While it’s sometimes overlooked, or just ignored, a specific litigation policy is an important piece of a complete and thorough credit policy. Coupled with a good collection policy, and a thorough lien policy, a specifically followed litigation policy should ensure that a company in the construction industry will get paid on nearly every project. Litigation should always be the tactic of last resort, not only is it extremely time-consuming, it’s also incredibly expensive. When used judiciously, however, litigation can be an effective final tool in your collections arsenal.
What Should a Litigation Policy Be?
First, a litigation policy should be written down, accessible, and strictly followed. Similarly to the business’s credit policy as a whole, the written litigation policy serves as a window into the company’s treatment of and philosophy on credit and debt. How often a business elects to employ this last option provides a unique look into the culture of the business. A set floor should be established, such that certain projects and non-paying accounts will never qualify for litigation, merely because it’s too expensive and time-consuming. However, the fact that a company will not shy away from litigation when strictly necessary can give a little bit more gravitas to earlier collection efforts. Further, strict compliance with the litigation policy as written allows a business to be more streamlined and efficient, and not waste time deciding which non-paying accounts should be sent to the attorneys.
Generally, a litigation policy notes the boxes that must be checked prior to initiating litigation. This may include the total amount of the debt, the size and financial resources of the non-paying customer, and whether or not the debt is secured in some way.
How to Craft a Litigation Policy: Factors to Consider
Just like any other business-specific policy, a litigation policy should not be an off-the-shelf or one-size-fits-all product. Each individual business has unique circumstances and needs, and should draft its litigation policy to best fit its specific situation. Also, the strategy and aggressiveness of a litigation policy will depend on the company’s specific philosophy and mission – some companies are much quicker to call in the attorneys and battle it out in court – even if that’s not necessarily the most business savvy of options. Generally, as with many things in life and business, a moderate approach is oftentimes the best solution. While there may be some visceral desire to sue anybody that doesn’t pay what they owe, oftentimes it’s just not worth it.
Clients with whom a longer relationship has been established may only be sent to litigation on the most egregious and largest of non-paying accounts. While strict adherence to the litigation policy is best to streamline the determination of which projects should qualify for litigation, that doesn’t mean that all clients must be treated the same way. Since litigation policies should differ business-by-business, they can and should take business variances and specific needs into account. For example, some clients with whom a longer relationship has been established may only be sent to litigation on the most egregious and largest of non-paying accounts. It’s generally not worth souring a long grown business relationship over one problem project.
Similarly to creating a collections policy, there should be some thought given as to which steps can occur in-house, and which must be outsourced. Clearly, if your company doesn’t employ any lawyers, the litigation policy will necessarily need to be completely outsourced. If, however, inside counsel is available, it will drastically cut down on costs to have at least some of the legal steps performed in-house. In many situations, even companies with in-house counsel will eventually offload the litigation to an outside firm, but these decisions should be made on a policy-by-policy basis.
The litigation part of a credit policy can often be overlooked, but it is an essential part of a sound and comprehensive credit policy.