As a law firm that does a lot of legal work for business owners of various sizes, we end up handling collection matters in which the business renders services to a customer and for which the latter does not pay. The business owner/client comes to our office to seek legal advice on how to collect that account receivable. The very first line of analysis is to obtain a copy of the agreement between the parties (hopefully, there is a written document, as opposed to a verbal agreement, and the parties have fully-executed same!). Once we obtain the agreement between the parties, the first thing we look for is the payment term…is payment due within a specific time period after the services are rendered/product delivered (i.e. 15 days for example)? If not, then the business owner is in a weak position to pursue collection. Make sure that the payment deadline date is clearly indicated in the agreement.
The next point of analysis is what are the consequences of payment not being made within the time period provided for in the agreement? Does the agreement provide for late fees to be assessed upon the customer if payment is not made within the prescribed time period? A percentage penalty (i.e. 1.5% per month or 18% per year)? If so, then we can calculate the late fee on a daily basis (i.e. per diem) to demonstrate to the customer the daily cost of not paying on time.
In addition, does the agreement provide that the customer is responsible for the business owner’s legal fees, expert witness expenses and court costs, as well as the aforementioned late fees, if timely payment is not made and the business owner has to file suit to collect? If not, and especially if there is no late fee provision, the customer has no incentive to pay the business owner in a timely fashion (in other words, there are no consequences for breaching the Agreement).
Finally, does the agreement provide for choice of law (i.e. laws of the Commonwealth of Pennsylvania) and venue (i.e. Montgomery County Court of Common Pleas) in the case of a dispute. This is an extremely important provision if your customer is located in another State as you want the agreement to require that disputes be heard in your local Court as opposed to chasing them down in another State. For that matter, the agreement can also provide for whether disputes have to be heard in a Court or, in the alternative, by an Arbitrator (i.e. American Arbitration Association).
The time to discuss these issues is when the relationship, and the Terms and Conditions of the services, are being negotiated. Contact OWM Law to discuss the above issues before you negotiate your next agreement with your customer.
Written by David A. Megay, Esq.
DISCLAIMER: The contents of this blog are not legal advice, and are not to be used for that purpose. If you are faced with a legal matter, you should contact a lawyer immediately in order to ensure that you are protected.