What to Do When Someone Won't Pay

At every point in a developer's career, there will be a time when he does work-for-hire or enters into a contract with a publisher; and despite the fact the developer does everything he was asked to do, the other party doesn't hold up their end of the contract. While I don't wish this on anybody, it does happen. What is important is that the developer recongnizes that this is part of doing business and he should conduct himself in a professional manner.

Negotiation

Before doing anything else the developer should to attempt to amicably negotiate with the debtor (i.e. the party that owes the developer money). Negotiation is truly an art form that takes practice and time to get good at it. As a side note, I highly suggest to go read "Getting to Yes." It is the seminal work on negotiation strategy and is a must read for anyone who is running a business and will need to negotiate anything at some point in his life. But to briefly summarize how to negotiate in this situation, the first thing to do is to jot down a couple of points prior to confronting the debtor:

• What each party wants and needs and why he or she wants/needs it. It may not intially be clear what the debtor's wants and needs are, but it is something to keep in mind as the negotiations unfold.


• The leverage of each party. Leverage is essentially power; the more leverage a party has the more likely the outcome of the negotiation will favor that party. In this situation the developer will most likely have some leverage due to the terms of the disputed contract but the debtor will also have leverage due to the fact that she holds the money. There may be additional facts that could add more or less leverage to either side (such as the debtor is overseas and out of jurisdictional reach of the courts). Note that, as more facts come to light, a party's leverage can change over the course of the negotiations.


• What is each party's BATNA. The BATNA or Best Alternative to a Negotiated Agreement is just that. In this situation, most likely the developer's BATNA is that he won't get paid, but there could be other factors as well. The debtors situation will most likely be she gets to keep the money but risks losing her reputation. Like leverage, as the negotiation unfolds, BANTAs can change and bring a party to settle.


• Possible creative solutions. The point of a negotiation is to arrive at a settlement. While neither party may be completely happy with the settlement, it will be one that both can live with. Sometime the solution will be one that's outside the box

Once all this information is written down, the next step for the developer is to amicably approach the debtor. The developer should call the debtor directly (not email or IM) and courteously remind her that the bill is due. Be polite and try to find out why the debtor is not paying. If possible, try to work out a payment plan that works for both parties. If the developer has anger management issues, to initially avoid a phone call and just email the debtor(make sure one or two people review the email before it is sent to ensure that it wont be constructed as aggressive or offensive); only call if the debtor does not respond to the email. Remember: the goal here is not to scare the debtor off or get into a pissing match; but rather, to find out the debtor's needs and wants and see if there is a solution that will serve both parties.

Hire a Lawyer or Collection Agency

If the debtor does not respond to negotiations or essentially tells the developer that she is not paying and to "go pound sand," the next step is to either hire a lawyer or a collection agency to take care of the problem.

Lawyers

While many developer's think that they are not able to hire a lawyer to solve this problem due to costs, there are plenty of lawyers out there that will work for a contingency fee. A contingency fee means that the lawyer will work for free, but if he is able to collect any money, he will take a portion of the award or settlement. However, the client (i.e. the developer) normally still pays for "costs," which include such items as phone calls, copies, filing fees, etc. Many times these costs can be settled after the case is over, so they can be taken from any award or settlement as well. If the developer has a "slam dunk" case, the lawyer may be willing to absorb the costs as well.

Also, many times a contract will have an "attorney's fee's" clause in which the looser of any dispute will pay the other party's attorney's fees. This means that the developer will receive the entire debt and the debtor will have to pay the developer's attorney's fees. Be careful though as this is a double-edged sword: if the developer loses his claim, not only will he be out of the debt, but will also have to pay the debtor's attorney's fees.

Collection Agency

A collection agency is a business that will act as an agent for the developer to collect an outstanding debt. The agent will do all the legwork for the developer to hound and negotiate with the debtor into paying the debt. The agency normally charges 30% - 50% of whatever it is able to collect depending on the credit rating of the debtor and how long the debt has been outstanding.

Which is best?

