This article is Part Four in a seven-part series on how to structure sales and what to do when your customer fails to pay. You can find previous articles in this series here: Structuring Sales to Ensure Payment; Signs of Trouble Before Payment Default and Default by a Customer: Knowledge is Power. Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series.
The previous article in this series, Default by a Customer: Knowledge is Power, outlined how to negotiate favorable terms with the customer to avoid default, proceed with litigation against the customer before there is a deluge, and prepare for a bankruptcy by the customer. This article will cover key considerations as you head toward litigation with a customer in default.
Determine Your Weaknesses
- Determine if you as vendor or service provider are subject to any counterclaims if you sue your customer for nonpayment. Might the customer assert that the goods sold or services provided were faulty, not in accordance with contract, or otherwise unacceptable? Your customer will have a difficult time proving its counterclaim if it has retained the goods you sold without complaint, has incorporated them into their product or resold them.
- Verify that your documents and the accounting of the balance that you claim is due from your customer are in order.
Determine Your Time Constraints.
- What are your deadlines? Are you subject to any time constraints that will affect your decision making, such as the desire to get income from the settlement into the current fiscal quarter or bank reporting deadlines?
- Determine the applicable statute of limitations for bringing suit. Note that in Ohio, effective September 28, 2012, the statute of limitations for suit on a written contract was recently reduced from 15 years to 8 years.
- Determine whether your written agreements with your customer require that you provide the customer with written notice of the default, including the delivery method, such as certified mail or hand delivery, and determine whether you must give your customer a specified amount of time after you notify the customer of its default in order to pay you, also known as "curing" the default.
- Determine where to file suit, also known as determining the jurisdiction. As recommended in a prior blog post in this series (see Structuring Sales to Ensure Payment), your written agreement with your customer should contain the customer's agreement that if a suit is necessary, the customer consents to be sued in your home state and agrees to pay your attorney fees. These consents to jurisdiction and to pay legal fees are powerful agreements. A non-paying customer will think twice about forcing a collection lawsuit if it has consented to jurisdiction in the vendor's home state and county and to pay the vendor's attorney fees.
- If the customer does not answer the complaint within the time established by your jurisdiction, seek judgment by default. The exact procedure will vary by jurisdiction, but generally involves filing a motion with the court with an affidavit stating the balance due. If the customer does file an answer to your complaint, it still might be possible to avoid a trial in court by using a procedure called summary judgment, which it does by written motion. It is rare for collection suits to go to trial where no real defenses are presented as to payment or the quality of the product or service sold.
You never want to file suit- it's not your core business. However, if your customer is not paying and not responding to your demands for payment or your offers to restructure their balance due, assess your options, analyze any defenses that your customer could assert to a payment demand and determine your obligation to give notice. In order to make litigation as convenient as possible, have your customer agree at the onset of your relationship that litigation will be in your jurisdiction, and that the customer will pay your legal fees.