it takes a long time for you to get your quote unquote, day in court. So litigation is there, it’s an option, it can be very expensive. You must be represented by a lawyer, which also adds to the cost. And that delay and costs associated with having disputes resolved in court encourages parties to really explore other forms of dispute resolution, like mediation and arbitration.
In fact, sometimes when you do file a lawsuit, some court systems will actually encourage you to take advantage of court mandated mediation processes to see if you can resolve your dispute via mediation before you enter the litigation process.
Now, I like to think of litigation as kind of like Big Brother court. And so this is the big fancy court that we always see on TV. But there’s also a small claims court, which I call little brother court. So small claims court, and it might be called something different in your state. It’s basically a court that was designed to resolve disputes involving small amounts of money in a very fast and expeditious manner. The amounts will vary by state, but range between maybe $2500 to maybe $20,000 or so. So if your claim falls within this prescribed amount, then pursuing your case in small claims court is always an option. If you do so, you must be prepared to attend the hearing and present your case yourself. Because most small claims courts will not allow you to be represented by a lawyer. Fortunately, the way that evidentiary and procedural rules work they are super simplified. You can usually get a lot of help from the court clerks, they can guide you through that process of filling out the right forms. So this is an option that is available to you if the amounts fall within the prescribed limit.
So what’s right for you? Before you draft your contracts, I want you to think about each of these dispute resolution mechanisms and ask yourself the following questions.
One, how much will it cost to get the dispute resolved? So consider the cost of hiring a mediator, arbitrator lawyer, your court fees may be travel or time spent away from work and on this matter, to really take that into consideration. You know, what is the quote unquote, cost, the opportunity cost? What is that really going to cost you both in terms of money and energy and time?
The second question is think about how much am I seeking to recover from my client. Now, I know you’re not always going to know in advance how much it’s going to be because we’re all hoping that our clients are going to pay us and there’s not going to be an issue. However, take a look at the potential cost if a client doesn’t pay you. And if you are, let’s say doing contracts that are in the 10s of 1000s of dollars, so your average contract is $25,000. Well, if a client forgoes paying you that $25,000 it may be worth exploring, let’s say arbitration, which may be cost you $3,000. IIt may be worth exploring arbitration at $3,000 in order to recover $25,000.
On the flip side, if your contracts are, let’s say, worth $500 each, that’s how much your projects go for, maybe you want a mechanism that is going to be a lot cheaper for you to pursue. So maybe small claims court is an option for you. And so what I want you to do is take a look at how much does it cost for you to explore mediation in your county. Or arbitration or litigation. What are those small claims limits in your county? And then take a look at how much are my average contracts worth? And then based on that you can make a decision on financially what is a more feasible solution for you?
The next question to ask is, how long will it take for us to have this dispute resolved? Sometimes you don’t want to be stuck in litigation for months, if not years on end. What you want to do is find a quick resolution so that you can move on and work on your business. So take that into consideration when weighing the different options.
Next, do I need to hire a lawyer to represent me and or understand my legal rights? Remember working with a lawyer will add extra cost. So factor that into your cost analysis.
One final thought on this matter. So far, we’ve been talking about disputes where you’re trying to collect money that is owed to you. Remember, if you have a dispute resolution clause, in your contract, this governs all disputes, including any issues that your client may have with you. So let’s say your client has a different claim against you that they want to bring. Or maybe they want to recover their deposit. It goes both ways. So when you’re considering what option works for you also look at it from the eyes of well, what if I’m being sued for something? How do I want to design this dispute resolution process so that it is fair, efficient, feasible and cost effective?
What I want you to do next is pull out your contract and take a look at what your dispute resolution clause says, Be really thoughtful about how you’re going to resolve disputes, because although we hope that it never happens to you, if it does, I want you to be prepared and have come to a thoughtful decision that works for you.
If you have any questions that you’d like me to address in a future episode of office talk, head on over to annettestepanian.com/qanda and that’s Q and A and submit a question to me. With that said, I hope you have a fantastic day and I can’t wait to talk to you later.