You make the call: Can customers just refuse to pay?

A severely past-due customer refuses to pay, claiming the company never met the contract’s quality standards. How do you think a court ruled?

“We received your letter. Issue you a credit? That’s rich,” CFO Cash Adams told Best Biz Inc.’s A/R manager, Sara Walker.

“You guys have never met the performance standards set out in our contract,” Sara answered.

“Funny, this is the first we’re hearing you’re unhappy with our services, now that you’re six figures in the hole with us,” Cash said.

“You won’t have to worry about dealing with us and our high standards much longer,” Sarah began. “We’re looking for a new supplier.”

“Wow — that’s news to us,” Cash offered. “And while that’s certainly your prerogative, it doesn’t excuse you from your rather large outstanding balance with us.”

“Look, we paid you a small fortune for services that have been sub-par at best. Maybe it’s you that should be paying us — as in a refund,” Sara asserted.

Cash’s company wasn’t about to go for that. In fact, it sued its customer for unpaid services and unfair business practices. The customer filed a counter-suit to recover what it considered to be “overpayments” for deficient services.

You make the cash call: Did Cash’s company get paid in full?

What the court said

Yes, Cash’s company was able to recoup $635,093 in unpaid services and late payment penalties.

The customer felt it was entitled to withhold payment until it received the level of service it expected according to the contract.

The only trouble: Cash’s company had no idea it was dropping the ball!

Because the customer made no attempts to alert Cash’s company it was falling short of quality expectations, it couldn’t then turn around and withhold payment. The fact that the customer was trying to find a replacement supplier on the sly was the final nail in the coffin for the customer’s counter-suit.

What you can do

The company came out on top in this case, but it did have to go through the hassle and expense of a trial to get that justice.

Sometimes customers may use a quality issue as a stall technique. Other times, there may be a real problem.

There’s one great way to head problems like these off at the pass: Call — at the least — your biggest-balance customers before the invoice goes out to ask whether there are any issues which may preclude on-time payment. (And be sure to document their response.)

Based on the case: Worldcare Clinical, Inc. v. Bracco Diagnostic, Inc., Superior Court of MA, No. 0523218, 7/23/07.