Dealing with a Deadbeat Client
A sad tale of a customer who won't pay evolves into a detailed discussion of contracts and legal alternatives. February 17, 2006
Question
I did a fairly large kitchen for a client about 2 years ago. We had a good relationship and thought I could trust him to pay, so I did not pre-lien. He signed a contract for around $45,000 and then almost every time I worked on the project he would add or make changes. Again, I trusted him to pay additionally for the additions and changes. About the time the cabinets were delivered and 40% was due, he said he needed more time to get the funds and was selling an investment property. He gave me 20% and said he'd have the rest in about two weeks. The job stretched out because of his many changes and lack of payment. The job is now 99% complete (lacking 4 speaker doors) and now he says because it took so long and I inflated the price, he owes me nothing. He signed the contract, price plus tax, but then said he would not pay the tax. I paid it already. He came up with a bogus timeline filled with personal attacks and even threatened to sue me. He now says he will get another contractor to finish it. I am at my wits end. I worked so hard on this project and anyone who saw it said it is magazine-worthy. He wrote me a check last week and before I could get it to the bank he stopped payment.
Forum Responses
(Business Forum)
From contributor A:
It sounds like this guy played you like a fiddle, and now you're being blamed simply because you were honest and forthright. We all risk this sort of treatment on every job, but go forward trusting in people's good nature. It is time to take the gloves off with this client. You do have legal options in this situation, and a tough lawyer is what you need with the dollars involved. A well written threat letter from a reputable law firm may be all you need to get this person to pay.
From the original questioner:
Thank you for the positive post - it helped! I am having a hard time not taking this situation personally. I know I am a skilled, hardworking, good person who does his best but it really hurts when you get screwed by someone you trusted. I have contacted my lawyer. Beware to all - this could happen to you. Make sure you pre-lien, regardless of the situation.
From contributor B:
He may be exempt from the sales tax. Here in NY a homeowner can sign a Capital Improvement Form and be tax exempt as long as the installation is a permanent part of the house. You still have to pay the sales tax when you buy the material that went into the job, but no tax on the labor you put in or the total cost at the end of the job. In New York a contractor can put a lien on a house for lack of payment. I would take that approach. He'll be pretty surprised when he gets a letter that says you now own a part of his house, and if he has a mortgage, the bank will get a copy of it too.
From contributor A:
It is unlikely that this is the first time this guy has done this. He may already have liens on his house. This is something the lawyer will check on, as well as this person's history of this sort of thing. At this level of money involved, I really would have a lawyer handle it.
From contributor C:
I did some work for an architect in his home. The original bid was $20,000, and he paid $10,000 down. As we neared the end of the cabinet work, $14,000, and we’re about to begin work on a $6,000 furniture grade island, I began to get suspicious. I bought some stuff for other parts of the house, unrelated to my bid or even cabinets. When he did not pay this $1,100 bill, and went on a cruise, I stopped work on his project. I told him that we would resume when he got current. When I added up the extras it was another $10,000.
I now have two attorneys working on this - a construction attorney, and a trial lawyer. The legal system is slow and expensive. This all started about a year ago, and I don't expect to go to trial for another year. Even then, if he loses, he can find some reason to appeal. And here is the real kicker - the judicial system is not always right. It is a matter of who can sway the jurors, not who is right. Remember the lady who sued McDonalds because the coffee was too hot?
Use your energy now to make sure this doesn't happen again. Talk to a good construction attorney and get a workable contract - 2 pages or so. Let people know right from the start that you are a professional organization and that you have gone to the trouble to protect yourself. Some people depend on relationships to foster their business. When you become friends with your client, you give him an opportunity to expect extras at a reduced price or even free. If your craftsmanship is lacking, you may need to rely on relationships to maintain your business. But if you have strong skills and provide a great product, you can be more business-like with your clients. They know that when they ask you to do something extra, they will be charged for it. If they don't want to pay full price, they will have legal actions brought against them. It sounds like you are a nice guy to your clients. Do you forgive them and excuse their negative behavior? If so, then you may be contributing to their actions. When a dog senses fear, he attacks. When a client senses an easy way out, he will exploit it. If you are doing work for clients other than your friends and family, then know that more than likely they will not maintain a social relationship with you after the job is done. You will not be invited over for dinner or parties. Your relationship is based on a contract. You perform, they pay, you both are happy. Nothing more than that - referrals, yes, but they did not hire you so they could add you to their social circle. I find that most clients want to be treated professionally, in a friendly and business-like manner. I find that is what most clients want, not another friend.
