Contractors’ Questions: How to deal with unpaid invoices?

Contractor’s Question:  My IT services business is struggling due to a client that hasn’t paid for his last two invoices/ orders – a mix of goods and services. How can I recover the amount owed?

Expert’s Answer: When you contract for good or services, you expect as part of that contract to supply what the client orders and get paid.  If only it was that straightforward as disputes of the transaction and changes in circumstances (such as the ability to settle the debt due) lead to difficulties in the full contract being completed.  Is this breach of contract? As is often the case with these issues, you need to ask whether your client is unable to pay or chooses not to. If your client is experiencing financial problems, you need to take steps to get yourself ahead of all the others demanding money.  If there is a genuine dispute, breach of contract may not apply.

Where you have supplied stock which has not been paid for, you should be able to rely on “Retention of Title” clauses to recover this stock, to the extent it remains on their premises, on the basis that the title to that stock has not passed to your client until it has been paid for in full. The terms and conditions of these clauses can be a legal minefield, and ensuring they are provided to your client at the correct time (i.e. not just on the back of an invoice) is critical to ensuring your terms are valid and enforceable under the contract between you.  It is essential that these terms are incorporated correctly into the contract between you and your client. As such, you should speak to a lawyer to get this right. If your client is in administration or liquidation, you should get on site quickly to identify your stock and set it aside, whilst your retention of title claim is validated by the Insolvency Practitioner. If you delay, it could be sold or converted into something else, and it is then far harder, if not impossible to enforce your claim.

Where you are considering action to recover a debt, you should also think about the wider impact. There is a big difference between taking action against someone representing 10% of your client base on an ongoing basis, compared to someone representing 1% of your fees for a one-off fee. You should also bear in mind the value of your services to their business.

Finally, if legal action is the route you are going to take, then make sure you have your housekeeping in order – that means having the terms of your engagement for services agreed in writing, the services clearly identified, and evidence of providing those services.  When you need to enforce a contract, that contract can be in writing or a verbal contract but proving a verbal contract is never going to be easy.

Remember that prevention is better than cure. Knowing your client, good credit control, and having appropriate written contract terms and conditions will reduce the risk of having clients that don't pay you.

The expert was Ian Robert, an insolvency partner, at Kingston Smith LLP, the chartered accountancy firm.

Monday 26th September 2011