273 - Tips for Non-Paying Clients
On today's episode of the podcast I'm sharing tips on how to deal with clients who won't pay.
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Today's episode ties into what we offer as part of our legal subscription and that is drama around non-paying clients and also refund requests. It's a pipe dream to say we can solve everything with a contract, but contracts, solid boundaries and good communication can solve 90-95% of our problems. And while most of our clients are great, or at least don't cause any problems, there's often that small percentage that are a pain in the ass but eventually pay the bills and then the even smaller percentage who just don't pay.
A common example I give is a case study from my website from before COVID when I worked with a well-established, highly reviewed, fully booked photographer that worked a wedding that went great and over a year after the wedding and at least eight months after the gallery had been delivered, the client came back and said they had family issues after the wedding so we didn't comb through the gallery that carefully and as we dive in now I see it's missing a lot of very specific shots and asked for a full refund.
Reviewing the requests, some were reasonable and some were unreasonable around what photos you can expect to get. The reasonable solution ended up being that a few of the expected photos the photographer said they were reasonable and ideally would have been in there, though the contract says no guarantees because you never know if someone will get in your way at an inopportune time, etc., but because a few shots were missing, the photographer said if they looked back they can reasonably think and assume that those were photographs that the second photographer probably should have gotten and that having worked with a newer second photographer for that wedding maybe they weren't in the right position at the right time .The compromise to the client was I will refund you the amount of money that you paid for the second photographer and tossed in a photo album. The client accepted and we created a release agreement where the client agrees to not pursue any legal action and it was resolved in a few days.
Another example came from a wedding vendor inside my membership during COVID with a problem that can happen to those in the events industry. The vendor had a wedding client who stopped responding to emails before the wedding 30 days out, two weeks out, one week out, and several times the week of the wedding. With a few days left to the wedding and no idea if it was happening or had been canceled due to COVID, the vendor canceled the contract. Three months later the couple came back and asked for a full refund. The vendor said absolutely not and the couple filed suit in small claims court. The vendor then also got an invitation to go on Judge Judy for this claim but they went to small claims court instead and mediated it that way. I chatted about a similar circumstance on Episode 184 of my podcast and also in my blog post, What Judge Judy Can Teach Us About Contracts.
Non-payment is a little different than refund stories but can often be remedied by a demand letter which is a legal letter demanding payment. The sister to a demand letter is a cease and desist letter. A demand letter says, "you have to do this," and a cease and desist letter says, "you have to stop doing this." For example, a demand says you need to pay me, a cease and desist says you have to stop using my brand name.
Ideally before sending a demand letter you want to go through all your informal hoops like sending the invoice and two to three follow-ups often three days and a week later and then even another week or two later. Before involving an attorney I usually recommend sending one more email that says you're planning on contacting your attorney to help collect payment on this and that this is one final attempt to amicably collect payment on this. In our Not Avg Law subscription, I help members draft this email to send on their own behalf. Sometimes this works better than having me send it from my law firm address because when they see it come from a lawyer they think they need to go get a lawyer and now it becomes unnecessarily complicated but sometimes it works better for me to send it from my law firm address. For example, a member of my new legal subscription had a client who owed an invoice in November and had since sent six reminder emails and in January and February the client kept saying they were in a financially tough spot and would pay next week which kept coming with no payment. I sent a simple email from my law firm address to this client and said I represent so and so, when we expect payment on this, and it was paid next day. If this client had not responded and paid, that's when we would have sent a demand letter which would quote the contract and sometimes cite state legal code and case law deeming it breach of contract and then we give them one more opportunity to pay and state what will happen if they don't pay.
What court you would need to take someone to is often dealt with in the contract. Ideally you have a choice of venue provision, a choice of law provision, and then also an alternative dispute resolution provision. For example, choice of law says this contract is governed under the laws of the state of *insert state*, if anyone is to sue it needs to take place within *insert your county* (this is your choice of venue) and then dispute resolution would be what you agree to i.e. arbitration, mediation, etc.
I see a lot of contracts with arbitration provisions in them. I don't like them. If you have one, depending on what business or industry you're in I would consider removing it. Arbitration is considered an expeditated version of what I call real court and is still expensive and lawyers are involved and it's a drawn-out process. Mediation and small claims court are a lot quicker. Small claims court will look a lot like Judge Judy or traffic court or family court and small claims courts can include mediation. For example, in California small claims court handles claims $10,000 or less and attorneys are not allowed in small claims court which saves tens of thousands of dollars in getting legal representation. The other alternative is mediation which is a few hundred an hour and often books in half day increments. If your claim is over $10,000 I recommend mediation for claims between $10,000 and around $50,000. Once we're talking hundreds of thousands of dollars is when I would say arbitration comes in but even then you would mediate first.
Coming this summer I'll be launching the Client Cure, a bonus course in Profit Rx, with templates on how to handle difficult clients. In the meantime, if you want an attorney in your back pocket to not only help you with issues like this but to also ask questions whenever you have them via email you can check out our $200/month legal subscription at notavglaw.com. Our founding member launch ends at the end of March so head to our website and join today. Our subscription folks also get a preferred rate on our one-on-one services like tax returns or trademarks.
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