Beware the Agent…

In Texas, we like to believe that we are as good as our word. We don’t lie. We don’t cheat. We do the right thing. Well…think again. Regularly, I see small businesses come in with the same problem: They were hired to perform a service and then weren’t paid. There are as many reasons for non-payment as there are cases of non-payment. Unfortunately, there are some cases where, even if you do everything right, you can’t recover from the person who requested your services. These people are known in the law as “agents of disclosed principals.” They are everywhere, and they are dangerous for you if you don’t tie them to a written contract.

When a person acts for another, and you know that the person is acting for another, then the actor is an agent and the person for whom he acts is a disclosed principal. The best example of such an agent is, frankly, a lawyer. When a lawyer represents a client in a lawsuit, he is by necessity revealing to everyone that he represents his client. He takes depositions and orders transcripts. He subpoenas documents. He hires experts. Everything he does in a lawsuit he does for his client. If a lawyer requests that your business perform services for him, you likely assume he is going to pay for the service. Don’t. Unless he specifically agrees to pay, the law says he doesn’t have to (except court reporters, who lobbied the legislature to get special protection). In a case here in Harris County, a company that provides DNA testing services for litigants in court cases sued a criminal defense attorney who called them and requested that DNA tests be run on his client’s tissue. He accepted the services and used the results in formulating his defense. Then, he refused to pay the $2,200.00 bill. The company sued, and won it’s $2,200.00. However, they won their money on an equitable theory of recovery, not on the basis of a debt, and they paid a lot of money in attorney fees to try the case. The lawyer fought the case, flat out claiming that his client, not he, must pay the lab. His client, of course, is in prison and won’t be paying anyone anything. The jury decided, and the Court ordered, that the lawyer should pay. He appealed the judgment, still maintaining that he owes nothing as the agent of a disclosed principal.

While that is a sad and embarrassing case of a fellow attorney, agents of disclosed principals are everywhere: Real estate agents, brokers, salesmen, etc.. We deal with these people everyday and most of them are honorable and honest. Nevertheless, most small businesses, or self employed people, can’t be at the mercy of the agent’s client, a person they have likely never even met.

So, before doing business with people you don’t know, think about how to protect yourself in the transaction. Some common protections people employ are:

• Actually discuss who is going to pay you. Know going in for whom you are doing the work and to whom you should look for payment.

• Get a written contract if you can. It is always best to memorialize your agreements, so that everyone knows what the rules are. While this is not always practical, it is extremely important to have written contracts as often as possible.

• Try to secure advance payment, or at least partial advance payment.

• Don’t extend credit until/unless you know and trust the person with whom you do business.

The old adage, “An ounce of prevention is worth a pound of cure” is as true as it is trite.