Features

Legal Aid: Guarding the Deposit

Are you handling your deposit properly?
By Peter J. Lamont
June 30, 2011

Regardless of the size of your design company, one of the most important components to finalizing a sale is obtaining a deposit. Any good designer knows not to order any tangible items until the client has provided a deposit, but many, unfortunately, fail to properly handle the deposit once they’ve received one. As a result, they may lose a client, as well as referrals, and end up being sued or, in some states, find themselves at the center of a criminal prosecution.

First and foremost, it is important to understand what a deposit is and how it should be applied to a contract. Simply stated, a deposit is a partial payment for merchandise, advanced to the designer by the client. Generally, design professionals are routinely required to pay part or full price when ordering merchandise from a vendor. Consequently, designers will often request a 50 percent deposit from their clients before placing an order. This is especially true of specialty items, for which some design professionals will request full payment. Regardless of the size of the deposit, however, the reasons for requesting one are the same: (1) to ensure that the client is serious about moving forward with the project; (2) to prevent the designer from having to use his or her own funds; and (3) to allow the designer to initiate the order and ensure that the merchandise will be available for the project.


BY THE BOOK AND THE REAL WORLD

Although most designers have little problem requesting and obtaining the deposit, they may get themselves into trouble in its application. If applied “by the book,” it should be credited toward the full purchase price as the contract is fulfilled. But if, for some reason, the contract is not fulfilled, the designer is required to return any remaining funds that the client has paid. In a perfect world, the “by the book” scenario would be as follows: The client desires a piece of furniture that costs $2,000. Because the vendor requires a 50 percent prepayment at the time the furniture is ordered, the designer asks his/her client to provide a deposit of $1,000, which is immediately paid to the vendor. When the furniture arrives, the designer asks the client for, and receives, the remaining balance, as well as his/her markup fees. As a result, the item is paid in full and the client is happy.

Unfortunately, we live in a world that is far from perfect and the above scenario is often just wishful thinking. In reality, many designers collect multiple deposits upfront from a client and do not immediately order the merchandise, leaving the funds to sit in an account while waiting for other parts of the job to be completed. When personal finance issues (i.e., it was a slow month or a client failed to pay in a timely manner) arise, some designers then borrow against the deposit with the honest intention of replacing it when money comes in.

But take note: Even if you have done this in the past with no incident, do not do it again. This is one of the worst practices to engage in and can cause you to lose referrals, clients and, in some states, subject you to criminal prosecution. While this practice is atypical of large corporations, such as top-selling international custom cabinet companies, it is frequently seen in small to mid-size businesses.


LEARNING BY EXAMPLE

The following example is a true story. A design professional in California was hired for a multimillion-dollar interior design job that required him to act as a site coordinator and commit six to eight hours a day; needless to say, the massive project quickly became his sole focus. In taking on the job, the designer signed a contract that required the client, an eccentric business executive, to pay him for his design hours, merchandise markups and various administrative fees.

At the start of the project, the designer received numerous deposits for tangible goods, but there was no need to order the items immediately and, in fact, could not be ordered until various construction projects were completed. After one year, however, the designer became overwhelmed and stopped billing monthly. Instead, he sent out six months’ worth of design hours in one invoice. Meanwhile, having run out of personal money, he decided to borrow against the client’s deposit, believing fully that he could replace it when his design hours were paid. Unfortunately, the client disputed the design hours and forced the designer to accept 60 percent less than what he was entitled to. With no other source of income, the designer had to find a way to replace the borrowed sums, which he was able to do by securing a home equity loan.

Although the designer was fortunate in resolving the situation, the outcome could have easily become a messy one. Had he not been approved for the loan, for example, he could have been subject to criminal prosecution. And even if the designer were to defend himself successfully, the ordeal would have cost him at least $20,000 in legal fees. In addition, borrowing against deposits can create order delays and result in dissatisfied clients. This in turn can eliminate any chance of receiving future referrals, thus damaging your business’ reputation and prospects.

So avoid borrowing against client deposits. While it may provide a quick fix, it’s a dangerous practice that may have serious long-lasting consequences.


—Peter J. Lamont, Esq., is a commercial litigation attorney with offices in Hawthorne, NJ, as well as Massapequa, NY. His practice focuses on the representation of small- to large-size companies in the building and design industry, as well as individual designers and architects. To contact him with questions and suggestions on topics for future articles, please email him at plamont@peterlamontesq.com or call him at (973) 949-3770.
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