What’s your maximum judgment?
The homeowners have been on your case since the start. They’ve been true pain-in-the-butt customers for whom no amount of explanation, reasoning, or indulging is enough to please. And just as you’re checking the last details off their very long punch list of unnecessary demands, Mr. and Mrs. Jones decide they’re not planning to hand over their final payment.
All too often, “bill collector” becomes one of the unfortunate hats small-business owners must wear, and in some cases, the urge to sue comes to a head.
But before you drag your clients in front of a judge, take a breath and decide whether court is the best option. When it comes to lawsuits, there are many considerations to take before the gavel drops.
The options
When Lucas Papageorge took a roofing client to court for $6,000 in unpaid fees, the owner of LCP General Contractors in Fairfield, Conn., hadn’t heard from his customer in months. “Normally, it’s not worth it for us to go to court unless you have a customer like her that’s not responding at all,” Papageorge says. “If there’s a dialogue … we’re better off making that deal.”
Before entering the courtroom, Papageorge sent his client a letter of intent to sue — another tactic that often aids in collections. “Our letter says that if there’s no communication, we’ll file within the next three weeks, and we include a copy of the completed filing report,” Papageorge says. “They know you’re serious and send their payment.”
Another way to stay out of court is settling through mediation.
Mediation is a process in which both parties come to an agreement with help from a professional. “In my view, it’s best to use mediation and settle it there,” says John Rusk, owner of Rusk Renovations, in New York. “That way, you’re not turning the case over to a third party, you’re still in control, and there’s less risk of going to court or arbitration and running into witnesses or evidence you didn’t expect.”
In addition to being a mediator, Rusk also serves as an arbitrator. Essentially, arbitration is a private court in which a neutral arbitrator, who understands law as well as construction (or whatever field the dispute is in) makes a binding decision. Cases that don’t settle in mediation are sent to arbitration if the contract contains an arbitration clause, or to litigation if it doesn’t.
The liabilities
Before going to court, take a close look at the contract. If it contains an arbitration or mediation clause, skipping it could be cause for the judge to throw out your claim.
“Whether it’s a $5,000 or a $25 million matter, you need to know what your downside is,” says D.S. Berenson, managing partner of Berenson LLP, a law firm specializing in the home improvement industry. “The vast majority of contractors are using contracts that are illegal, unenforceable, or ineffective in some way. Always do a preventive defensive review with your attorney, and know that even if John Smith clearly owes you $10,000, if your contract isn’t enforceable, you’re not going to get that money in court.”
Papageorge’s contract did have an arbitration clause, and he also had some liability due to a change to the project which deviated from the contract. The judge actually did find in Papageorge’s favor, but also ordered him and his client to go to arbitration before the client had to pay.
“The cost for arbitration was over $1,000 and would have taken another three to four months,” he says. “Working with my lawyer was another fee, and I knew I had some liability. In the end, we won but it wasn’t worth it to collect.”
Time and preparation
If small claims court is your best bet, the process is easy. Most courts only require a simple form and a small fee. Having subpoenas served on witnesses is an additional fee. Small costs can add up, but on the bright side, you won’t rack up legal fees, since representation is not necessary in small claims court, and in some states is prohibited.
Berenson says his firm likes to take the small-claims route when possible particularly because representation isn’t necessary. “If the dispute is over a small amount, you don’t want to pay gobs of money toward litigation,” he says.
But also consider the cost of your time. Most states have adopted a “People’s Court” model in which plaintiffs and defendants face the judge, present their cases, and hear the judge’s decision then and there. The process doesn’t take long, but plan to lose a day of work waiting at the courthouse for your case to be heard.
To keep the process moving smoothly, have all your paperwork prepared and ready to present. Papageorge brought copies of the following documents to court, and says the judge asked for most of them:
State Home Improvement Act
Signed contract
Scope of work
Photos of the completed project
Project permit
Certificate of compliance
Trade license
Berenson adds that contractors need to bring a good attitude to court and leave the theatrics at home. “It may sound simplistic, but the most important thing is your conduct,” he says. “Wear a suit and tie, and have an officer of the company — not a salesperson — who speaks proper English representing your company. Judges are used to seeing uncategorized documents, so have your paperwork ordered, nice and neat, and don’t overwhelm the judge with more information than he or she asks for.”
After the judgment
Perhaps the biggest misconception around suing someone is that a judgment in your favor means you receive what you’re owed.
Alabama’s small claims court website says plaintiffs should “find out if the person or business you plan to sue has any money or assets to pay your claims if you should win. Otherwise, you may have a difficult time collecting on a court judgment. Remember, it is up to you, not the court, to take further legal action against the person or business if they do not pay the judgment.”
As in Papageorge’s case, that “further legal action” would have cost additional money out of his pocket. Taking out a lien against a property could help in some cases, but still calls for additional filing fees and management time.
Note: This story previously appeared in Remodeling magazine.
