What to Do When a Client Refuses to Pay an Invoice

A client who refuses to pay is one of the most common commercial disputes faced by small and medium-sized businesses. Knowing the right steps to take, and when to take them, can mean the difference between recovering the money owed and writing it off as a bad debt.

Start with the contract

The first step when a client refuses to pay is to review the contract under which the services were provided or the goods were supplied. The contract sets out the terms of payment, what was agreed to be delivered, and what happens if payment is not made. Understanding what the contract says is essential before deciding how to approach the situation.

Key questions include what the agreed payment terms were, whether those terms were complied with by both parties, whether the client has raised any specific objection to payment, and whether there are any dispute resolution clauses in the contract that need to be followed before proceedings can be issued.

Chasing the debt formally

Where informal reminders have not produced payment, the next step is a formal letter before action. This is a letter setting out clearly what is owed, the basis on which it is owed, and what steps will be taken if payment is not made within a specified period. The letter should comply with the relevant pre-action protocol, which sets out what information the letter must contain and the notice period to be given before issuing court proceedings.

A formal letter before action sent on solicitor's or barrister's headed paper can often prompt payment where earlier informal communications have not. It demonstrates that you are serious about pursuing the debt and that the next step is litigation.

Our property law barristers can advise on the most effective approach to recovering unpaid invoices.

Court proceedings

If payment is not made following a letter before action, the next step is to issue court proceedings. For debts up to a certain value, the small claims track in the County Court provides a relatively straightforward process. For larger claims, the standard County Court process or, for high-value or complex disputes, the High Court may be appropriate.

Where the client does not respond to the claim, or does not file a defence, judgment in default can often be obtained relatively quickly. Once a judgment is obtained, there are various enforcement options available to collect the money, including instructing enforcement agents, obtaining a charging order over property, or applying for a third party debt order against the debtor's bank account.

Where the client disputes the invoice

If the client raises a dispute about the quality of the goods or services, the amount charged, or some other aspect of the contract, this complicates matters but does not prevent you from pursuing the claim. The dispute becomes part of the litigation if the matter goes to court, and the court will decide which party's position is correct.

Where the dispute has some validity, it may make sense to negotiate a settlement rather than incurring the time and cost of a court hearing. A barrister can help you assess the strength of any counterclaim and advise on whether a negotiated outcome is more likely to be cost-effective than pursuing full recovery through the courts.

Interest and recovery of costs

Where a business debt is unpaid beyond agreed payment terms, the Late Payment of Commercial Debts Act 1998 may entitle you to claim statutory interest at 8 percent above base rate, together with a fixed sum towards the cost of recovering the debt. This can be a useful addition to a claim and is worth considering when calculating what you are actually owed.

If you have questions about your situation, and are thinking about taking the next step with legal action, contact our team. Contact us here.