more-arw search

Q&A Forum

Customer is refusing to pay/Bad Debt Collection

Atul  Madahar's Profile

Hello Proformative Friends, My company is a small chemical engineering consultancy and technology licensing firm. We have built a reputation of being the leader in our segment, and have worked with the 'who's who' of major global chemical companies over the past 25 years. We have built and operated some ~30 plants based on our technology in that time. We licensed a series of technologies to a large US/EU based multi-national chemical firm about 5 years ago. During the construction phase of a project in China, they decided to 'cut corners' and use sub-par construction materials in a critical part of the plant; presumably to save money. We repeatedly warned them against doing so, and that this would invalidate the guarantees of our license. Nevertheless, they used the sub-par material, and no surprise, their plant stopped working. We have documented evidence the company violated the specifications of our design, at their own risk. We are owed, ~$1.2M on residual license payments. We have been after them to pay for ~12-18 months and after repeated emails, letters and other communication asking them to resolve the payment issue, we are informing our lawyers to pursue the recovering of the debt. We also, had an arbitration clause in our contract, but feel this is 'cut and dry' case where the customer ignored our repeated advice. What options should we consider to recover as much of the bad debt as we can? Are collection agencies an option to arbitration? My CEO is reluctant to be aggressive as he feels we can do business with the customer in the future, but is also upset we haven't been paid. I'd appreciate any advice and options on recovering this bad debt.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Has your CEO spoken with his counter-part? In the alternative, have the CFO's or the General Counsel's interfaced?

For the most part, going the Collection Agency route will cost you points on the invoice; plus usually a lower negotiated price. You can do that yourself and save the points.

Law suits will cost (at least here in New York) a minimum of $50K and in my experience most often the suit is settled out of court. If the C-Suite acted un-emotionally, they would have settled their difference and saved most if not all that legal bill. When the suit doesn't get settled, it drags on for years.

Talking does wonders, especially if without emotion. An arbitrator (assuming its not binding) might be a good alternative to lawyers.

Lyle Newkirk
Title: CFO
Company: Corrigo Incorporated
(CFO, Corrigo Incorporated) |

I agree that you talking it through is your best option. But I would get outside counsel to review the agreement and the situation and give you an assessment on the odds of collection if you elect to be more forceful. You may find that because the customer is in China, your chances for recovery are not high. You need to know how strong your position is legally now. $1.2M is a lot of money and worth the investment in legal advice.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Lyle, that goes without saying (and a $1.2M contract should possibly been reviewed before going forward by the GC).

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

A "collection agency" is not typically the party you would choose to pursue claims like this. Although it's a clear-cut situation from your perspective, a disinterested party could perceive something more like "he said, she said." Written documentation, supported by contemporaneous customer acknowledgement of your company's recommendations and suggestions, will be key. The client's perception and recollection of the prior conversations may differ from that of your people, there could have been employee turnover, the people who made the decisions may not have gotten appropriate approval at the time or may now want to shift blame, etc.

As suggested, try the high-level interface first. There may be things the client wants to say and that is the way to find out. Lawsuits cost $$$ even if you win but sometimes the threat of such action is necessary to collect. Your CEO is right to be concerned about the long-term implications of a pursuing a legal claim but I have almost never seen things like this offset in future deals. Potentially offsetting that is an issue of what message this sends to customers and prospects about the quality of your company's work as well as your willingness to be "walked on" by a customer for a matter that is material in size. A customer that does not pay is not a good customer, regardless of how much is purchased, and is deservedly suspect in any future dealings. Ultimately, you either write it off, settle for an agreed amount, try to recover the money in some future (currently non-existent and perhaps never-to-materialize) deals, arbitrate or sue.

John P. Martin
Title: Analyst - Finance
Company: Own
(Analyst - Finance, Own) |

I agree with the comments and options previously mentioned. Yes, communication is absolutely necessary. And, for the amount you are trying to recover ($1.2M), I am also curious if your CFO has had any communication with his counterpart at the firm? It is essential that the reasons for non payments, some have been mentioned, but in addition, a business slow down for them, cash flow issues, and yes, even staff turn-over, that information needs to be understood by your company. I believe that consulting counsel is wise to review the contract and continue to explore potential remedies to the issue. Perhaps if this company receives a letter or notification from your counsel, they will take notice, and it may result in better communication. You indicated that your CEO is reluctant to take aggressive action due to doing business in the future with this firm? If a company engages in a business deal and then violates the terms of the contract/agreement and defaults on payments (especially a deal at $1.2M), they are no longer a customer.

Atul Madahar
Title: Director
Company: Anonymous
(Director, Anonymous) |

Thank you all for your helpful advice... I'm talking to our team tomorrow and will use your collective inputs

1534 views

Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email content@proformative.com to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.