How to Sue Your Best Client

In a credit crunch, more than at any other time, ‘cash is king’. For any organisation at present, obtaining loans or refinancing is problematic and expensive. Yet the most obvious and immediate source of finance is the client debtor list and the work in progress. The problem is that, equally, the immediate source of at least temporary finance for the client is to slow down or cease payments on projects, either completed or in progress.

Against this background finance directors of companies will be looking to enforce payments as quickly as possible and clients may be scouring project contract documents and events on the ground to find areas where service and delivery did not live up to expectations or at least the contract terms. Sometimes it is those blue chip clients that companies will have the greatest difficulty with.

There are typically three types of organisation that companies fall out with regularly: suppliers, distributors and clients. All are important but, of course, without clients nothing else counts. Quite often that falling out will occur with one of the company’s best clients, despite all the good work that has been done for them and the best efforts of the organisation. It may well be a client that the organisation has fostered over many years, pouring thousands of hours into developing the relationship and sometimes tens of thousands or even hundreds of thousands of pounds.

The problem, when it comes, may result from a number of sources: over exuberance by the sales team; failure to manage the client’s expectations in terms of the project’s key deliverables; failure to carry out a risk assessment properly before the start of the project; failure by the team implementing the project to identify quickly enough the problems that have arisen; project scope creep induced by the client’s ambitions and definition of the project expanding as the project develops; failure of the client to provide information or co-operation to fulfil the contract. This is apart from other more prosaic errors that may occur on any project, or outside influences such as a change in financing arrangements or the failure of a key supplier.

Approached correctly there are ways to achieve what the company wants, which is usually prompt payment of its account or stage payment in the project and, more importantly for the future, to keep the client. Indeed, one can do even better than that, as we shall see. There are a number of principles that need to be applied, as follows:

1. Identify what the company wants – what result does it want to achieve in terms of payment received, retention of the client, position in their own sector or industry, position in the sector or industry they are targeting; or other object such as commercial precedent
2. The law should be used as a commercial tool in the toolbox, not as an end in itself
3. It is important to obtain an early, quick assessment of the problem from the people involved and their documents, before actions by the company start to close down the options and opportunities available
4. One needs to appreciate any weaknesses in the case early on and have an appreciation of how the company’s client would view the position
5. Early identification of the key issues is essential
6. Use a solutions based approach to solving the problem; identify options and recommend a practical course of action from one of those options
7. If possible, adopt an option that is flexible in its strategy to enable the approach to be adapted as circumstances change
8. Deliver a focused, reasoned approach that is verifiable and sustainable
9. Test the planned approach regularly to ensure it is delivering the desired commercial result
10. Manage realistic expectations both of the corporate and its client at the appropriate levels to deliver the commercial result

The application of these principles can lead to some interesting results.

Case study A

A top three global IT supplier encounters difficulties with a top three global phone supplier. The project set by the client to the corporate was highly ambitious: to produce cutting-edge technology at the forefront of its battle for customers with other phone companies. The client is very important to the corporate, but so is the money. Result – case resolved, money secured, project adjusted to suit both parties. Client succeeds in its business area and rewards the corporate.

Case study B

A major outsourcing company is engaged by a new large global investment bank to help it set up facilities worldwide. The deadlines are strict and immovable. The technological challenges are immense. The project begins to fall apart and failure is a very realistic possibility. The costs/damages are very worrying. Any exit seems preferable in what appears to have turned from a dream appointment to a nightmare. Matter resolved and the ‘client from hell’ is so impressed by the result that it agrees to become a reference site for the corporate for future business, which does indeed subsequently bring in further business.

Case study C

Corporate A enters a new sector of industry offering a brand new suite of products that will transform that sector. There is great interest in the sector. At the same time corporate B enters the sector with an equally compelling product. Both corporates have underestimated the difficulty in practical terms of applying their products to that sector and both quickly encounter complications in application with their respective offerings. Corporate A decides to apply the approach advocated in the ten principles. Corporate B does not wish to be taken for granted and challenges the client from the sector. Both cases are resolved. Corporate B loses its case, which it had quickly launched in the courts, both at first instance and on appeal. Corporate B is heavily criticised for its handling of the client in business trade journals. Corporate A resolves its problems with its client, obtains payment and, in the absence of Corporate B, goes on to substantially clean up the work available in that sector.

While some cases have gone to litigation in arbitration, the High Court, Court of Appeal or the House of Lords, commercial law should be used as a commercial tool to achieve commercial aims, not as an aim or academic exercise in itself. If used properly, what may appear as a crisis can be rescued and a recovery made. Indeed, better than that, a crisis can be turned into a marketing opportunity with the client – how one reacts and deals with issues while under stress can impress the client more than everyday marketing activities. If you are really lucky, the client or sector may turn into a reference site for further work.

When you have a crisis with your best client, don’t despair – with correct handling it could be the best business development opportunity you have had in years, provided you use the commercial law in the right way as your tool for business.

Philip Hooley Biography

A Cambridge graduate, Philip joined Manches as a partner in 2009, prior to which he was a partner at Clyde & Co.

Philip advises on a wide range of commercial disputes, from complex IT projects, financial services and regulatory matters, to insurance/reinsurance, insolvency, professional negligence, international and jurisdictional disputes. He has acted for many years representing large corporates in their commercial disputes. He was involved in defending one of the two top four accountants involved in the BCCI action; other cases he has handled include Sumitomo for the LME, Lloyd’s R&R, the collapse of the State Bank of South Australia and of the State Bank of Victoria, and the seminal insurance case Lord Napier in the House of Lords.