Written by Murtaugh Law

What should a contractor do when the client refuses to pay?

You get the work in, you get the work out, you get the bill out … but you don’t get the money in. So now what?

Legally you’re probably in the right and your client in the wrong, and you have the legal right to commence a lawsuit, perhaps in conjunction with lien rights. Occasionally this works fine … occasionally. Typically, however, a lawsuit becomes an exercise in damage control, with the righteous recovery being lost to attorney fees, lost billable time and negative karma. And all too often, a fee action is countered with a professional negligence cross-complaint. To the uninitiated, a lawsuit is the first thought; to the sophisticated, the last.

While a lawsuit is always an option, there are others that should be considered. First, however, before you consider how to deal with the client’s failure to pay, you should understand the cause. Is the client conveying dissatisfaction with your performance? Is the client satisfied, but needs all available cash to make payroll? Is there dissension within the client’s management about how to proceed with the project? Is the client abandoning the project and cutting its losses? Different causes call for different strategies.

Keeping in mind that the goal of any non-lawsuit strategy is to cause the client to want to pay what’s owed, consider the following possible strategies:

• Use relationships. Design professional services are provided in the context of a surprisingly small community, a community made up of people who value their relationships and reputation. If your one-on-one dealings with your client are not working, consider what intermediaries could be involved.

• Related to using relationships, if you’ve signed one of those annoying lender assignment consents, then you’re probably obligated to notify the lender of the client’s failure to pay, which can be a nice obligation to have since lenders have ways of making project owners want to keep their payments to the project design team current.

• If circumstances allow, withholding services when they’re needed is far and away the most powerful option; but also the most dangerous. Before withholding services, check if your contract has “work through disputes” or “right to cure” clauses that would render you vulnerable to a breach of contract claim. And even if there is no contract issue, as a professional you should always consider the risk of liability for “professional abandonment.”

• Related to the withholding of services, perhaps you have the option of withdrawing or terminating the copyright license in your plans. Doing so puts the client at risk of a federal copyright infringement action for proceeding with the project, and thus tends to get people’s attention without the breach of contract or professional abandonment risks. Note, however, that contracts sometime tie the client’s copyright rights to payment, but sometimes do not.

• While the laws vary widely from state to state, every state provides some legal options short of a lawsuit by way of lien rights, rights to charge interest and prompt pay statues, and while a lawsuit might be a course of action, always be open to negotiation a mutually-acceptable resolution.

For more information on the content of this article, please contact your regular Murtaugh Treglia Stern & Deily LLP attorney, Michael J. Murtaugh and/or Michelle R. Generaux at (949) 794-4000.

Michael J. Murtaugh, Esq.
Michelle Generaux, Esq.
Murtaugh Treglia Stern & Deily LLP
2603 Main Street, Penthouse, Irvine, CA 92614
Telephone: (949) 794-4000 / Fax: (949) 794-4099