Our blawg last week introduced the options available to you if your client isn’t paying and this week looks at the issues in more detail. Go back and check out the first instalment here
Late payment vs non-payment
Is the client being lax in paying on time or does the client dispute the amount of an invoice or is it claiming that the services haven’t provided to an adequate standard?
It may simply be the case that the invoice has been mislaid or possibly that the client is having cash flow issues – in which case you could consider giving them longer to pay.
But if they are refusing to pay, this is obviously going to be more of a concern. The first step should be to examine why they are refusing to pay and if there is any merit in their argument or if there has been a simple misunderstanding.
Whichever one of these it is will massively affect the view you might take as to how deal with getting payment.
Stacking the contractual cards in your favour
Litigation is never recommended unless absolutely necessary – it kills the relationship and it’s always expensive. If you decide to go down this route it could be that a strongly worded letter from you or a lawyer is enough to make the client pay. Ultimately if this doesn’t work your only recourse would be to take the client to court to obtain payment. But before you get to this stage, it’s important that you consider any weight to any arguments being put forward by the client – for example, if a judge finds that the services don’t meet the spec they would rule in favour of the client which may have costs implications.
However, even if you don’t want to litigate, a strong contractual position can help suppliers in other ways. Sometimes, the fact that a client can see that there is a strong contractual obligation to pay, will help to focus their minds!
Also, it can help suppliers manage expectation and pro-actively deliver the payment message through processes and communications. For example, a strong contract would include a “deemed acceptance provision” that allows suppliers to invoice x days after completion unless acceptance testing throws up a material and substantive reason as to why the deliverable does not match the original specification. Probably, most importantly for suppliers, the contract would allow for a final invoice to be raised if the client doesn’t expressly approve the deliverable, or if they use it, i.e. the client will be “deemed” to accept the deliverable through their silence or use of the deliverable. The supplier’s process will remind the client that if you don’t hear from them you’ll be invoicing anyway.
If there is a written contract, you should check to see if you have any of the following rights:- • is there a right to suspend services (obviously only appropriate in instances where the contract hasn’t been completed) • is there a right to terminate (again not appropriate if services are complete) • is any intellectual property licence (for example in any designs) linked to payment.
If there isn’t a written contract it’s less likely you will be able to rely on any of the above. For example, you should be cautious before stopping work as there isn’t an implied right to suspend, i.e. it would have to be “written in” to the contract.
That said, even if there isn’t a written contract you may be able to charge statutory interest for late payment under the Late Payment Act 1998 (this is at the rate of 8% above the Bank of England base rate).
You also need to be cautious of using contractual remedies too soon. If you suspend/ terminate where you didn’t have a right to, for example they validly dispute the invoice (this doesn’t necessarily mean they are correct), you (not the client) could be found to be in breach of contract.
The commercial relationship
Have the services for which you have not been paid been completed or is it an interim payment or is it a contract for ongoing services?
Clearly if you are part way through providing the services, for example a website design project, you may be in a stronger position to enforce payment as the client will want to project to be completed.
Or equally, if it is an ongoing relationship such as a hosting arrangement you may have more bargaining power. If the client is trying to end to end a fixed term contract early, check out our previous blawg Money for Nothing.
This may not only have implications on the strength in the relationship but also if you’re hoping to continue the relationship may affect the actions you commercially feel inclined to take. Whilst the contract can be a tool to help, there are commercial practicalities to bear in mind also.
But if the services have been completed, the client may be less inclined to pay up.
Unfortunately, if you were designing a website for the client which you have already handed over (and you’re not hosting), in these instances this may mean that you are forced to go down the legal route.
Practical tips
Proactive and reactive measures: • Allow for staged payments so that you get money throughout the life cycle of the contract – this means that non-payment will likely have a smaller impact on your business • If you have concerns about a client’s ability to pay, have a short payment term so that any issues come to light quicker • Have T&Cs in place which give you strong contractual remedies to give a strong message, bolster a strong process and to fall back on if you need to resort to litigation • Proactive management! Keep on top of issues and speak to your client as soon as there’s an issue! • Is there a payment dispute process in the contract or a dispute resolution process? If so, you may be required to follow that process before taking any other steps.
Keep a lookout for an announcement for our next Digital Law Scrum and… Bacon which will touch on this issue.