Why most American businesses pay their vendors, even without loser-pays

As has often been noted, the so-called American Rule on fees in litigation (prevailing party has no right to recover fees from loser) creates an incentive for businesses to refuse to pay the full sums they owe suppliers, since it would appear rational for a vendor to accept, say, 70 cents on the dollar rather than embark on the substantial cost of litigating over nonpayment. And yet deliberate vendor-stiffing (“selling out your good will”) remains uncommon in our system, rather than being the rule. Roger Parloff at Fortune, drawing on the work of the late contracts scholar Arthur Leff, explains why.


  • For Gitacarver and MattS:

    Two quotes from the article is why I am so aghast at what Mylar did:

    1. “[M]ost business people, despite what some people think, have integrity, a heart, and a conscience.”

    2. “[M]ost business people, like most other Americans, are fundamentally decent people. They believe in, and practice, the Golden Rule.”

    These two principles are what makes American business great. Businesses who do not follow these principles should fail. And society should make sure there are incentives for not doing so.

    • Allan,

      I agree with the quotes in context which is why Mylar did nothing wrong.

      They did practice the golden rule by making sure their contractors, employees and shareholders were paid. That is the context of the quotes from the article.

      Furthermore, in case you missed it, Mylar does have programs for those who cannot pay for the Epipens or can only pay a limited amount for the devices. How is that not helping out those in need?

      Finally, while you advocate businesses following the Golden rule, you still seem to miss the point that people who want to punish Mylar for their pricing do so because they think the price is too high. They are fine with taking money from the pockets of Mylar, their employees, their stockholders and further research as long as they as individuals can keep more money in their pockets.

      In other words, you support individuals keeping and making as much money as possible while denigrating a company for doing the same thing in order to pay their employees, stock holders, etc.

      Please explain how what you perceive is greed by Mylar is “immoral” while the same greed by individuals is moral. How is stealing from a company “doing unto others what you would have others do to you?”

    • 1. It’s Mylan, Not Mylar. Mylar is the shiny material that movie screens and metallic balloons are made of.

      2. What Mylan did is only possible because the FDA, despite having the authority to do so, has flat out refused to authorize the sale of generic versions of Epipen. If the FDA did authorize a generic, the price jump would put Mylan out of business. The patent on Epipen (the device) expired in 2000. There is nothing that would legally bar the FDA from approving generic auto injectors at this point. Yes, the FDA regulates OTC and off patent prescription drugs. In fact, 6 months before the price hike Mylan signed a lawsuit settlement in which they agreed to not oppose the authorization of generic auto injectors.

  • I wonder whether there are ways of reducing this problem other than adopting loser pays. For example, what about adding to sales/supply contracts a liquidated damages clause that applies in the case of non-payment, or creating a tort of deliberate failure to pay so that the supplier could sue not only for the breach of contract but for the refusal to pay?

  • The premise of this article — that most businessmen simply pay the full sums that they are billed without question — is entirely false, especially in the construction trades. It is also not true that Donald Trump has a particularly bad reputation for stiffing his contractors. People who “sell out their goodwill” eventually run out of goodwill to sell. Trump has been in business for 40 years and contractors remain eager to do business with him.

    Nobody in the construction trades pays their contractors and subcontractors the face amount of their bill all the time or even most of the time. Anybody who did would be a sucker and would quickly go out of business.

    The fact is that sometimes contractors don’t show up when they’re supposed to, they miss their deadlines for completion, they overstate their hours, they fail to use union labor when required, they fail to meet minority set-aside requirements, they pay less than the contractually required wage to their workers, they overstate the qualifications of their workers in order to bill higher rates, they fail to pay their own subcontractors, they overstate the cost of materials, they charge for materials that they are supposed to supply at their own expense, they use substandard materials, they violate building codes, they violate employment laws, they fail to do a workmanlike job that meets contractual specifications, they steal, they break things. There are also a lot of honest disagreements and disputes. Contractors’ invoices are subject to extensive audit, and even the most honest contractors often submit bills for more than they expect to get paid, in anticipation of negotiations.

    I have handled many billing disputes for clients in the industry. It is simply not true that Trump has a bad reputation for stiffing his contractors. My clients tell me that he has a reputation for being as tough as anybody else but reasonable and fair in his dealings, and that he rewards good work with additional future contracts. In short, his reputation is average or better, and pretty much as he described it in his Wall Street Journal interview, “‘I love to hold back and negotiate when people don’t do good work,’” he told the paper. ‘If they do a good job, I won’t cut them at all. . . . It’s probably 1,000 to one where I pay.’” The 1,000 to one ratio is a typical Trump exaggeration, but the fact is that he does pay and that the vast majority of his contractors leave the negotiating table reasonably satisfied with the deal they have made.

    By the way, does anybody really believe that Hillary has personally met all of these supposed disgruntled contractors? And the idea that he stiffs his dishwashers, as Hillary claims, is preposterous. Dishwashers are hourly wage employees, not contractors. Typical Clinton exaggerations.

  • I have learned three rules of running a business. While they may fail in individual cases, if you hew to them, you will have a long and successful business career. They are:

    1: Always leave something on the table for the other guy.

    2: If you can’t do business on a handshake, you can’t do business.

    3: Never be partners with a guy named Morty.


  • Bob, you left off a rule when doing construction:

    4. Never hire a carpenter named “Two Fingers.”