A Step-by-step Approach from Preventing, Obtaining a Judgment on, and Collecting on Business Debt
Do you own a Massachusetts based business? If you have been operating your Massachusetts business for some time, you will probably have one or two lawsuits that you have won in which you received a judgment in your favor, or maybe you operate a new Massachusetts business and you have debts owed to you that you do not know the first thing about how to collect. If you have received a judgment and need to know how to collect on the debt or your business is owed money, but you don’t know how to begin the process of getting paid on that debt, pay close attention to this article.
Step 1: Prevention is Worth a Pound of Cure
Have a Strong Contract
In business, prevention really is valuable. Probably the best way for a Massachusetts business to position itself to have leverage in a courtroom or in a settlement prior to a courtroom is to reduce to writing all agreements with businesses, vendors, contractors, and others. Most business owners, almost intuitively realize that a contract is a necessity, but not all business owners effectively use contracts. I suggest to you that a good contract, one which clearly identifies terms, the parties, is executed properly, that foresees potential litigation and uses language that addresses solutions to prevent litigation, and that uses ‘boilerplate’ to the advantage of the drafting party or at least uses fair ‘boilerplate’ language, is without equal in any business-to-business relationship in Massachusetts.
The Personal Guarantee
One frequently overlooked aspect of the business-to-business contract is the inclusion of a personal guarantee. While it may be challenging to get one party to agree to take on this role, keep in mind that every party to a contract approaches the contract from different points of view. I have seen many negotiations where one side assumes a personal guarantee simply because that party believes that a default will never occur. If credit is being extended to any degree, always attempt to contract for a personal guarantee in a contract because this provides you with another party to pursue in a breach of contract case.
What are Some Examples of a Personal Guarantee?
Absolute guarantees: I agree to pay the full amount of $x in damages.
Conditional guarantees: I agree to pay the full amount of $x in damages if y occurs (I default in my performance under the contract, or some other event).
Continuing guarantees: I agree to pay the full amount of $x if (a) my company defaults in its performance on September 1st and December 1st. I agree to pay the full amount of $y if my company defaults in its performance on any future agreements to perform not yet considered under this contract.
Do Your Due Diligence on Your Adversary and Obtain a Security Interest
Some may question why I perceive a business-to-business relationship as adversarial. Years of business experience and legal knowledge have taught me a concept that applies not only in business but also in interpersonal relationships, which is; everything is great until it isn’t.
How many times have you experienced the honeymoon phase of a personal, business, or any relationship as being wonderful, different than others, etc., only to discover that things weren’t what they seemed. While I am not suggesting that taking a cynical approach to every interaction is wise, I am suggesting that failing to trust but verify and to take every precaution you possibly can is foolish.
Spend some time vetting the opposing party(ies) in any business-to-business relationship that you enter. Ask for financial statements, e.g., profit and loss and balance sheets when you are entering into a large transaction where profit is based on the other party’s timely performance or where credit is being extended. Also, demand a security interest, if necessary, that is, demand that the party pledge something of value to you or your business where you reserve the right to repossess that collateral if a necessary condition is breached.
Know Your Enemy
Another important aspect of any business-to-business relationship in Massachusetts with respect to vetting and due diligence is to understand the party that you are going into business with. Be sure to gather intelligence on what that person or business does. Are they overextended? Do they have previous cases against them which might imply lack of credibility, trustworthiness, or other issues? Do they have a history of successfully performing similar contracts? These are questions that should be answered by a responsible owner or manager of a Massachusetts business prior to entering the business relationship.
Keep a File on Your Business Partners
Whether it be a physical paper file or a desktop file, keep a file on your business partner that includes any correspondence, due diligence that you have done on their background, financial statements, contracts, and other pertinent documents. Not only will the process of information gathering be helpful in your prevention strategy, but it will also be helpful as potential evidence in the event that a lawsuit should ensue.
Please read other articles by Attorney Gaudet which outline other aspects of debt collection for Massachusetts businesses.
DISCLAIMER: The information provided in the pages and posts of this website are for general informational purposes only. The information presented on this site is not legal advice, and no attorney-client relationship is formed by the use of this site.