What do I do if my client won't pay?

By On Your Terms co-founder Claire Bodle
September 2024

How do terms and conditions help me get paid?

You probably know you should have T&Cs in place with your clients. But you might not understand how they can help you get paid:

Legal Enforceability

In New Zealand, when T&Cs are agreed or accepted by both parties (whether by signature or electronic acceptance), they form a legally binding contract. The agreed T&Cs show the promise your client made to pay you. The process of giving and understanding this promise makes the client more likely to pay you on time. However, if they don’t, and you need to escalate the matter to a debt collector or take legal action to recover your debt, you’re much more likely to be successful if you have written evidence of the client’s obligation to pay.  

Clear terms will also make any legal process faster (and therefore cheaper) as the referee or judge will spend less time reviewing material and considering the outcome.

Clarity and Evidence

Your T&Cs should clearly document the scope of work (in as much detail as possible), payment schedule and any penalties for late payment. This provides the key evidence needed to take action to recover debt. Without this, it will become your word against theirs, making it much harder to prove your case. Without this clarity, your clients may argue they didn’t understand or agree to the payment schedule or that the work delivered didn’t meet their expectations. This can lead to protracted disputes and delays in payment.

Allow you to structure payment terms to your advantage

If you don’t have T&Cs, you’re unlikely to get paid by your client until you’ve delivered the work. However, if you structure your payment terms in your T&Cs to protect your cash flow, you can help protect your business against non-payment. Consider requiring a deposit, payment in advance, or milestone payments throughout the project. These strategies ensure you’re not left entirely out of pocket if a client disappears before making the final payment. Also, if clients have already committed some funds, they are more likely to pay the final amount to receive their product/finish the work.

What steps can I take to recover debt?

Sending a demand letter: when and how?

Before escalating to a debt collection agency or taking legal action, sending a letter demanding payment of debt can be an effective step in the debt recovery process. This is a formal request for payment, sent after the payment due date has passed and informal attempts to collect have failed. Here’s when and how to use it:

• When to send it

A demand letter should be sent after the payment due date has passed and the client has not responded to initial reminders, such as phone calls or emails. It’s often a final attempt to resolve the issue before taking legal action.

• Content of the demand letter

The letter should clearly state the amount owed, the basis for the debt, any applicable late fees or interest, and the deadline for payment. It should also outline the potential consequences if the debt remains unpaid, such as legal action or referral to a debt collection agency. Physical delivery (rather than email) to the address stated in the contract is preferred so that there is proof of delivery.

• Why send a demand letter?

The demand letter serves as evidence that you have made a formal request for payment. If the matter proceeds to court, this letter will demonstrate that you gave the debtor ample opportunity to settle the debt before pursuing legal action. Taking more formal action can also prompt your debtor into paying and mean you don’t need to take the matter further.

Engaging a debt collector

If the client still doesn’t pay after you’ve sent a demand letter, and you don’t want to jump straight into costly legal action, engaging a debt collector can be a useful next step. If you have clear T&Cs that don’t leave room for misunderstandings, it will be much easier for the debt collector to perform their role, and you’ll get a much faster outcome.

If your T&Cs include a clause that allows for the recovery of debt collection costs, you can also pass any debt collection or legal costs on to your client. Without this, you will be liable for these costs.  

Legal action

If your debt collector is unsuccessful or you want to pursue legal action, your options are set out below. Remember, the legal process is likely to be expensive, and while you may be able to pass some of the costs on to your debtor if you’re successful (where stated in your T&Cs), pursuing this avenue will often only make financial sense for a large debt.

• Statutory Demand Letter

If the debt is owed by a company and is not in dispute (just overdue) you can send a statutory demand letter in accordance with the requirements of s 289 of the Companies Act 1993, setting out the amount of the debt and requiring payment. The debt must be worth more than $1000 and the demand must be ‘served’ on the company (ideally in person). The debtor has 15 working days to reply. If they don’t, they are considered insolvent, giving the creditor a right to pursue an application for liquidation. We recommend discussing this option with an insolvency lawyer before pursuing it.

• Disputes Tribunal 

The tribunal can only be used where there is a dispute over whether the product or service has been delivered as promised, or the amount being charged is correct. The Tribunal doesn’t assist with debt recovery where there is no dispute (the client is just refusing to pay). Tribunals can only hear claims for up to $30,000. The hearings are run by a referee who will encourage the sides to reach an agreement before giving a binding decision.

• District Court 

You can take action in the District Court for a debt up to $350,000. If the case goes to trial, it will be heard in front of a district court judge.

• High Court 

While action to recover a debt of any amount can be taken in the High Court, as the costs of going are greater, it’s usually only used if the debt is more than $350,000.

Key points

Having robust and accepted T&Cs is the first step to protecting your right to be paid for your work. They should clearly state when your clients or customers are required to pay, and ideally include penalties for late payment. If a payment is overdue and friendly reminders have been unsuccessful, a more formal letter demanding payment of debt can be an effective tool to encourage payment before considering debt collectors or legal action.