Most clients look for low or no-fee debt collection and don’t want to go out of pocket to collect bad debt. However, this can conflict with the terms of the clients’ agreement also known as contract carve-outs.
Many contracts contain a clause that provides for mediation and/or arbitration in the event of a dispute. In order to avoid going out of pocket to pursue bad debt, the contract will provide an exception, or better known, a carve-out, for fee disputes. The contract may state that in the event of any disputes, the parties agree to mediate or arbitrate the dispute.
The client may add language to the provision allowing for an exception in the case of unpaid invoices or fee disputes. This offers an escape clause to the need to mediate or arbitrate debt collection matters.
Most often the carve-outs or exceptions from the need to pursue mediation or arbitration are successful. That is, unless, the non-paying client objects.
A Real World Example
A recent case we handled, tested whether the court would enforce a carve-out for fee disputes or unpaid bills.
In this case, the client’s contract had a carve-out from compulsory mediation and arbitration. The clause stated:
Additionally, in case of unpaid invoices, client’s name, may bring suit against Client for the collection of such invoices in the applicable state or federal courts of New York County, New York, and/or in the jurisdiction in which the Client holds offices.
And, as sometimes happens, our client was not paid and turned the claim over to us for collections.
Our demand phase did not produce payment and, with our client’s authorization, we filed suit in NY State Court. The debtor, by way of counsel, responded to the lawsuit and made a motion to dismiss the case.
The debtor claimed that our client, by their own contract, was required to mediate all disputes. They claimed that the case we started for non-payment of invoices for services rendered was more than just a “collection case for unpaid invoices.” According to the debtor, the client rendered improper services, and that is why the debtor did not pay. And, by stating that, the debtor, by way of counsel, raised an issue that would need to be arbitrated.
Court precedent has stated that proceeding with arbitration is preferable when possible. However, if there is a dispute between the parties and it is not clear whether the agreement provides for a court proceeding or arbitration, the court must make an initial determination prior to proceeding. Often this will happen with the plaintiff filing suit in court, and the defendant’s attorney moving to dismiss to refer the case to arbitration. The court then will either dismiss the case and refer the case to arbitration or, if the contract provides for a court proceeding, deny the motion and allow the case to proceed.
In our client’s case, the court dismissed the lawsuit, finding the dispute would need to go through mediation based on the client’s agreement. Based on our client’s Our client has decided and instructed us to proceed to file for mediation.
Check back for a future article to learn how the case turned out.
Have a debt collection matter you need to resolve? Contact Frank, Frank, Goldstein and Nager for a consultation.
