Guest Column

Weigh business and reputation costs of lawsuits

November 1, 2013
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“I want to sue this guy.”

Business owners say this when they are frustrated by consistently late payments or customers who fail to meet expectations over and over. While it may feel right in the heat of the moment, the reality of a lawsuit can have unexpected consequences.

There are times when a lawsuit makes the most sense to resolve a breach of contract or obtain a judgment for payment. Before reaching that conclusion, however, business owners should weigh the costs and benefits. If it still seems like the right course of action, certain steps should be taken before filing suit to improve the owner’s case.

One of the first questions to ask when considering a lawsuit is whether or not the business owner has a vested interest in keeping the other party happy. The chances of sustaining a business relationship following a lawsuit are slim.

Consider the scenario of an automotive supply chain. Perhaps the business owner is a third- or fourth-tier supplier who isn’t getting paid by a larger supplier to a major auto manufacturer. If the real problem is delayed payment from the auto manufacturer, the small supplier could risk losing a lot of business by suing the middleman.

Legal counsel should explore the business owner’s history with the debtor or disputed party, the terms of the contract and payment history, potential reasons for nonpayment and the prospect for more business in the future. Answering these questions can help the business owner move forward with a solution.

If the business owner is dealing with a complaining or nonpaying customer with a history of unreasonable demands and withheld payments, pursuing a lawsuit may hasten a resolution. With little prospect for more business, this customer may be more trouble than beneficial. The business owner may decide to sue for final payment and move on.

A formal letter from legal counsel is often an effective step to move a nonpayment issue toward resolution — particularly if prior attempts to receive payment are consistently met with little or no response.

Depending on the potential reasons for nonpayment and the value of the business relationship, a letter from counsel can offer options to the debtor: payment in full by a certain date, negotiation of a payment plan, or perhaps a short-term credit or discount. The letter should stick to the facts of the situation and offer a solution that supports the business owner in case a lawsuit is pursued later.

For example, the debtor may agree to a lien against real property until the debt is paid or may sign a promissory note for payment in full by a certain date. If the agreed payment date passes and the business owner decides to sue, these earlier decisions will eliminate the business owner’s need to prove in court that debt is owed. The debtor has already proven debt is owed by agreeing to legally binding payment terms; the lawsuit won’t turn into a drawn-out, he-said-she-said dispute about bad product or broken promises.

In some cases, a letter from counsel may uncover miscommunication issues by one or more parties. Perhaps the debtor is withholding payment due to a complaint, or the debtor was promised a credit that didn’t happen. The business owner may not be aware of these issues, but can resolve them once brought to light.

Outside of court, an attorney can play the role of counselor to hear both sides and resolve differences. Once in court, however, the attorney will advocate on behalf of the business owner to obtain a judgment for payment. This is not a guarantee of payment, but an agreement by the court that the business owner is owed a debt.

Business owners must weigh the potential benefits of sending a serious message to the market against the costs of court. Does the defendant have sufficient funds to collect? What is the time and cost involved in a lawsuit? What impact will the suit have on this and other business relationships? And how will collections proceed if the court rules in favor of the business owner?

Disputes can happen, but business owners don’t have to go it alone and they don’t have to fight it out. Seek legal counsel early if a nonpayment issue or disputed contract starts to feel unmanageable.

Jim Komondy is a litigation attorney with Law Weathers. He can be reached at jkomondy@lawweathers.comor (616) 732-1764.

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