Key Contract Provisions That Give Your Business an Advantage When Collecting from Deadbeat Customers

Whether you’re located in Philadelphia, Lancaster or Pittsburgh, running a small business in is challenging enough without having to chase down unpaid invoices. The terms of your customer contracts can either help or hurt you when trying to collect from non-paying customers. Including specific provisions regarding interest on late payments, attorney's fees, collection costs, and choice of venue can significantly improve your chances of recovering what you're owed, and minimize your legal expenses. Failing to include these provisions can leave you footing the bill for collection efforts, even when you win your case.

Let's outline the crucial provisions you should include in your customer contracts to give you a significant advantage when collecting debts.

The High Cost of Vague Agreements

Without clear, enforceable contract terms, collecting overdue payments becomes an uphill battle. You may face drawn-out negotiations, expensive litigation, and the frustrating possibility of never recovering what you're rightfully owed. Vague payment terms, missing interest clauses, and a lack of clarity on dispute resolution can all severely weaken your position.

Key Contract Provisions for Debt Collection in Pennsylvania:

Interest on Late Payments

Pennsylvania law allows you to charge interest on overdue balances. Your contract should clearly state the interest rate you will apply to late payments. This incentivizes timely payment and compensates you for the delay. Without a specific interest clause, you may be limited to the statutory interest rate of six percent.

Attorney's Fees

It’s a common misconception that the winner of a lawsuit gets their attorneys fees paid by the lower.  That’s not the law, however you can make it a term in your contract.  In Pennsylvania, you can include a provision in your contract that requires the non-prevailing party to pay the prevailing party's attorney's fees in the event of a lawsuit. This is a powerful tool, as it makes customers think twice before defaulting, knowing they could be responsible for your legal costs in addition to the debt. Without this clause, you will likely have to pay your attorney even if you win the case.  That reduces the net payable to you even if you win.

Collection Costs

Recovering a debt often involves more than just attorney's fees. It can include court filing fees, service of process costs, and other expenses. Your contract should explicitly state that the customer is responsible for all collection costs incurred in pursuing the debt.

Choice of Venue

If a lawsuit becomes necessary, the location of the court can significantly impact your costs and convenience. A choice of venue provision allows you to specify the county in Pennsylvania where any legal action must be brought. This can save you time and money, especially if your business is located far from the customer. Without this clause, the customer may be able to sue you in their home county, regardless of where your business is located.

Personal Guarantees

If your customer is a business entity like a limited liability company or corporation, consider requiring a personal guarantee from the owner(s). This makes them personally liable for the debt, providing an additional layer of security.

Confession of Judgment

A confession of judgment clause is a powerful tool in Pennsylvania that allows you to enter a judgment against the customer without a lawsuit if they default on their payment obligations. This clause must be conspicuously placed in the contract and contain specific language to be enforceable. While potent, these clauses are subject to strict scrutiny by Pennsylvania courts, and the customer must knowingly, intelligently, and voluntarily waive their due process rights. It's critical to consult with legal counsel to ensure the clause is drafted and implemented correctly. These are powerful but come with significant risks if drafted improperly.

Consequences of Omitting These Provisions

Failing to include these provisions in your customer contracts can have significant financial consequences:

Reduced Recovery

You may only be able to recover the original debt amount, without compensation for attorneys fees, late payments or collection costs.  Litigation is expensive and has risks.  Deadbeat customers sometimes get away with not paying the bill when a business owner weighs the costs of litigation vs. the net amount they’d collect if they’re successful.

Increased Legal Expenses

You will likely be responsible for your own attorney's fees, even if you win the case.  Laying out attorneys fees for an uncertain litigation outcome, not knowing of the customer can pay even if you win, can be a huge disincentive for engaging in collection efforts.

Inconvenience and Added Costs

You may be forced to litigate in a less convenient venue, increasing your travel costs and time commitment.

Don't Get Stuck Chasing Payments!

Protecting your business's financial health requires proactive measures. By incorporating these key provisions into your customer contracts, you can significantly improve your ability to collect debts efficiently and cost-effectively. Don't wait until a customer defaults to address these issues. Consult with one of Fiffik Law Group’s experienced small business attorneys to ensure your contracts are legally sound and provide the maximum protection for your business.