Client Will Not Pay the Invoice? Options for BC Small Businesses

An unpaid invoice is one of the most common problems a small business faces, and one of the most frustrating. Before you file anything, it pays to look closely at what you agreed with the client, what you can prove, and what interest you are actually entitled to charge.

This article covers those business-side questions: the contract, the interest, the evidence and the escalation. For the court process itself, our step-by-step guide to collecting unpaid debts picks up where this one ends.

Start with what you and the client agreed

Your rights come mainly from the contract, which may be a signed agreement, an accepted quote, a purchase order, or a string of emails. Before you escalate, find it and check:

• Payment terms. When was payment due? "Net 30" runs from the invoice date only if that is what was agreed.
• Scope and change orders. Was the work you billed within the agreed scope, or were extras approved in writing?
• Dispute and notice clauses. Some contracts require written notice, a cure period, mediation or arbitration before a claim.
• Interest and collection costs. Did the client agree to pay interest on late accounts, or collection costs?
• Who the client is. If you contracted with a company, the company generally owes the debt, not its owner, unless someone signed a personal guarantee.

Terms printed for the first time on an invoice, after the work was agreed, may not bind the client. If you rely on a term, you need to show the client accepted it.

Interest: what you can lawfully charge

Interest is often where small businesses either leave money behind or overreach.

If your contract sets interest

You can claim interest at the agreed rate. But the federal Interest Act limits rates that are not expressed as a yearly rate. If a written contract sets interest per month, such as "2% per month", without also stating the equivalent annual rate, interest above 5% a year cannot be recovered. Stating the equivalent annual rate in your terms avoids that problem.

If your contract says nothing about interest

You cannot simply add a late fee that was never agreed. If you sue and win, though, BC's Court Order Interest Act requires the court to add interest to a money judgment from the date the claim arose to the date of the order, at a rate the court considers appropriate. That interest is not awarded where the parties had their own agreement about interest. Once you have a judgment, it carries simple interest at a rate equal to the prime lending rate of the Province's banker, reset twice a year.

Build the paper trail as you go

Invoice disputes are usually won on documents, and the most useful ones are created before anything goes wrong. Keep:

• The contract and any changes, including emails that approve extra work.
• Proof of delivery, such as sign-offs, delivery records, photos and timesheets.
• A running statement of invoices, payments and the balance.
• Every response from the client, especially any complaint about the work and any promise to pay.

A client who raises a quality complaint for the first time only after being chased for payment is a common pattern. Your contemporaneous records are what answer it.

Escalate in steps, and watch the clock

A sensible sequence is a polite reminder, then a firm written request, then a formal demand letter that sets a deadline and explains what will happen next. A payment plan can be a good outcome if it is put in writing.

Keep the limitation period in mind throughout. Under BC's Limitation Act, you generally have two years from the day the claim is discovered to start a proceeding. For an unpaid invoice that is usually around the time payment was due and not made, but the exact start date can be debatable, so do not leave it late. Reminders and demand letters do not stop the clock.

When it is time to file, the amount decides the forum. Claims of $5,000 or less generally go to the Civil Resolution Tribunal, claims up to $35,000 go to Small Claims Court, and larger claims go to the BC Supreme Court. Our article on whether a dispute belongs at the CRT, Small Claims or Supreme Court explains the differences, and our guide to collecting unpaid debts in BC walks through filing, defences and enforcement.

If you supplied work or materials to improve land, such as renovation or construction work, you may also have rights under BC's Builders Lien Act, which come with short deadlines. Ask about them early.

Make the next invoice easier to collect

Each unpaid account is a chance to tighten your terms. Common improvements include:

• Deposits and milestone billing, so you are never far ahead of what you have been paid.
• A clear interest clause with the annual rate stated.
• A right to suspend work if invoices are overdue.
• A personal guarantee from the owner when you are dealing with a small company.
• A simple dispute process that requires the client to raise complaints in writing within a set time.

Terms only help if they are part of the contract, so build them into your quote or service agreement and get it signed before work starts.

Owed money by a client? Get a plan before the next step

Our litigation lawyers can review your contract and records, calculate what interest you can claim, prepare a demand letter, and advise on the right forum and on collection. Our business lawyers can also update your standard terms.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.