In this guide our dispute resolution solicitors explain how you should deal with unpaid invoices. They discuss the your rights when a dispute arises and the steps you can take to resolve an invoice dispute.
Contents:
What are my legal rights if a customer refuses to pay a disputed invoice?
Your legal rights if a customer refuses to pay a disputed invoice depend mainly on your contract but legislation may also apply. Any rights you have under the contract might be suspended where there is a genuine dispute over the amount payable.
Examples of the rights you might have include the following:
Retention of Title
A retention of title clause permits a seller to retain ownership of the goods until the buyer has paid for them. If you believe your contract contains this clause, you must act quickly to prevent the buyer (or the buyer’s Liquidator) from doing something to prejudice your position, like incorporating the goods into another product.
Interest
Your contract might give you the right to charge interest on the late payment of invoices. Even if it doesn’t, you are entitled to statutory simple interest at the rate of 8% above the base rate.
Can I stop working for a customer if an invoice is disputed?
Disputed invoices can be a particularly thorny problem if you are in the middle of a job for the customer. You will have ongoing obligations under the contract but you will likely be concerned that the customer might refuse to pay you for any further work. Whether or not you can suspend work until the customer clears their account depends on several factors.
Your first port of call will always be the contract, which you should check for any express terms permitting you to suspend work if an invoice is unpaid. Even if such a term exists, though, you must be sure that the circumstances of your case are covered by it. You should seek legal advice before suspending work to avoid breaching the contract.
In the absence of an express term, you should never stop working before seeking legal advice. By downing tools, you may breach the contract, and the other party might be able to terminate it and bring a claim against you for damages. There’s an exception in the case of construction contracts, where suspending work for non-payment is permitted in some situations.
If you have no right to stop work, an alternative might be terminating the contract for the other party’s non-payment. Again, you will need to check your contract to understand whether an innocent party can terminate when an invoice is not paid.
You may be entitled to terminate a contract when there is no express right if the other party’s breach is sufficiently serious. Non-payment of an invoice is generally not serious enough to warrant termination, but there may be additional factors that justify termination in your case (for example a series of unpaid invoices).
Terminating a contract is a serious step, and getting it wrong can be disastrous. If you terminate when you are not entitled to, the other side can sue for breach of contract, seeking damages for any losses they sustain. Conversely, if you have the right to terminate and don’t exercise it, you may be deemed to have accepted the other side’s breach and lose your right to terminate for that non-payment.
The appropriate course of action depends on a wide range of commercial and legal factors, including how important the other party’s business is to you, the level of non-payment and your rights under the contract. Seeking guidance from dispute resolution solicitors before taking any action will ensure you do nothing to damage your relationship with the other party or prejudice your legal rights.
What steps should I take when an invoice is disputed?
When you become aware that a customer is disputing an invoice, it’s important to address the issue promptly by taking the following steps:
Review the disputed invoice
You should check the disputed invoice to understand whether there is any merit in the customer’s complaint. If your invoice contains inaccuracies (such as the incorrect amount), you should apologise to the customer, correct the information, and resend the invoice.
Speak to the customer
Many disputes can be resolved if you speak openly about the issue. The other party might have misunderstood your charges, or there might be confusion over what you had agreed to invoice for and when. Taking the customer through your invoice line by line, with reference to the contract where necessary, might clear up the confusion and satisfy the customer that your charges are correct.
If you accept the customer’s position, you should try to make amends, get your relationship back on track, and avoid them taking legal action.
Collate and retain evidence
Invoice disputes can quickly escalate into legal proceedings. It is important to retain any evidence that might support your position if you decide to bring a claim for the outstanding amount or if the customer sues you for issues such as supplying faulty goods.
Examples of the types of evidence you should keep hold of include the following:
- The contract.
- Any correspondence with the customer relating to how you do business and the specific issue.
- Where you have supplied goods and photographs of the goods.
- Where you have supplied services and photographs of the work.
Consider legal action
Despite your best efforts, if the other party still refuses to pay the invoice, you may need to take legal action against them. Whether or not legal action is appropriate depends on the circumstances. For example, where a valued customer owes you a relatively minor amount, it might make more sense to try and reach a compromise, such as offering a discount or time to pay. If the disputed amount is significant and neither party is willing to budge, legal action might be your only option.
Business owners are often relieved to learn that visiting a solicitor does not necessarily mean they will end up in Court. Most Court proceedings begin with a letter of claim, which is a formal letter sent from the complainant’s solicitors to the other party. The letter details the complaint and tells the recipient what they must do to avoid further legal action.
If the other party’s refusal to pay the invoice stems from a desire to delay payment, receipt of a letter of claim from a firm of solicitors often focuses their mind, and they make paying you a priority. Where they genuinely dispute the invoice, a letter of claim tends to open negotiations that often lead to the parties settling the issue on terms that are acceptable to them both.
If the parties need a little extra help in reaching a settlement, there are several alternative dispute resolution methods that are commonly used to resolve invoice disputes. They are referred to as ‘alternative dispute resolution methods’ because they offer an alternative to litigation. These methods are usually quicker, cheaper, and less stressful than Court proceedings and can produce excellent results. They’re also less hostile, so they are useful when you are keen to maintain your relationship with the customer.
Many commercial contracts contain dispute resolution clauses detailing what the parties should do if a dispute arises. For example, the clause might state that the parties must go through a specified alternative dispute resolution process before resorting to litigation. If your contract contains such clauses, you must follow them. If you don’t, you’ll breach the contract and legal action may be suspended until the relevant steps have been taken.
Examples of the types of alternative dispute resolution methods regularly used to settle invoice disputes include the following:
Mediation
Mediation is a popular alternative dispute resolution method that often resolves invoice disputes quickly and effectively. In mediation, an impartial third party, known as the mediator, works with the parties to identify common ground and reach a settlement that works for them both.
Adjudication
Adjudication is compulsory in the construction industry primarily because it allows the parties to resolve a discreet issue swiftly and without derailing the entire project. The adjudicator, who tends to be a construction professional, reaches a decision within 28 days. The decision is binding and can only be appealed in very limited circumstances.
Litigation
While litigation should always be a last resort, it’s sometimes unavoidable. Before embarking on Court proceedings, though, you must be sure that the customer will be able to satisfy any Judgment you obtain against them. A customer who is disputing an invoice due to cashflow problems may similarly struggle to pay any sums ordered by the Court. Our dispute resolution solicitors will investigate the customer’s financial health before advising you on the best course of action.
If you issue a claim to recover the unpaid invoice and succeed, you will likely be awarded the invoice amount, interest, and legal costs. Successful litigants rarely, if ever, receive their full legal costs, but you can expect to receive around two-thirds of them, depending on the circumstances.
Summary
Disputed invoices can have a serious impact on your business’s profitability and put a strain on your relationship with valuable customers. Some disputes might be resolved fairly easily by talking to the customer and reaching a commercial compromise that suits you both. Other disputes require extremely careful handling to avoid them escalating and causing irreparable harm. Even if an issue seems straightforward, it is often anything but. Complex laws govern commercial contracts and the supply of goods and services, and seeking to navigate an invoice dispute without a thorough understanding of these laws can be problematic.
Prompt legal advice from our expert dispute resolution solicitors will ensure you don’t inadvertently take any action that exposes you to proceedings for breach of contract or which is detrimental to your legal position. With the proper legal support and guidance, you stand the best chance of securing the swift payment of the unpaid invoice, minimising the disruption to your business, and preserving your commercial relationship with the customer.
