My invoice is not paid, now what?

It happens to every contractor: the client does not pay the invoice (in full). There can of course be various reasons for this: the client does not agree with the (quality of the) work, the client does not think he can pay, or the client thinks the invoice is simply not due. Regardless of the reasons for withholding payment: as a contractor, you have to deal with it. This article outlines some steps/opportunities to persuade the principal to still pay.

Introduction

Obviously, a contractor will first want to find out the reason why the client is not paying. The first step is therefore an open door: seek contact, find out what the reason is for withholding payment and try to come to a solution by mutual agreement. This contribution assumes that this (non-legal) step has already taken place.

Step 1: The notice of default

The most logical next step is to send a notice of default. A formal notice of default consists of a letter (or e-mail) in which a demand is made (that is just a bit stricter than "request") to pay within a reasonable period of time. A notice of default must (i) clarify what is claimed and on what basis and (ii) include a reasonable (specific) period within which payment must still be made. An example:

"Pursuant to our agreement dated January 1, 2020 and the installment schedule therein, you should have paid the last installment of €5,000 by October 1, 2020. This has not happened and you are in default. I therefore summon you to ensure that the aforementioned amount is credited to our bank account number no later than December 1."

(For a more detailed account of the how, what and why of the notice of default, see my earlier article of Sept. 22, 2020 in Roofs)

This notice of default may possibly mention some additional incentives for the principal to make payment.

In fact, over the period in which a debtor (the principal) defaults, the contractor can claim statutory commercial interest. That can add up nicely. That legal commercial interest is in fact (currently) 8% (per year). One should also be aware that it is sometimes possible (depending on the applicable general conditions) to increase this percentage (see for example § 45-2 UAV 2012: an increase of 2% is possible).

In addition to statutory interest, extrajudicial collection costs may be claimed under circumstances. The amount depends on the amount of the outstanding invoice. This too is (often) worthwhile: these costs can amount to €6,775.

Step 2: Suspension of operations

Another powerful remedy is the so-called right of suspension. That is, a contractor defers ("suspends") his obligations (for example, the repair work of a roof), until the client has fulfilled his payment obligations.

A special form of suspension is the right of retention. The contractor can suspend the surrender of an item (such as a building site). There are a number of requirements for the successful exercise of a lien. The most important of these is having "actual control" of the item being withheld.

By the way, step 2 can also be exercised at the same time as step 1.

Step 3: The escalation

If a demand and/or suspension does not produce the desired result, then heavier artillery may need to be used. One option to consider is garnishment. For this, a lawyer should be engaged. Seizure has a "custodial" function. As a contractor (creditor), you want assurance that assets are available to satisfy your claim (after the court has awarded the claim). Attachment not infrequently has an important secondary function: as a means of pressure.

If (for example) a bank account is seized, the (positive) balance of the debtor/client (up to the amount of the seizure) will be 'frozen'. This can cause problems for the client's business operations, as a result of which there will be more 'pressure' to reach a solution (read: to pay). After attachment, it is necessary to start proceedings (as a rule) within two weeks after attachment. This of course unless payment is still made or a solution is reached (which regularly occurs after attachment).

Another means of pressure is to file for bankruptcy of the principal. However, this requires that there is at least one other party (creditor) with respect to which the principal is (also) in default of paying an invoice.

Conclusions and recommendations

This post has mentioned some options for getting a defaulting client to pay. There are, of course, several roads that lead to Rome.

Intermediate solutions are also possible. If there is only inability to pay (and not unwillingness to pay), the "stretched-bones approach" probably does not pay off. In that case, payment agreements can also be made, with or without simultaneous provision (by the client) of securities.

Finally, the contractor/creditor is well advised to seek legal advice in the event of i) a significant claim, ii) doubt about the correct approach/formulation or iii) made (payment) agreements that need to be recorded.