Avoiding Payment Problems
August 1, 2009
Surveying and mapping firms need to set appropriate fees for their services and collect those fees to stay profitable. However, that’s only one part of the challenge. Collecting those fees can sometimes prove even more challenging, especially in a recession. Regular billing and follow-up will open communication about a client’s concerns that could lead to a fee dispute. Implementing billing controls can minimize the risks that come with trying to collect on an unpaid invoice.
Enforcing Rights by Suspending Services
If a client fails to make timely payments for services, firms should have the right to suspend performance or to pursue the legal remedy of termination of the contract. Termination is a drastic step that has important legal consequences and potential liability associated with it and should be pursued only after careful consideration and discussion with legal counsel. Suspending services for nonpayment is a less-drastic option.
Distinct from termination, a suspension of services merely stops the performance of services while the nonpayment or other default that forms the basis of the suspension continues. As with termination, suspension should be preceded by at least the contractually mandated advance written notice to allow the client an opportunity to cure the default. Professional services contracts should clearly deal with the parties’ rights to suspend or terminate the contract.
Recovering an Unpaid Fee
Filing suit to collect an unpaid fee may seem logical. But doing so invites a countersuit for negligence. Even if the counterclaim is merely retaliatory, it still takes time and money to defend. Worse yet, it may be a legitimate claim that would not have been pursued but for the fee action. Firms seeking an unpaid fee must perform a cost-benefit analysis: Are the risks of taking legal action to recover a fee justified against the potential benefits? Considerations include whether the client can actually pay, the costs of legal fees and internal costs such as lost time during the effort, the likelihood of success, and what percentage of the amount due is an acceptable result.
Giving the Client the Right to Withhold a Fee
Clients often demand the right to determine whether payment is justified and try to protect themselves by having the option of withholding payment. But firms must realize that while professional liability insurance is triggered by a demand for money or services alleging negligence, the client’s withholding of a fee based on a contractual provision is not a claim. For a professional liability policy to respond, a claim must be filed and a settlement, award or judgment must be rendered. Allowing a client to refuse to pay is problematic in good times; in a recession, it is a shortcut to bankruptcy.
Agreeing to Pay a Client’s Legal Fees
Firms that have successfully sued a client to recover unpaid fees often believe that the legal expense of doing so should also be reimbursed. Clients have the same belief, and this shared attitude often results in a “prevailing party” contractual agreement. Such provisions can create significant risk.
Any agreement on the recovery of legal fees by the prevailing party is a contractual condition a firm is free to assume. Professional liability insurance, however, does not cover the risk of the firm paying prevailing party costs related to a successful claim of negligence against the firm.
The firm’s agreement to pay prevailing party legal fees is a contractual obligation chosen by the firm and is therefore its sole responsibility. There is no common law entitlement to recover attorneys’ fees, and few statutes award such fees. Therefore, there is no coverage for the payment of another party’s costs based on a contractual fee-shifting provision.
In addition, prevailing party provisions often result in the coercion of the weaker party--often the surveying firm--by the financially stronger client. While it is not a certainty that a client will use a prevailing party provision to coerce a settlement, such a provision increases the likelihood of prolonged litigation, the exposure of the surveying firm’s assets, and the cost of any covered claim.
Establishing business lines of credit, maintaining cash reserve funds and carefully scrutinizing expenses can help a firm survive difficult times, but the most important risk management tool is preserving cash flow through the inclusion and enforcement of appropriate contract terms and collection procedures.
Editor’s note: A version of this article originally appeared in Guidelines for Improving Practice. Reprinted with the permission of Victor O. Schinnerer & Company Inc. (www.schinnerer.com).