Cesar CantuNo company in the services sector wishes to find its client sitting on the opposite side of a lawsuit. But as much as industry lawyers advise against it, sometimes, going to court is the only option available to survive the toxic fumes left after a business relationship has burned to the ground.
The first thing to understand about suing a client is that it is a very rare occurrence among providers of B2B services. Long-term contracts and relationships are hard to come by in the industry. The statement holds even more true for nearshore and offshore providers, who already have to deal with the negative notions some stateside clients might hold about their operating model.
“Software isn’t a contentious industry. In anything related to outsourcing, service providers really appreciate the contracts they sign; for them, each one is highly valuable. It’s uncommon for those contracts to lead to a lawsuit,” commented Gabriela Smith, Founder & Managing Partner at Texas-based firm GNS Law.
Conventional industry wisdom among SLA lawyers is that client lawsuits should remain encased behind thick glass, accessible only in moments of true emergency. All options available should be explored before pressing the big red button.
“If a lawsuit does happen, its cost should be considerably lower than the benefits that it might bring to the service provider,” stated Daniel Guzmán, Senior Legal Counsel at cloud solutions company Escala 24X7. “Harm should be evaluated [before considering a lawsuit]. SLAs usually have clauses that aim to avoid any controversy through mediation, conciliation or even arbitration before going to court.”
All that said, instances do exist in which a company’s legal team will not object to taking legal action.
More than money owed
One might think that most service providers are willing to take their clients to court when there’s money involved. But even then, industry lawyers advise against it. The general view among legal professionals is that non-payments by themselves aren’t enough to launch a courtroom clash.
“The issues should be more than enough to justify a lawsuit,” commented Ameyalli Amador, Contract Analyst at Nielsen. “For example, if a client violates confidentiality; if code is being shared [without consent] or if a services platform is being shared in a way that benefits a third party.”
“Even then, you would have to evaluate if the damage done merits a lawsuit,” Ameyalli added. “In most SaaS contracts, either B2B or B2C, there’s a conciliation clause and/or mediation prior to a trial.”
“I think suing a client should only be done when a breach of contract is so harmful that the damage it causes is not only monetary, but reputational too,” added Daniel Guzmán. “Only when all avenues have been explored without success, and when the breach causes considerable harm [to the service provider], should a lawsuit be considered.”
Another thorny issue in nearshore contracts is talent poaching. Tech companies are always starved for quality software developers, so it isn’t rare that they’ll try to hire talent directly from nearshore staffing agencies following a very successful “test-run.”
“It is particularly common in staff augmentation contracts. A company will provide talent to a client, the client will fall in love with this developer and will try to hire him or her directly,” Gabriela Smith pointed out.
“But agreements happen there too,” she added. “If there was a non-solicitation clause in the contract and the client violated it, then they will have to compensate the service provider in some manner. If there’s no such clause, well, they’re in their right to help themselves.”
The bill should be big enough
When lawsuits happen over money in SLA contracts, the quantity should be big enough to justify the legal expenses and the potential reputational damage.
“If the client is out of money and the software company provided hundreds of thousands of dollars in products, services or development, that’s when you see legal clashes. But even then, before going to court, we try to negotiate. Tactics vary from company to company,” commented Gabriela Smith.
“In our 10 years as a firm working with the tech industry, I’ve seen but one case in which we had to sue the client, and it involved a lot of money,” Smith added. “I’ve seen many instances of non-payment. In those cases, we usually send a letter demanding the money owed. We end up negotiating with the client, and they usually pay at least a percentage of what’s owed.”
Lawsuits are a rough reality of business relationships in the services sector. However, legal experts stress over and over that they should be seen as a last resort to deal with a very difficult situation.
“I think suing a client shouldn’t be common practice in the services sector. In all my years of experience, I’ve never reached that point [of suing a client],” stated Daniel Guzman.
“I can’t think of specific examples [of lawsuits against clients], but if a lawsuit does happen, its cost should be considerably lower than the benefits that it might bring to the service provider,” added Amayelli Amador.
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