In the post-pandemic world of high inflation, war in Europe, and the disruptions to global trade caused by Brexit, no business – be it big or small – has survived unscathed, with one of the most seriously impacted parties being small and medium-sized enterprises (SMEs), for whom the pandemic cost an estimated £126.6 billion.
As there are over 6 million SMEs in the UK – who account for over 99% of all businesses and 21% of all turnover – this staggering cost has had a significant impact on the economy and on the survivability of the SMEs themselves.
One aspect hindering their recovery is losses suffered due to a lack of reasonable and affordable legal advice, which often leads to any disputes with clients going unresolved, and to invoices not being paid.
A 2016 YouGov survey suggested that financial losses suffered as a result of this were around £13.6 billion a year. Whilst slightly out of date, if this survey were to be undertaken today the figures would almost certainly be much higher.
Legal practices regularly experience two key issues that prevent SMEs from trying to enforce payment of bills:
- The value of the dispute is such that the business cannot justify paying legal advisors to assist them with debt recovery, especially as any dispute worth less than £10,000 is unlikely to allow for the recovery of legal costs.
- The business cannot afford to pay for legal advice to identify whether they are entitled to bill the client for work undertaken – like for example, if the instructions they received were ambiguous, or if the client decided they ‘wanted to go in a different direction and didn’t need the work done anymore’.
With that in mind, and in an effort to assist, here is some handy guidance about your legal rights, and a few details about what solicitors can do to try and resolve the dispute.
NOTE: Please be aware that you should obtain professional and independent legal and accounting advice before you undertake any of the actions outlined in this article.
I was engaged by a client to undertake some work on their behalf; upon completion, they then told me that they no longer needed the work and had decided to take their business elsewhere. Is there anything I can do?
Firstly, you will need to look at what was discussed prior to you starting the work for that client.
- Was a scope of work for your fees agreed upon before you started the work?
- Was it made clear that you would be charging for the work?
If the answer to either of the above is no, then you may struggle to satisfy the Court that there was a binding contract between you and the client, and that they are therefore obliged to pay you.
If the nature of your business is such that you are governed by the Distant Selling Regulations (or the Consumer Protection (Distant Selling) Regulations 2000, to give it the full title) then did you comply with the requirements under these Regulations?
In particular, did you allow your client the required 14-day cooling off period before you started the work? If not, did you have them expressly agree that the period could be waived and that they would be liable for your costs?
If the answer to either of the above is no, then again, you may have difficulties in satisfying the Court that you have a valid claim against the client.
Next, has the client given any valid reason as to why they are unhappy with the work? If so, have you offered to put right any concerns they may have?
If any of the above applied, then whilst it is not the advice you want to hear, sadly all you can do is learn from it and prevent a repeat – either by having someone review your process to ensure that a binding contract is always formed, or that you always comply with the applicable legislation.
Alternatively, if you are not caught out by any of the above, then there is no reason why you should not be paid. Which brings us to the next commonly posed question.
I have undertaken the work for the client; they are satisfied with it and I have raised my invoice. It is now two months and they have not paid. What can I do?
It is very disheartening for a business to provide a good service to a client, only for the invoice to remain unpaid. Unfortunately, this is a common issue experienced by all businesses. But for SMEs in particular, there is a significant impact when any invoice goes unpaid, regardless of the work or the costs involved.
Initially, it is beneficial to identify whether there were any discussions as to the payment terms before the work was undertaken. For example, was it agreed that invoices would be paid after a certain amount of time? And if so, what was the time period? Did your invoice require a certain purchase order number to be quoted on it? If so, was it included?
When the customer is a business, if a payment deadline has passed, and unless a dispute has been raised, you are well within your rights to escalate the matter to a more senior person (assuming they are not a sole trader).
Alternatively, sending a firm and concise letter of claim addressed to the debtor will demonstrate that you want paying; it should set a deadline as to when payment must be made, thereby offering the debtor a final opportunity to raise any grievance they may have with the service you provided.
You may also warn them that the amount they will have to pay will increase if Court proceedings are necessary, as you can ask the Court to award interest on the debt at up to 8% above the Bank of England base rate, from the date the invoice became due.
A letter of claim is always necessary. Should your debtor respond with a dispute, it provides the opportunity to resolve the matter without having to resort to Court proceedings. Or, if they ignore your letter, it satisfies the requirements of the Court that you have tried to resolve the matter amicably.
If the letter does not result in payment, and you want to escalate further, then you will need to issue a claim against the debtor. The process for doing this has been streamlined, and for claims of less than £10,000 it can be done online via the Money Claim Online service.
When issuing a claim, you will have to pay a court issue fee that ranges from £35 to £455 depending on the value of the claim. This will be recoverable from the debtor should your claim succeed.
What are the risks of Court proceedings?
- They will require you to spend a lot of time and energy dealing with the claim.
If the debtor chooses to defend the claim you may be in for a long dispute, as court claims can take up to 18 months to resolve. You will likely have to take part in telephone mediation, prepare witness statements, and provide the Court with all the evidence they require. Eventually, you may also have to attend Court hearings.
- If the debtor instructs Solicitors to assist them in defending your claim, you could find yourself suffering from an inequality of arms, having to correspond with qualified Solicitors who are trying to undermine your case on the debtor’s behalf, or threatening you with their legal costs if you do not discontinue the claim.
Whilst there is no automatic entitlement to the debtor recovering their legal costs (even if they successfully defend the claim), this does not stop them from threatening you with adverse costs.
- Even if you are successful in obtaining a judgment against the debtor for the money owed, this does not always mean you will get paid. Whilst a county court judgment will be registered against the debtor, this does not automatically prompt payment unless the debtor wishes to keep a healthy credit score, or unless you opt to enforce the judgment – i.e. by using bailiffs.
- The debtor may not possess the money or assets that you instruct bailiffs to recover on your behalf.
If this is the case, then again you risk spending good money pursuing bad, involving yourself in lengthy court disputes to pursue a debtor that doesn’t have any money to their name and thus cannot pay you even if you obtain a judgment against them.
In this instance, whilst you may come away with an apparent victory, you may have invested the best part of 18 months to end up with nothing.
Although it may seem overwhelming, you should take comfort in the knowledge that the majority of legal disputes never make it as far as Court, with most matters settling during pre-action correspondence with the debtor.
As such, if you find yourself with a dispute of this nature, and you know you are entitled to the debt, stick to your guns, apply pressure to the debtor, threaten court proceedings if necessary, and you will more likely than not receive payment.