Chasing down unpaid invoices from clients who fail to pay disrupts your entire business, costing you valuable time and hurting your cash flow. In Connecticut, the best time to address a collection problem is before it ever begins, with a well drafted business contract.
As a creditor, your contract is your most powerful tool. You cannot force a client to pay with funds they do not possess. However, your agreement can include specific clauses that establish clarity and a clear path to recovery.
1. A clear definition of default
Your contract should leave no room for ambiguity. It needs to clearly define what constitutes a default on payment, such as when an invoice is more than 30 days late.
The clause should also specify the immediate consequences, like the accrual of interest or late fees. It is important that any interest rate specified complies with Connecticut law to be enforceable.
2. A dispute resolution clause
This powerful clause determines where and how a lawsuit will be handled. It should specify that any legal action must take place in a specific location, such as “the courts of Fairfield County, Connecticut.”
This prevents you from having to travel to another state to sue a client. It also defines which state’s laws will govern the contract, providing certainty and making the process more efficient.
3. An attorney fees provision
Connecticut follows the standard “American Rule,” which means each party in a lawsuit typically pays for its own legal fees, regardless of who wins. This can make pursuing a smaller debt financially impractical.
However, a “prevailing party” attorney fees clause in your contract can override this. This provision states that if you must sue to collect a debt and you win, the debtor is responsible for reimbursing your reasonable legal costs.
4. A personal guarantee
When you are working with a new or small business, such as an LLC, consider including a personal guarantee in your contract. This is a provision signed by the business owner as an individual, stating that if the business cannot pay the debt, they are personally responsible.
When drafted correctly, personal guarantees are generally enforceable in Connecticut courts, adding a significant layer of security for you.
Proactive protection for your business
A strong contract is a fundamental part of protecting your business’s financial health. Taking the time to ensure your agreements are built to protect your rights as a creditor is a wise investment.
If your business is facing challenges with unpaid accounts, consider speaking with an experienced collections attorney to understand your legal options.