I am sure that you did a great job for this guy. Unfortunately you were his mark. There is a good chance that he will spend a good bit of money to keep you from getting what you deserve. This is a good amount of money, and you may have good grounds for a lawsuit. But it may take a long time to get it. If a lien is filed, it may include interest. But in my case, the architect who stiffed me had a lien on his house that he had to get cleared before he got a home improvement loan. That lien was 7 years old.
From contributor D:
You did not say how much of a deposit he gave you. Early on in my career I had a client who did almost the exact same thing to me. Take him to court - small claims at first, and appeal for arbitration if you are not happy with the decision. This guy does not want to spend his money. It’s all about the money for him, but for you it’s the principal. Make him spend his money on an attorney. A lawyer will most likely try to reach a settlement with you.
Don't let him keep your money - make him spend it. Even if you lose it will have cost him plenty. My guess is that you will most likely have to waive all the extras and changes, and he will pay. You most likely will not be able to collect on what is not yet installed. I know you have learned a hard lesson as I did back then. If the payment agreement says 40% due on delivery and the client has only 20% then you only deliver half the delivery. What was his reason for stopping payment on the check?
From the original questioner:
My wife has been looking for every hole in his story and finding a lot of them. We charge 50%, 40%, 10% so I am out about 30% which represents all of my profit. I am losing money at his point. Regarding the stop payment - as I was walking out with the $8500 check, he said "don't go right to the bank, I need to transfer funds.” At this point I was going to pay the tax for him just to get something out of it (-$3000). Then I figured no more freebies and told him in writing that anything outside our contract would be time and materials. He got mad and used that as his reason to make me out to be a crook. The next morning the check was no good, if it ever was.
I think there are two kinds of liens, the first you have to pre-lien and only have here in AZ, about 20 days from when the work starts. The other is a Mechanics Lien and as I recall, you have about 120 days after work ends to file. Does anyone know?
From contributor F:
This is a good reminder to upgrade your contracts by making them as ironclad as possible in your favor. Do you specify when ownership of property becomes theirs? A good lawyer who specializes in contracts is worth having now and in the future.
From contributor C:
Talk to a construction attorney about liens. In Texas there are several. Each has certain requirements. Some require both homeowners’ signatures. And here is another kicker that we hear very little about. If you do more than $20,000 on a home, you must be registered with the State of Texas as a 'Builder', even if you are a subcontractor. If not, the homeowner can not pay, and sue you for deceptive trade practices. You work and you pay them. What a poor piece of legislation. Talk to a good construction attorney so you do not forfeit your rights by omission.
From contributor G:
Call a lawyer and then file a lien, and do it soon. If you are direct to the owner the rules are different than for subs. Be prepared to not work for him in the future. Sometimes an invalid lien is slander of title but all you have to do is remove it. It will get his attention and if he wants financing the disputed money will need to be bonded around or put in escrow.
From contributor H:
We once had a long winded contract that specified everything, hoping it would alleviate disputes. However, getting it signed took an act of congress, and left the parties involved feeling suspicious about the energy we had put into getting it signed. If you want someone’s signature, be prepared to offer him ultimatums that will leave a bad taste in his mouth. We do 1-1/2 million dollars a year with average projects in the hundreds of thousands, but almost never have a signed contract.
The reality is that if you ever have to refer to your contract during a conversation, the job is in the toilet at that very moment. If you have a deposit, you have 3 options. You can walk away with just the deposit money and wash you hands of the whole situation. You can sue for the point of it all, and still walk away with 50% because the attorneys will get the remainder anyway. Or, you can attempt to sweet talk the guy and settle for something/anything less than the total. In any of these cases, you'll never work for him again by choice.
