Contractors' Questions: Should I stop work until my invoices are paid?

Contractor’s Question: I’ve been informally contracting for a firm for 6 months but every weekly invoice is paid very late. They always say they haven’t been paid so can’t pay me.

I haven’t used late payment law but plan to tell the client next week that I will cease working until all outstanding invoices are paid, which I believe I'm within my rights to do.

But they’re likely to ask me to hand over the work I've done to date, which I want to avoid as this is work they've essentially still not paid me for. So would it be wise to stop work and withhold the intellectual property until I’m paid? Please note, although I have time sheets recording hours worked, there is no written contract, just a series of emails agreeing the work.

Expert’s Answer: It’s never fun to deal with a client that consistently pays late. If the client is slipping further and further into the red, with every invoice submitted, it’s sensible to limit your exposure to a potential bad debt.

As you probably know, your main problem is the lack of a formal contract or agreement. Normally, your contract would define the scope of the relationship, and provide some guidance as to exactly who owns any intellectual property. It would also define the point at which ownership of that intellectual property passes from you to the client.

We’re credit controllers by trade, so we aren’t qualified to provide legal advice. However, our understanding of UK copyright law is that the ‘author’ or ‘creator’ automatically acquires copyright to any works. For the purposes of this article, we will assume that you retain ownership of the intellectual property until it is paid for.

Fortunately, you’re in a strong negotiating position. You’re already on-site with this client, and you’re in possession of intellectual property it wants.

We would suggest that you have two instant options open to you.

Option One – Terminate the services and withhold the IP

This is the option you reference in your question. It’s the most straightforward, from a practical perspective. You would need to notify the client in writing that it is in default of the agreed payment terms, and as such, your services are being suspended with immediate effect.

Make it very clear that this a last resort, and say that services will not recommence until all outstanding invoices are paid.

This option also gives you the opportunity to levy late payment charges on every invoice currently outstanding. You can also add charges to previous invoices that were paid beyond the agreed terms, if you want to.

With this option, you retain the intellectual property until you are paid in full. (“In full” means the client must pay all applicable late payment penalties, as well as the original amount). When you receive payment, release the intellectual property to the client, and go your separate ways.

  • The advantage with this approach is that you immediately stop increasing your risk. You also send a clear signal to the client that you have reached your limit, both professionally and financially. The client may not like it, but it will respect your decision.
  • The disadvantage is that you will probably kill off any goodwill that exists. You may also find yourself in a ‘catch 22’ situation if the client refuses to pay until you release the intellectual property. In some cases, the client might claim it has a claim against your company for an alleged breach of contract.

Option Two – Negotiate a ‘new deal’ for payment

With this option, you’d have to secure a new deal for payment that reduces your existing risk and avoids allowing any further credit.

Ideally, this means notifying your client that the situation has become untenable. You’d say “I am approaching the point of terminating my services,” but because the client is a valued customer, you would also say that you’d “like to reach a suitable compromise.”

Under the terms of the agreement, the client would need to pay all future invoices on a pro-forma basis. So you’d be paid for each week before work commences. This advance payment reduces your risk moving forward.

In addition, you’d need an agreement to cover payment of the outstanding debt. As an absolute minimum, we’d suggest the client should pay 50% of a weekly invoice, along with your new weekly payment. It would be preferable if the client paid double – i.e. one new invoice and one old invoice - until the account is brought back in to good standing.

  • The advantage with this option is that you retain your engagement with the client. You can continue to supply them, risk-free, while they pay off the arrears. Also, you may gain some goodwill by compromising during their time of need, rather than simply withdrawing your services.
  • The disadvantage is that your continued presence on-site gives them scope to try and renege on the agreement. If you suspect the client is dishonest, think carefully before negotiating.

Remember: if they don’t agree to option two, you can always revert to option one.

Final Thoughts

Consider purchasing a credit report on the client, prior to making a decision. If the company has filed recent accounts and looks financially stable, you then have some reassurance if you want to try to reach an amicable resolution.

Conversely, if the credit report shows they are high risk (or already show a CCJ from another unpaid supplier), then you know ‘the writing is on the wall’ and can act to protect your own cashflow. Good luck.

The expert was Adam Home of specialist debt recovery firm Safe Collections.


Thursday 26th Jul 2018
Profile picture for user Adam Home

Written by Adam Home

Adam Home is Managing Director of UK & International Debt Recovery Specialists Safe Collections. The company, founded in 1984, has more than three decades of experience in recovering unpaid invoices and contractual arrears anywhere in the world.
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