This article is provided as member benefit by CAMICO, the OSCPA preferred provider of professional liability and employment practices liability insurance.
By CAMICO Loss Prevention
An effective way to avoid having a collection problem in the first place is to communicate with the client regarding your billing and collection policies, and to include stop-work or disengagement provisions, or both, in your engagement letter. Such provisions can then be enforced if the client doesn't pay you in accordance with the engagement letter.
A stop-work clause in the fees section of your engagement letter enables your firm to stop work in the event the client fails to pay in a timely manner. The enforcement of this clause will help prevent your firm from completing too much work without receiving payment from the client. Stop-work clauses must be enforced in order to be effective.
Bill on a timely basis, and do not allow fees to build up. When unpaid fees become too large, they provide an incentive for the client to sue for malpractice, especially when the CPA sues for fees. CAMICO claims experience clearly shows that suing for fees creates a high probability of a countersuit by the CPA's client, usually alleging malpractice during the engagement in question. This escalates the situation from a simple fee dispute to a malpractice lawsuit. Lawsuits and countersuits almost always result in the CPA spending far more in attorney fees and in lost billable time than is warranted for the fees owed to the CPA.
Claims experience also shows that simple fee disputes are better resolved through mediation and arbitration than through litigation. That’s why CAMICO recommends mediation for all disputes as a first step and binding arbitration for fee disputes only as a second step. Include a mediation clause for all disputes and a binding arbitration clause for fee disputes only in your engagement letter, which is signed by the client.
Confirm with your legal counsel and liability insurer the applicability of agreements for mediation and arbitration (also known as Alternative Dispute Resolution) in your state. In some states these agreements are effective only if they are used as part of an engagement letter or a separate contract signed by the client, but the engagement letter always needs to be signed by the client in order to be effective.
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