It is much more effective to pre-screen your clients than to pre-lien your clients. A pre-lien is like a prenuptial - it says that although I distrust you completely, I'm willing to take the risk and work for you anyway. Not the way I want to start a job. Every attorney will tell you that a contract need not be long, but must have three things - price, delivery date, and the ability to recover attorney’s fees. This simple one paragraph statement is at the bottom of every quote we send out, signed or not.
From contributor I:
In reading your original post you stated that he gave you a check and then stopped payment. That check is very important. It shows that he recognized that his debt to you was legitimate. If the total due is under $15,000.00 you can probably go to small claims court and let a judge decide. The rules may be different depending on your state. You need to write everything down while it is fresh in your mind.
From contributor J:
Contributor H wrote: "The reality is that if you ever have to refer to your contract during a conversation, the job is in the toilet at that very moment." I respectfully disagree. A friendly contract which clearly denotes the scope and the various parties' responsibilities can make for a much friendlier transaction. Most of our projects also range in the hundreds of thousands of dollars. It's not uncommon six months after the start of the job where the involved parties refer to the contract to see what was originally mutually agreed upon. The major items are easy to remember; it's the little stuff over which disputes arise and which are easy to forget as to what is whose responsibility. The contract is the pacifier. Whereby I'd tend to agree with Robert Frost that good fences do not inherently make good neighbors, I do think good contracts allow for smooth transactions.
From contributor K:
Your client gave you a check, thereby admitting his debt to you. Then he stopped payment. If all your paperwork is in order then take the check to the sheriff. Your client has in fact done a theft by deception.
From contributor L:
I know it's not going to help this time but for the future it might be worth doing what I do (if it’s legal where you are), i.e. the customer pays 45% when the job starts, and when all the stuff is made they come to my workshop and inspect it and pay another 45%. The final 10% is paid after it's been installed to their satisfaction. The fact that they have some leverage (the 10%) seems to make them happier than if they had to pay it all up front, but 10% is small enough to take a risk on, and most customers won't risk the loss of good will (and loss of warrantee) by refusing to pay the 10%. It is much better to have their cash than to have their signatures on a contract.
From the original contributor:
Thanks again for all the advice and input! We figured up the final invoice with comments saying the bill is due upon receipt and interest, and collection or legal fees will be added if we don't receive the payment promptly. We are going to send it certified for our records. The balance is about $12,000. I do have pre-paid legal and they said they would write a demand letter. I was told by another cabinet shop that I should go to the court house tomorrow and make claim in small claims court. The limit here, as I am told is $10,000. This is better than nothing but I hate to give him $2,000. I may see if I can file two because his master bath was added later. The funny thing is that he came up with the timeline to show how we cheated him but it ends up reinforcing our position. The prices never changed and he was informed on the invoices of additions. I think he will have to pay one way or the other. And yes, that check he gave me is gold.
From contributor H:
A recent post on this forum stated that a client defined custom cabinets as needing to have 3/4" backs. There's a vastly different reaction when you explain to them the benefits of a 1/4" captured back system vs. saying "my contract doesn't call for 3/4" backs".If ever I was unable to convince a client that the method I've chosen is the best possible method for that situation, and I was forced to refer to the language of my contract to defend myself, I would consider that to be a huge failure on my part. Why does this client not trust me, an expert in my field, to provide him with the best possible product? Why does he feel that he knows better? Why does he feel that after the selection process where we were chosen for our reputation and quality, we're out to screw him? I think if you find yourself frequently referring to your contract to solve disagreements or misunderstandings, there may be a bigger problem at play.
From contributor K:
To contributor H: You are right, there is a much bigger problem. Your client is talking to someone who doesn't know better or someone who was convinced to do things a certain way on their cabinets. I’m ashamed to say this but some cabinetmakers spread this garbage to get jobs. I have a problem with a decorator who fancies herself to be a designer. I almost gave up on a job just today because of it. My wife just stunned me by not only getting her fired, but she got money as well as extras.
From contributor J:
Contributor H wrote: "No, I think if you find yourself frequently referring to your contract to solve disagreements or misunderstandings, there may be a bigger problem at play." I agree with this statement, and I think that in fact it may be unduly generous.
