How I saved my business when a client refused to pay

Tony Ryder and Keith Lucas started Resource Equipment in 2003, offering pumping and other types of rental equipment to mining companies and other firms in the oil and gas sectors. Riding on a boom, the company has managed significant growth, with revenue of $29 million in 2009-10.

But the company hit a snag in its first year when a client simply wouldn’t pay up. The pair were forced to take the creditor to court to recover the funds, and were saved by an earlier decision to have legal counsel look over their contracts.

How has the business been travelling?

We’ve had growth certainly in line with expectations, and our strategy for this year has gone quite well. Since day one we’ve had a particular strategy and we’ve gone down that line. Being in a very niche market we are continuing to develop new products and services to keep us at the forefront, and we’ve had a very good response.

So what happened with this contractor?

We encountered this about three or four months from starting up, and that was in 2003. We commenced operation in October, and after a considerable amount of investment and time completing this project for a client, we ended up in an extremely long battle to recover the funds that were due to us.

What project were you working on?

It was a large oil and gas project. We put a considerable amount of effort into it, we had about 12 guys on the job, and we had a considerable spread of equipment out as well. We built things specifically for the job and we completed every single component of the job. We completed everything within the target dates, and delivered the job in full, on time and we hit all the safety targets as well.

What role were you actually playing?

We were actually a sub-contractor for a client, who was working for another client. But those two ended up in a dispute, so we had to work it out.

At what point did you think they wouldn’t pay?

Part of the contract we entered into was that we would produce a daily operational report, and this would detail all the actions taken by personnel. This was quite a detailed report and was done in conjunction with the site manager.

At one point, about a month before the job ended, he kept saying, “I’ll get to the report later”. He kept saying that, and eventually we found out that he was on instruction not to commit the company to anything further.

How did you react to this? Did you confront them?

At one point I confronted him about it, and he told me that he wasn’t instructed to sign these reports. So as we were closing the job, he said they would get on with these reports. Everyone went back to Perth, they went back to Singapore where their head office was. And that’s when the general manager just flatly refused to pay us and said, “We think you’ve been paid enough”.
I, of course, argued that we had signed an agreement and they were bound to this. And he essentially said, “If you want it, come and sue us”.

That’s a potentially fatal position for a start-up.

It made life extremely difficult. However, I was aware this scenario might happen. I had a business partner let me know that this would probably go into negotiations. For a small company, this was a considerable amount of money… heading into the hundreds of thousands of dollars.

So what was the next step?

We did consider legal action, and then we took it. However, what saved us was our scrutiny in the original contracts. We were fortunate to have had legal advice during that time when we were setting up the contracts, and a few words saved us. These contracts stated that “any pursuant legal action will be fought in the courts of Western Australia”, and so we moved through all the legal action here instead of overseas.

So we sued them, and served them, and we reopened negotiations. They went back and forth and eventually we got to a point where I was satisfied with the money we were getting back, and didn’t need to take it any further. They settled out of court the day before the trial, and we were confident in the amount we were receiving from them. It was the majority of the funds.

So for other businesses that have to deal with this, what can they do?

There are a few things that I would want to be on top of. The first is that your terms of trade are critically important. Many businesses find a contract from within their industry and then take the terms of trade from there. But I would urge anyone to do their own terms of trade and then access some legal advice in the process. You need to take these terms to a commercial solicitor and get them checked.

The other thing I would recommend is that if you are contracting, make sure you have recourses if things go awry. If you are dealing with international companies you want to make sure legal battles are fought here because in certain markets such as Asia taking things to court takes a long time, let alone receiving funds, and you’re going to be at the mercy of the conditions of their court system.