Do Not Fear Commercial Collection Clauses: A Guide for Creditors
In another episode of our wildly popular #AskaPro webinar series, shareholder, Commercial Collections Group chair, and Commercial Law League of America (CLLA) immediate past president Jim Kozelek moderates some pretty exciting panelists. Shareholders Andrew Voorhees and David Wolfe and attorney Nick Rohner alleviate fears surrounding commercial collection clauses.
WATCH THE WEBINAR HERE.
Now, let’s dive into our team’s top takeaways!
Does the FDCPA apply to the collection of commercial debt and are there any other regulations that apply to the collection of commercial debt?
It depends. The Fair Debt Collection Practices Act (FDCPA) applies to personal debt such as mortgages, credit cards, student loans, and auto loans. When you look at the nature of the debt, you can better gauge whether the FDCPA applies. If it’s a business debt, even when there’s an individual liable for that debt, it does not apply.
To that end, when a business hasn’t been incorporated, and it’s a sole proprietorship or doing business as its trade name — the owner is liable because there’s no legal distinction between the business and the individual. Still, the FDCPA does not apply because it is a business debt. Side note, just because someone puts “Inc.” after their business name, doesn’t mean they’re technically incorporated.
Are venue/jurisdiction clauses enforceable in commercial agreements and can they be challenged?
A common clause in commercial contracts, these provisions may mandate where an action may be filed. Venue defines where it’s fair to file an action and jurisdiction defines whether the court has the power to preside over it.
In most cases, they are enforceable if it’s a solid clause in the contract. However, these clauses, like everything, can be challenged. Most often, they are challenged to delay an attempt to collect the debt. If the parties have no rational relationship with the chosen venue, a challenge can be won. For instance, if neither party is located in the chosen venue, it wouldn’t make sense to file there.
An attorney would help determine how a venue/jurisdiction clause impacts where to file suit, and determine the best place to file suit. Facets they’ll look for include:
- Is it mandatory or optional?
- How does it define a specific geographic location?
- Does it have a carve-out?
The law presumes that if you’re putting yourself out into the stream of commerce, you are more sophisticated than the typical consumer, so courts like to hold businesses to their contractual provisions. It’s also worth noting that a governing law clause is not the same as a venue or jurisdiction clause.
Are attorney’s fees clauses enforceable in commercial contracts?
Usually, yes. First, make sure your contract has the clause. If it doesn’t, you’ll want to add it. Most states follow the American Rule, which says each party pays for their own attorney fees, whether you win or lose. An exception is when you have an attorney’s fees clause in your contract.
There can be exceptions to this exception. In Ohio, going back to the 1800s, the state supreme court has upheld that these clauses are not enforceable. The legislature, however, has said they are enforceable when the principal amount of the contract is $100,000 or more. To further confuse matters, some courts have made exceptions to the $100,000 guideline. Clearly, it’s up to the individual judge.
When you have a contingency fee arrangement, this allows you to mitigate the risk because you don’t pay the attorney unless you recover a dollar amount. Although not impossible, it can be difficult to recover all of your contingent attorney’s fees.
What costs are recoverable in collecting a commercial debt?
Costs that occur before you retain a lawyer need to be directly connected to collection activities. For example: repossession fees, collateral preservation costs, and door-knock fees. Once you have retained a law firm, the courts consider costs like office supplies, postage, and photocopying costs to be traditional overhead costs and not recoverable. Court costs are recoverable. Whether or not you can recover electronic filing convenience fees can depend on the court or local rules.
How are evergreen clauses incorporated into commercial contracts?
Also called an automatic renewal provision, an evergreen clause is a provision that allows a contract between two parties to continue with no defined end date. It continues until one of the parties intentionally terminates the contract. Sometimes the contract renews on a defined periodic cadence (e.g., every month, every quarter). Evergreen clauses enable efficient, uninterrupted business relationships.
The courts recognize that when one party makes an investment, it should be able to rely on the continued relationship a contract promises. For example, let’s say you have a factory that depends on a specific material. You may have an agreement with a supplier that you’re to receive a monthly supply of that material. Rather than negotiate every month, you simply continue the relationship. You don’t need to submit a monthly order nor are you subject to price changes. Advertising contracts are another example of evergreen clause contracts. It’s up to you to give notice when you want to terminate the contract.
Are evergreen clauses generally enforceable in a commercial matter?
The answer depends on the clauses’ verbiage and termination requirements. When writing a contract, you want to be as specific as possible, most notably around the time limit and notice requirement. Some states have their own requirements, and generally the courts will look at the clause in question and determine its legitimacy.
Does the commercial contract contain an arbitration provision?
Whether you have an arbitration clause depends on your contract. The laws surrounding these vary widely by state. Knowing its terms are important because if you have an arbitration provision and you don’t enforce it, the other party can raise it as a defense to delay or even request sanctions. Your case may be dismissed if you file a lawsuit without going through arbitration if your contract states that’s where a case should start. You also then may be made to pay attorney’s fees.
Are contractual arbitration provisions enforceable?
Yes, generally, they’re enforceable, and they can be challenged. The scope of the arbitration provision is often challenged. These clauses can go from short and simple to long and complex. We encourage you to know your contract.
At what point should a commercial lender refer a matter for collection?
The answer to this depends on the situation; however, we encourage commercial lenders to go to collections as soon as you realize your client isn’t going to pay you, isn’t going to work with you, or isn’t responding at all. The longer you sit on the claim, the more you risk another creditor coming in taking the limited funds available. Be sure to set definite timelines along the way with your client.
For more specific examples, check out the full Ask a Pro: Commercial Collections - Don't Be Clause-trophobic! webinar. If you have additional questions or want to learn more about our commercial collection solutions, connect with Jim, Andrew, David, or Nick at any time.
These blogs are not a solicitation for business, and they are not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