I use a contract as a written summary that outlines the particulars in a previously established agreement. In a well negotiated agreement there should be no need to frequently refer to the contract. That said, there will be times when referring to the written agreement are necessary. We're currently working on an over $200,000 job. The contract was signed in January. There's a small part ($2,500) where we're supposed to trim out part of the house. I recalled the contractor was to supply the materials and we were merely providing the labor since we were going to be on site anyhow. We discussed the matter, and each of us had a different recollection as to what we had already agreed to. The contract clearly indicated it was within my scope to provide the material. I'm now providing a few hundred dollars of material without feeling like I'm being taken advantage of. In the nine months since we signed this contract, last week was the first time I looked at the document since we signed it. I feel that if one views and uses the contract as a tool that documents a previously established agreement rather than a piece of paper the dictates the terms of a relationship, then the contract will only benefit all parties.
From contributor M:
Writing a check for work performed and then putting a stop payment on the check is stealing - period. It can't hurt to stop by your local police dept. A uniformed cop or detective knocking on the door might be enough to scare the customer into reality.
From contributor N:
I know this thread is old, but for everyone who has participated here, I thought you may be interested in the way I was scammed by a customer. I had a very similar situation as Bob. It was a $25,000 job - I got $12,500 up front and was supposed to get $12,500 on completion. This was in my first year of business when I was very naive and trusting. The guy kept changing, and making additions, and in the end he blamed me for taking too long. Here was the real scam: after taking the case to my attorney, we later found out that he had positioned himself to be untouchable. He had his wife sign my contract. The wife had no assets via a prenuptial agreement and was bankrupt. All the assets were in his name, and all the debts in hers. There was nothing that we could do. I am sure I could have recovered something if I had thousands of dollars, and many years to devote to the matter, but I didn't. I chalked it up to a $12,500 learning experience and moved on. The worst part is that I was taken advantage of, and this person didn't even break a law doing it. This is a loophole that needs to be tied up.
The comments below were added after this Forum discussion was archived as a Knowledge Base article (add your comment).
Comment from contributor P:
I had a project a couple of years ago that was 50% up front and the rest due upon completion of the installation. Several times during the installation the couple pointed out what to them were flaws and I fixed them. On the last day of installation, I asked both the husband and the wife if there was anything else they had a problem with and neither said a thing.
I sent the final bill for about $2500.00, and got a check a week or so later for $500.00, with a note in the bottom left corner, "paid in full." I called them back to find out what was going on. "There are so many things that are not right. Just take the cabinets out and refund the whole amount they had paid, or settle for the $500.00." I reminded them that they had neither one said anything the last day I was there. They sent photographs of what they considered to be flaws - a 16" wide crack between crown molding and cabinets, one cabinet the wrong configuration, even though they had agreed in writing on its dimensions and features.
I called a lawyer friend. He wrote the "friendly lawyer's" letter to them and they hired an attorney. They also called in two or three other cabinet shops to assess the quality. One agreed to fix the "flaws" for $400.00. My attorney was then contacted by their attorney to say they would settle for what they owed less $400.00.
My attorney said their attorney had probably advised them that they had better settle or it would go to court, they would lose, and then they would pay the amount owed, plus their attorney fees and also mine. They sent a check for the balance due less the $400.00. I was terribly demoralized by the whole experience. I began to doubt myself big time. But then I slowly came back to reality. You can't please everybody all the time. To expect it is to be unrealistic. Learn from the experience, and move on.
Comment from contributor Q:
I own a construction company and have had several problems with dead beat customers. We are in the process of revising our contract and one clause we will be including is regarding property ownership. It will state something to the effect that all products purchased, used, and installed in the clients home are considered leased at $50 per day. The daily fee is waived when final payment is made. If the customer fails to make final payment for work completed, the lease fee will go into effect until said contract is paid in full. We will also have them initial this area on the contract. I’m not sure if it will work, but we have to try something. We also are honest and hardworking individuals, and there are many clients out there that know the system and are deliberate in their actions of not paying. It’s tough, but that's what we have to deal with at times.
