My client won’t pay and we didn’t have a contract. Now what?
December 12th, 2014
Starting work with a new client can be an exciting experience. But what if the relationship goes wrong and the paperwork isn’t in order? One small business owner tells us about their personal experience of taking a client to court and what they learnt about the process.
Last year a client cancelled on me. We were three weeks in to a six month project. Even worse? I’d started work without a signed contract. Ouch. My bad. My failure to get a contract signed meant we ended up in County Court. I won. But would you?
Did you send a contract?
Do yourself a favour. Don’t ever start work without a signed contract. I have standard business terms and conditions that I send with a Letter of Engagement. The letter takes about 15 minutes to write up and send. We all have digital tech. They can sign and return immediately if they are desperate for you to start work straight away.
Tip: No scanner? Most cameras on smartphones are high enough quality to get a digital version in place while the hard copy is in the post
I stupidly succumbed to pressure to help them out straight away. And bought some story about them needing to check a couple of things in the T&Cs. I’ve learned now that if a client is serious about working with you they’ll just sign the documents – yours or their own, so that everyone can start work protected from the outset.
Although they didn’t sign the contract my client acknowledged they’d received them and read them. This meant that the judge took my terms (like my notice clause) into consideration when deciding what I was entitled to, because the client was aware of my terms and at no point rejected them or provided alternative ones.
There is no contract in place
If there is no signed contract, or even worse one was never even provided, your position isn’t always clear, but not necessarily weak. If you did work for the client and you can prove that (with emails, time sheets, documents, meeting notes etc.) then English Contract Law may apply.
You probably won’t have a case if you haven’t started work yet, or if they cancelled immediately after requesting some work.
I learned through this that it was also my legal responsibility to ‘mitigate my losses’. That means that I couldn’t just ask for the full value of the six month contract.
You have a duty to replace the lost income. You can only go after the client for actual income lost. How does this work? Again, it’s not always clear. This is at the discretion of the judge on the day.
Be careful about prejudicing yourself
Unfortunately I never got to test ‘mitigating my losses’ in court. I made a mistake and prejudiced my case beforehand.
You must use the words WITHOUT PREJUDICE in the email header or body of the letter in any or all negotiations you make with the client.
In my case I didn’t expect we would end up in the small claims court. Unable to get the client on the phone or in a meeting, I made what I thought was a friendly offer to just pay me for the month and be done with it.
Unfortunately this can be seen as a legal admission that I was only owed for one month. I was advised that I could now no longer file a claim for anything more than one month’s work. The judge even told my client in court that they’d got off lightly – that it was not unusual to have to pay out up to 12 months of a service contract, even if only verbally agreed.
In that early email when I was trying to be friendly I would’ve hesitated to write WITHOUT PREJUDICE. At that stage, I had no idea it would end up in a small claim. But it seems to me that once you write it, it shows an intention to pursue it legally.
What should I have done? Well you must show that, at all times leading up to the case, you acted reasonably. That means considering any offers made to you by the client. For example you may be claiming £4,000. If the client offers £3,500 and you reject it this might look bad in court, especially if we’re talking about fees and not direct costs incurred.
I should’ve continued politely and persistently to speak or meet with the client. I should’ve waited to see what they were offering first – not much as it turned out – and then countered and included WITHOUT PREJUDICE.
Get advice but manage the claim yourself
If it gets to claim stage then the small claims court recommend you manage the whole process yourself and not get lawyers involved. In fact, it can reflect negatively on you if you use a lawyer to prepare the case and/or appear in court. Let’s be realistic, lawyers’ fees quickly add up to more than the small claim itself (small claims are any amount under £10,000).
My client used their lawyers early on, aggressively claiming that if I pursued a small claim against them they would file some sort of counter claim for wasting their time.
I made the decision to get some advice and check my position. I found an independent solicitor through the Small Business Network and hired him for a few hours only.
First off he made sense of the confusing legal letters their lawyers had sent me and then told me whether I was still entitled to make my claim. He also told me it was OK to reject the tiny settlement amounts they were offering, which was a few hundred when a few thousand were owed. He gave me a good steer on the strengths and weaknesses of my case and how a judge might view it – without making any promises.
Everything else I did myself. I prepared documents, created timelines, made duplicate copies of evidence, filled out court documents and paid fees. The onus was on me to put the case together and there were deadlines to stay on top of too.
Think hard before starting a claim
As you can see it was a lot of work. Would I have been better writing it off? I have written-off client debts before. But in this case the amount was too big, and the impact on me too great, to let it go.
For anything less than a thousand pounds on a consulting gig I’m personally not sure I’d bother (but you may feel differently). If your claim is successful you can reclaim court fees. But don’t forget that up until the day of the court case the client can offer you a settlement. Settlements can be less than the amount you’re claiming and not include court fees – and of course all the hassle.
Don’t fall in to the trap of pursuing a moral victory either. No court case, successful or not, can guarantee you that.
In my case, my client never accepted that I was retained by them, at times shouting at the judge in disagreement, despite overwhelming evidence against them. After receiving their CCJ they skipped out of the court room giggling. They seemed to take genuine delight in having made life as difficult as possible.
At Hiscox, we never want to see small businesses get caught out and exploited by clients. While we can’t offer solutions to issues such as the one discussed here, we can offer a range of high quality commercial insurance to protect businesses from the other risks of day-to-day operations. If you want to start planning protection for your own business, Hiscox can provide you with a quick online quote to get things started. Or, if you’d like to continue researching your options, check our our Insurance FAQ Hub. You’ll find answers to queries such as how much does an commercial cover cost and what level of cover is right for my business.
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