What to Do If Your Customers and Clients Can’t Afford to Pay You Right Now
November 16, 2020
Author: Christina Carriere Lutz
It goes without saying that times are very difficult for businesses, and many are faced with an increasingly bleak dilemma: their customers and clients cannot afford to pay them.
Businesses are continuing to face late payments and non-payments, and eventually must contend with whether or not to sue their own clients to recover amounts they are owed. There are things to consider before you go down this road.
- Be prepared to end the relationship.
Don’t think that this is merely a business decision and that you will be able to continue your relationship with the customer either once the dispute is resolved or even while the lawsuit is ongoing. The moment you sue your client, that business relationship will end, no matter how friendly you have been in the past. Be prepared for that client to take their business elsewhere if and when their business rebounds.
- Be aware of any counterclaim.
Does the customer have a counterclaim they can bring against you? Think back over the course of your business relationship with this customer. If there is anything you’ve ever done where you couldn’t comply with contractual terms and your customer let it slide or gave you the benefit of the doubt, be aware that they will take the opposite position once you sue them and bring a counterclaim against you. Even if it occurred a long time ago, the statute of limitations in Illinois is ten years on a written contract. Once you are in court, the gloves are off.
- Know your price.
How much money are you willing to devote to a lawsuit? Litigation is expensive. You’ll spend money on filing fees, attorneys’ fees, e-discovery vendor costs, and possibly expert witness fees. These costs can be substantial, and even if you win at trial, that could be years away. Do you have the money to devote to monthly legal bills, and even if you do, would you rather spend that money elsewhere?
- Know your limits with time and energy.
How much time and energy are you willing to devote to a lawsuit? For businesses who do not worry about money (and what businesses are those, anyway?) lawsuits also take a lot of energy and attention from business owners, particularly in companies without a legal department. You will be giving your lawyer access to all your emails in an invasive and expensive document collection process to get practically every email, invoice, purchase order and document that has ever been exchanged between you and the customer you may sue. You will have to assist in responding to interrogatories and verify that the answers are correct. You will have to prepare and sit for depositions. And you will have to prepare and testify at trial if the case doesn’t settle. Most executives do not have the time or energy for that and do not consider the opportunity cost of focusing so much on a lawsuit when that energy could be spent in more productive ways.
- Discuss the nuts and bolts with your litigator.
Like we said, litigation is expensive. Ask your litigator how much is in dispute. It will make no sense to sue your client and disrupt that business relationship if it will cost you more to sue than you stand to recover. You’ll lose the client and money. Also ask if your contract allows you to recover attorneys’ fees. If there is no provision in your contract with the customer that allows you to recover your costs of collection (often referred to as attorneys’ fees provision, a fee-shifting provision or a prevailing party provision), then you will be subtracting attorneys’ fees from whatever amount you win.
- Consider settling.
Are you willing to settle? Less than 3 percent of civil cases go to trial. That means that more than 97 percent of cases settle. You may be adamant about suing your customer, but if in all likelihood you are going to settle eventually, does it make sense to wait years to get that money, or try to settle before the lawsuit starts? Your litigator should be talking to you about these kinds of issues before jumping into a lawsuit, particularly with a customer. There are lots of strategies we use to recover as much money as possible for clients without setting foot in a courtroom. And if all else fails, then we develop a strategy to aggressively reach a resolution as quickly as possible. But you should know that a lawsuit is not your only option, and it comes at a price. If your lawyer isn’t telling you this, then they aren’t telling you the whole story, and you would rather not find all of this out three years into a case.
If you have questions about collecting on past due amounts owed by a customer or client, the Litigation Group at Levenfeld Pearlstein can help you understand your options.