Collecting on past due accounts receivable begins before the contract is signed. Many companies do not have the proper procedures and documents in place to allow them to have the possibility to be made whole in the event that they need to pursue a former customer or client. Unfortunately, by the time the account is referred to the lawyer, it is too late to fix the lapses or mistakes in the contracting process. To be made whole, the most important written contract provisions to consider may be for interest and attorneys’ fees.
Any agreement for the sale of goods or services over five hundred dollars ($500) should be in writing signed by all parties. The written contract should include a clear recitation of the deal terms including the who, what, when, and where: who is providing what, when they are providing it, and where they are providing it. Most importantly, the who, what, when and where of payment should be clear. A contract that is legally ambiguous opens the door for court interpretation and the possibility of a protracted dispute at substantial cost.
The agreement should provide for interest and attorneys’ fees. A high rate of interest (e.g. 18%) for non-payment within thirty (30) days of invoicing or payment due date is typical to provide an incentive to pay. Varying attorneys’ fee provisions might say: (1) reasonable attorneys’ fees; (2) actual attorneys’ fees incurred; or (3) reasonable attorneys’ fees of not less than 33% of the amount then due. While attorneys’ fees can be articulated in a number of ways, they are always awarded at the discretion of the court (should you get that far). Therefore, it would be preferable to set an objective minimum attorneys’ fee amount for the court to rely upon as the contractually agreed amount: reasonable attorneys’ fees of not less than 33% of the amount then due. The failure to include a written interest and attorneys’ fee provision usually prevents the ability to be made whole on any single delinquent account. Generally, in the absence of a written interest and attorneys’ fee provision, a court cannot award an aggrieved party more than the accounts receivable. Even if fully recovered, the creditor would be out-of-pocket, the costs of legal services and the interest for the unpaid receivable (often for a period of years).
In terms of a collection process, receivables should not be allowed to sit for an unreasonably long period of time. While receivable aging varies by industry and objective benchmark should be set to review accounts receivable. Some companies begin their collection process at the 60 or 90 day delinquency date. A collection process can begin earlier with in-house efforts to collect. Some companies, unsuccessful with in-house efforts, send the account to an outside collection agency. Accounts still open are referred to legal counsel for the filing of suit. Objective dates and deadlines for each escalation can help an organization to process the inevitable accounts receivable.
Among other reasons to begin the process more quickly are special statutes of limitations that may bar the ability to recover or to obtain certain types of remedies. In the construction industry, for example, mechanics liens may only be obtained by subcontractors in Maryland if they send the proper notice to the owner within 120 days of the last day of work, and file for a lien within 180 of the last day of work. On the far end, general statutes of limitation bar the filing of any type of suit. In Maryland, the general statute of limitations is three (3) years from the accrual of the cause of action.
