Jim's flooring crew installed a by-the-book 2 1/4 -inch red oak floor in a foyer in an upper-middle-class home. The only complication faced on the job was a finish problem caused by the homeowner, Mrs. Griffin, when she tip-toed across the wet floor, even after she had been informed that she couldn't walk across the floor for at least a day. Being a nice guy, Jim buffed and refinished the floor. It has been several months since the job was completed, and Mrs. Griffin has yet to come through with the payment, citing a finish flaw that can be seen only at 5 o'clock in the afternoon when the sun shines at a certain angle through her entryway windows. Feeling that he has complied with industry guidelines, Jim refuses to redo the floor again and is thinking about taking Mrs. Griffin to small-claims court to collect his payment and teach her a lesson about how things work in the real world.
The decision to file a lawsuit over payment must be made with careful consideration of the facts of the particular case. A wood flooring contractor must focus on business issues, not emotions or principle. The two crucial issues to consider during the decisionmaking process are whether you have exhausted all the other means to resolve the dispute and if you have examined the risks involved in filing a lawsuit.
Exhaust All Other Means
Before authorizing litigation, consider using other available means to resolve the claim. This includes:
1) Demand letters: A demand letter, which could be forwarded by you or your attorney, is a letter requesting payment. Although you may have historically relied on oral promises to pay, many times a simple written demand, along with a notification that a lawsuit will be filed if payment is not made within a certain time period, will work. Sometimes failure to pay is the result of a clerical error or mistake, and the letter will be sufficient to prompt payment. Additionally, demand letters serve as evidence that you provided the debtor every opportunity to pay before pursuing litigation.
2) Liens: Many states permit material suppliers or tradesmen to file mechanics' liens. Because there are many technical requirements for filing liens, you should engage an attorney to ensure that your lien rights are properly secured. In addition to securing the payment of your claim, filing a lien may also interrupt the debtor's financing or create a contractual breach and force the satisfaction of your debt.
3) Notice to third parties: If you have performed work for a lessee or are a subcontractor, many times notice to the owner, lender or other individuals who have an interest in the project will force payment of your claim or cause those individuals to pay you directly.
4) Stop work: If you are providing services over a period of time, you may have the right to stop work. Alternatively, if you are working on other separate projects, you may also have the right to stop work on those projects. You must determine if your contract permits you to stop work. Simply refusing to do work is often very effective in causing payment to be made.
5) In-person visit: It's amazing how effective a personal meeting with invoice in hand can be with someone who has been avoiding your phone calls or letters. If you take this approach, be sure to act in a professional manner.
Know the Cost
Before considering litigation, you should understand a few important points about the process. Litigation is very time consuming. A lawsuit will typically take anywhere from six months to two years to complete. This does not include the time period in which the case could be appealed to a higher court. Consequently, if your goal is to quickly resolve the dispute, litigation is not the answer. You and your employees may devote a tremendous amount of time to prepare and work with the lawyers before and during the litigation, resulting in lost production. You should consider whether you have the time and energy to gather the documents necessary to support the lawsuit, invest in personnel educating the lawyer and be present for depositions, mediations, settlement conferences and the trial. If your business does not have the time or resources to invest in litigation, it should not be pursued.
The cost to litigate must also be analyzed before engaging in any lawsuit. Do not throw good money after bad. Although litigation costs can vary greatly, it is not unusual for a civil collections case to cost from $5,000 to $25,000. There are firms that handle matters on a contingency basis; however, your award will be reduced by the contingency fee. Contingency fees usually range from 25 to 40 percent. As a result, the amount of potential recovery must be balanced against the cost to litigate the case. To determine this, you must consider the actual amount in dispute, the estimated legal costs to try the case, the cost in personnel and resources of your business, and the collectibility of the debt. If you are successful in your lawsuit, but the judgment is not collectable or if the debtor files bankruptcy, you may end up with no recovery.
Litigation may also create the risk of a counterclaim being filed against your business. Counterclaims are claims brought in response to a lawsuit and are simply assertions that you as a plaintiff caused certain damages to the defendant and owe him or her money. These types of claims are typically for defective or untimely performance of work, according to the original agreement with a homeowner or general contractor (GC), or damage to a GC's business reputation. If there have been assertions that the work you performed was not done appropriately, or other claims, those must be seriously considered, because filing a lawsuit will, in all likelihood, cause the other party to file a counterclaim.
Is it Worth it?
Once all these issues have been examined, you can determine whether it is truly in the best interest of the business to pursue litigation. Pursuing litigation because of emotions, to teach an individual a lesson or because of principle is usually a bad business decision. Many plaintiffs are ultimately disappointed when they file a lawsuit based upon emotions or principle. Lawsuits are not good vehicles to teach someone a lesson, because they take a long time, and it's hard to sustain the emotion over the months or years the case may take. Additionally, courts are often focused on mediating, settling or resolving disputes prior to trial, which lessens the possibility of an emotionally satisfying "victory" in many cases. As a practical matter, although you may feel it is outrageous that you have essentially performed work for free, many courts see much more egregious acts, which desensitizes the judge to your problems.
As a final consideration, remember that the best defense is a good offense. Avoiding litigation is something that should be considered before you ever perform services. One way to help avoid litigation is doing your homework on the individuals with whom you work. You should consider performing credit and litigation checks, requiring personal guarantees, checking with other trades or individuals performing work for this company or person to see if they have issues getting paid, and using the lien procedure if you are not receiving timely payment.
Of course, you should always use written contracts and document your activities. Upon performance of work, provide the invoice immediately and require an acknowledgment that the work was performed properly. Require any notification of improper work to be written and to specifically describe the problem. Consider requiring binding arbitration to resolve disputes, and include an arbitration agreement in the contract. Arbitration can be an effective means to quickly resolve a matter. Generally, arbitration is a much quicker and less expensive process than litigation.
Your contract should also provide the successful party at a litigation or arbitration compensation for their legal fees. Finally, although litigation must be carefully considered and carries many risks, in appropriate cases it can still be the best means for collecting payment.