Unpaid Invoice? What Your Business Should Do Before Going to Court

For many businesses, an unpaid invoice can start as a minor administrative issue.

A customer misses the payment deadline. You send a reminder. They promise to pay next week. Another reminder follows. Before long, weeks or even months have passed and the invoice remains unpaid.

At that point, the issue can become more than a cash-flow problem. If the customer disputes the invoice, stops responding or refuses to pay altogether, you may need to consider debt recovery or formal legal action.

So, what should your business do when a customer doesn’t pay an invoice?

Before taking any action, go back to the agreement with your customer.

Check:

• What payment terms were agreed?
• When was payment due?
• Were any conditions attached to payment?
• Does the contract contain a procedure for dealing with disputes?
• Does it allow you to charge interest or recover certain costs?
• Is there a contractual right to suspend services or terminate the agreement?

It is important to establish exactly what you are entitled to before sending a formal demand for payment.

If there is no written contract, that does not necessarily mean there is no claim. Emails, purchase orders, quotations, invoices and other correspondence may help establish what was agreed.

There is a significant difference between a customer who has simply overlooked an invoice and a customer who is refusing to pay because they say you haven’t performed your obligations.

Ask yourself:

Is this an unpaid invoice or a genuine dispute?

If the customer accepts that the money is owed but has not paid, the issue may be relatively straightforward.

If they say, for example, that the work was defective, incomplete or delivered late, you may be dealing with a wider contractual dispute.

Understanding the reason for non-payment will help determine the most appropriate next step.

If you think the matter could become contentious, preserve your records.

This might include:

• the contract or terms and conditions;
• quotations and estimates;
• purchase orders;
• invoices;
• emails;
• letters;
• WhatsApp or other relevant messages;
• records of meetings and telephone calls;
• evidence of work completed or goods supplied; and
• records of any complaints or attempts to resolve the issue.

Don’t assume that because something is stored electronically it will always be available.

A clear chronological record can be extremely valuable if the dispute eventually reaches court.

If informal reminders have not worked, consider sending a more formal request for payment.

The letter should clearly identify:

• the amount outstanding;
• the invoice or invoices concerned;
• when payment was due;
• any interest or other sums being claimed;
• how and when payment should be made; and
• what you intend to do if payment is not received.

The tone matters.

The objective is not necessarily to send the most aggressive letter possible. It is to make your position clear and give the customer an opportunity to resolve the issue.

In some cases, a well-drafted letter can resolve the dispute without the need for proceedings.

Depending on the circumstances, a business may be entitled to claim interest on an overdue commercial debt.

For some business-to-business transactions, the Late Payment of Commercial Debts (Interest) Act 1998 may apply.  However, whether statutory interest is available — and how much can be claimed — will depend on the circumstances and any contractual terms that apply.

This is one reason it is worth checking the contractual position before simply adding interest to an outstanding invoice.

If the dispute cannot be resolved informally, court proceedings may become an option.

However, issuing a claim should not usually be the first step.

The Civil Procedure Rules contain pre-action requirements designed to encourage parties to understand each other’s position, exchange relevant information and consider whether the dispute can be resolved without proceedings.

Depending on the nature of the dispute, this may involve sending a formal Letter of Claim or Letter Before Action setting out the basis of the claim and the remedy sought.

Failing to engage properly with the relevant pre-action requirements can have consequences, particularly when the court considers costs.

Going to court is not the only way to resolve an unpaid invoice dispute.

Depending on the circumstances, negotiation or mediation may provide a quicker and more commercially sensible solution.

For example, the parties might agree:

• payment in full by an agreed date;
• payment by instalments;
• a reduced settlement figure;
• an agreement concerning disputed work; or
• a wider settlement bringing an ongoing commercial relationship to an end.

Settlement is not necessarily an admission that one party was “wrong”.  Businesses often settle disputes because they want certainty and to avoid the time, cost and disruption associated with litigation.

If payment still isn’t forthcoming and attempts to resolve the dispute have failed, you may need to consider issuing a court claim.

Before doing so, think beyond simply asking:

“Can I sue?”

You should also consider:

• How strong is the evidence?
• Is the amount owed worth pursuing?
• Is the customer likely to defend the claim?
• What will the legal costs be?
• Is the customer able to pay if you obtain judgment?
• Is there a continuing commercial relationship to consider?
• Are there better ways of resolving the dispute?

A successful judgment does not automatically guarantee that you will receive your money. The defendant’s financial position and the available enforcement options can be important considerations.

One of the most common problems with unpaid invoices is that businesses wait too long before addressing the issue.

A business may continue providing services while an account becomes increasingly overdue because it doesn’t want to damage the customer relationship.  But allowing a debt to grow can make the eventual dispute more difficult to resolve.

Early action does not necessarily mean immediately issuing court proceedings.

It can simply mean:

• checking the contract;
• understanding the position;
• preserving evidence; and
• addressing the problem before it escalates.

An unpaid invoice does not always need to become a legal dispute.

Often, the most effective approach is to identify the problem early and deal with it commercially.

But where a customer refuses to pay, disputes the underlying work or stops engaging altogether, obtaining advice at an early stage can help you understand your options and avoid unnecessary escalation.

The key message for businesses is simple:

Don’t wait until an unpaid invoice becomes a major dispute before deciding what to do about it.

Early, proportionate action can give you more options — and potentially save significant time and cost later.

To find out how we can support you, contact our friendly team today