If you’re like most business owners, suing customers or clients probably isn’t something you relish. But, if your business has receivables on a regular basis, having to sue to collect on a debt is probably inevitable to protect your brand.
Here are five tips to help improve your chances of either avoiding lawsuits in the first place, or winning those you have to pursue.
1. Have a valid, written contract.
Customers typically don’t like signing contracts. But, having a well-written, properly-executed, written contract can help protect both sides in a business relationship by setting clear expectations at the outset. Aside from formal legal requirements, the contract should properly identify the parties, describe the scope of work (including cost, deliverables, and timelines), outline the terms of payment, and set up a process for what happens if things go wrong (changes or, ultimately, termination). If properly executed, such a contract can serve as a roadmap while projects are ongoing to help navigate through disputes. And, if litigation arises, the contract is the first place a court will look to determine the rights and obligations of the parties. Bonus: In Massachusetts, having a written contract is necessary for contractors and subs to place a mechanic’s lien on property.
2. Communicate.
It’s important to communicate with your customer throughout your relationship with them. Make sure they’re happy with the way things are going, that they understand the status of work, and have reasonable expectations. Most importantly, if anything comes up during the project (add-ons, delays, unforeseen expenses) and you need to change the terms of the contract, make sure you explain the change and get the customer’s approval beforehand and in writing, such as with a written change order or amendment. Most litigation I see comes up when customer relations sour because of misunderstandings or unexpected events.
3. Get money up front.
One way to minimize your exposure is to avoid balloon payments by clients at the end of the project. It’s fair to ask for your client to pay you in installments, including some money up-front. This is particularly true if you’re expected to spend money to buy materials or make other expenses during the scope of work. Just make sure your contract explains how these payments will be made, when they’re due, and what happens if the client pays you too little or too much at a time.
4. Start with a demand.
When client relations do sour, litigation might not be the best first step. In order to preserve relationships and keep your costs down, you could try to work it out on your own. Otherwise, my advice is usually to start by having your attorney write a formal demand letter to the customer explaining what’s wrong and how you want it fixed. In many cases, controversies that would otherwise take years and thousands of dollars to litigate end up getting settled quickly and cheaply just because a lawyer gets involved and resolves things professionally. Your lawyer also can help act as a buffer so your don’t have to further tarnish relations with your customer.
5. If you need to litigate, hire an attorney.
If you do need to sue a client, do yourself a favor and hire an attorney to represent you. Your attorney can explain to you what to expect, and can help to make sure you’re protected as much as possible. It is imperative that you consult an attorney promptly, to avoid missing important legal deadlines. Also, make sure you save all important documents and emails, and give copies of everything to your lawyer. It’s important that your lawyer know everything that happened, even if you don’t think it’s important or if you think it’s harmful to your case. Your lawyer can’t help you proceed unless he or she knows everything that happened.
Of course, there are lots more considerations for businesses involved in litigation with customers and clients. If you find yourself in such a situation, please consider giving me a call. I would be happy to provide you with advice to help protect your business and maximize the strength of your legal position.