One of the best advantages to using a lawyer is that he can also recover what is known as "consequential damages." That is, any additional foreseeable damages the developer incurred that were directly caused by the lack of payment. For example, if a developer can't make payroll because the debtor did not pay, and consequentially has to take a loan from the bank to cover his expenses; the interest on that loan would probably be considered consequential damages and the debtor would have to compensate the developer for the interest paid.

An advantage to using a collection agency over a lawyer is that the developer does run the risk of having to pay the lawyers "costs" even if the debt is not recoverable. A lawyer's costs can quickly accumulate and can run into the $1000 range even for very small cases. Furthermore, hiring a lawyer can be a long and involved process, and can take valuable time away from a developer's business. On the other hand, a collection agency works independent of the developer and normally only bothers the developer if additional information is needed.

So which one should a developer use? A good rule of thumb is: if the debt is greater than $5000, it is probably better to use a lawyer. However, the best thing to do is go in for a consultation with a local lawyer (normally its free) and she will tell you the merits of your case, the likelihood of recovery, whether or not she will take the case on contingency, and give you a fair estimate of the additional costs associate with the case. If, at the end of the day, the costs and risks of going to trial is going to be more expensive than using a collection agency, then the collection agency is probably the best bet.

Small Claims Court

Alternatively, if the debtor is in the United States, and if the debt is small enough (it varies from state to state), the developer could file a small claims action against the debtor. This would require the developer to pay a filing fee to file the claim, pay a service processor to deliver the claim to the debtor, and make a trip out to the debtor's local courthouse to stand before a judge and argue his case.

For more information on filing a small claim suit in any particular jurisdiction, contact the nearest state courthouse to the debtor (normally state courthouses are done by a county by county basis). The court's website normally has great information on how to file a small claim. Or, if no information is available, call the courthouse, the clerks are (normally) very helpful.

Self-Help

If hiring a lawyer, even on contingency, is too expensive, the developer doesn't want to give up 30% - 50% of the debt, and small claims is not available, the other option is to engage in what I refer to as "self-help." Self-help can easily be described as a doing the same thing that a lawyer or collections agency would do, but on your own . If the developer gets to this point, I would seriously recommend taking an hour or two to talk to an attorney about his rights under the disputed contract. I do not recommend using self-help unless there are no other options.

The developer should carefully read his contract. And he should make sure that he has followed all his duties under the contract and note which duties the debtor has not followed. Also, there should be some sort of "breach" or "default" provision which will describe what should happen if a party does not follow the contract. The developer should make sure that the debtor has breached a specific term in the contract. Normally contract provide that a party needs to provide another with X days written notice to cure a breach in the contract.

The next step is to write what I affectionately call a "nastygram." A nastygram is a notice letter that essentially says "Hey! Your in breach of our agreement! Pay me or I'll sue/send a collection agency to get my money." The letter typically consists of six parts:

1. State the purpose of the letter.


2. State what the non-breaching party's requirements were to complete the contract and how those requirements were fulfilled


3. State what the breaching party's requirements were under the contract and how those requirements were not fulfilled; and


4. Give the breaching party an opportunity discuss the matter with you and to cure the problem within X days (the number of days required under the contract)


5. State what the developer will do if the breach is not cured. (Don't be over dramatic or threaten anything illegal. Just state something simple like "You will be contacted by my attorney/collection agent to settle the matter.")

If the debtor does not respond to the nastygram, the developer can either write the debt off or follow through with the letter's threat of legal action (see above). Furthermore, the developer can tell his fellow developers the TRUTH, and recommend not using the debtor because he did not pay his bills. However, this should be done tactfully, as the developer wants to maintain his own reputation.

The developer should never do anything to "take revenge" on the debtor including engage in threats or acts of physical violence, vandalism, or interfere with any other business contracts of the debtor.

Foreign Debtors

If a debtor is in a foreign jurisdiction, it can make it more difficult to collect the debt. However, the recommended actions above don't necessarily change. But, a collection agent will probably charge a higher percentage, or you may need to find an attorney that specializes (or practice) in that particular jurisdiction. Also, some jurisdictions (Russia, for example) have very weak collection laws which severely reduce the developers leverage regarding the contract since there is not much that can be done to collect if the debtor party does not want to negotiate.