Worker’s Comp Networks and Their Offensive Contracting Practices

May 2nd, 2013

Nonpayment for the goods and services you deliver is an all too common problem. No business can prevent all instances of non-payment, but active management can both increase the likelihood that you will be paid, and help you recover even in those cases where legal action is needed.

The following five tips can help you improve your rate of realization on your invoicing:

  1. Build an Effective Contract Form
    Many businesses find contract forms on LegalZoom or by “borrowing” from forms they see from others in their field. While these documents will indeed result in your making binding contracts, that does not mean that the contracts you make are serving you as well as they could be. A generic form from a national vendor may not provide you with the best protections available under Virginia law, or may even include provisions which are not enforceable under Virginia law. But more importantly, none of these forms were drafted just for you and the unique aspects of your business. “One size fits all”, we often find, really means that you are making do with something that does not actually fit you well at all.
  2. The truth is, it costs relatively little to work with your personal attorney to tailor a contract form to your particular needs and preferences. The form should protect you from nonpayment situations, but otherwise be kept as simple and unintimidating as possible; “over-lawyering” a document can scare off even your good customers.
  3. Require Signatures
    Once you have settled on your form, train your sales and credit management personnel to ensure that it is used in all future transactions. This will allow for a uniform collections process, making it easier for you or your accounts manager to know exactly what to do and when, in those instances where your customer does not pay on time.A surprising number of nonpayment situations involve customers who receive the contract form, but never sign or return it. Many times, sales personnel feel reluctant to follow up, for fear of irritating the customer and losing the sale. In truth, these customers are throwing up a big “red flag” about how they intend to handle their debt to you. Customers who like to take their time to pay, or who may even doubt their own ability to pay, tend to find ways to “forget” about your document. These are the very customers your contract was designed to protect you from.The time to get your form signed is before you provide any goods and services. The typical customer is satisfied at the time they commit to a purchase, so this is the opportune time to collect signatures. On the other hand, the high risk customer may well do you the favor of identifying himself before you actually perform your end of a deal, if you politely but firmly make it clear that no work or deliveries will start until you have the signed document in hand. Sales to customers like those, you can do without.
  4. Keep Control of the Documents
    In business-to-business sales, your customer’s purchase order may often contain contractual terms that could override your contract form if you do not read them carefully and communicate your objections to them. Where sales of goods alone (without services) are involved, the law may bind you to your customer’s terms even if you never signed anything explicitly agreeing to them. The key is to insist that your document be the last word in all negotiations, so that any other terms not to your liking are essentially paved over.Some businesses find that industry custom does not permit them to control the choice of contract form. Construction subcontractors, for example, almost always have to deal with general contractor form documents in addition to project plans and specifications. A surprising number of businesses allow their focus on the goods and services being sold and the price being negotiated to divert their attention away from what are often lengthy and onerous contract forms. But because the other party has devoted its efforts to developing a form that serves its needs, reviewing the documents they present carefully will often uncover offensive terms that can and should be stricken from the document before you sign.Discipline here is key. Never allow hunger for a sale to lead you to gamble that the other party will not do what its contract says it can do. Start by deleting offensive terms or otherwise adding or rewriting terms. But be prepared to drop the deal entirely if the other side makes it clear that it will deal with you only if you entrust the fate of your business to their hands.
  5. Collection Charges
    Most sales involve extensions of credit. That is, you deliver your goods and services first, then you invoice, and then you await payment. All such transactions require you to consider in advance whether your customer will be good for the money, and whether you are protected if your customer fails to pay.If your contract does not explicitly provide for accrual of interest, Virginia law allows you to ask for interest, but (a) you may not get it in court, and (b) the most you could hope for is 6% per annum. You can improve your position by specifying a higher rate of interest. First, it provides a powerful incentive to the customer who is short of cash to pay you ahead of other creditors. Second, if the customer persists in nonpayment for an extended period, you can at least hope for some compensation for having to do without your money.If you end up having to hire a lawyer to pursue collection, you will be glad to have included a clause in your form allowing you to tack on the lawyer’s bill to the amount your customer owes. Without such a clause, you will not have any hope of getting reimbursed for those expenses. While having an attorney’s fees clause does not guarantee that you will get all your money back, it is the only way to give yourself hope of getting back to even on the deal you thought you had made.
  6. Watch the Age of Your Accounts
    The longer you wait to act on unpaid accounts, the lower the odds get that you will ultimately receive your money. An unpaid bill indicates your customer is having trouble. Those kinds of troubles tend to grow worse over time. Early action can help you to get your money and get clear of the problem customer before he may reach the point of bankruptcy or other business failure. And in those situations where you may have collateral rights (such as mechanic’s liens in construction dealings), the “waiting and hoping” approach can result in key deadlines passing so that you lose your last hope for damage control.While these general rules should be considered by every business, the needs of each business are always going to be unique in some way. Getting your lawyer’s help up front, both for developing your contract form and for educating your key employees on how to use it, is truly an instance where an ounce of prevention is worth a pound of cure. While your lawyer will always help you to collect problem accounts when they inevitably do arise, doing what you can to limit the frequency of problems not only improves your initial financial performance, but ultimately saves on litigation costs.At The Marrs Law Firm, we welcome the opportunity to help you to grow your business and prosper over the long term.