This guide is for business owners and freelancers in England and Wales whose customer says an invoice is not due. It explains the grounds customers most often rely on, what abatement, set-off and counterclaim mean, and how the courts separate a real defence from a delaying one.
The grounds customers usually give
The goods or the work were defective
In a contract between two businesses, statute adds terms the parties did not write down:
- Goods. Where the seller sells in the course of a business, there is an implied term that the goods are of satisfactory quality and, where the buyer made a particular purpose known, that they are reasonably fit for it (section 14 of the Sale of Goods Act 1979).
- Services. Where the supplier acts in the course of a business, the service must be carried out with reasonable care and skill (section 13 of the Supply of Goods and Services Act 1982) and, if no time was fixed, within a reasonable time (section 14).
Those implied terms do not apply where the customer is a consumer: an individual acting for purposes wholly or mainly outside their trade, business, craft or profession. The Consumer Rights Act 2015 applies instead, with equivalent terms on quality and on care and skill (sections 9 and 49). Remedies include repair, replacement or rejection of goods, and repeat performance or a price reduction for services, which may be the full price (sections 19, 54 and 56). The consumer may also rely on the breach against the trader's claim for the price.
The price was never agreed
Where the price of a service is not fixed by the contract, by a method the contract sets out, or by the parties' course of dealing, there is an implied term that the customer will pay a reasonable charge, and what is reasonable is a question of fact (section 15 of the 1982 Act). Section 8 of the 1979 Act says the same about goods, and under section 51 of the 2015 Act a consumer must pay a reasonable price, and no more. These provisions point to a reasonable sum, not to nothing. See also is my contract legally binding?.
The work was not finished
The starting point is what the contract says about when payment falls due: on completion, at stages, or periodically. How the courts treat a claim for part-finished work depends heavily on that wording and on the facts.
The wrong party was invoiced
A contract debt is owed by the party who made the contract. A registered company is a 'body corporate' in its own right (section 16 of the Companies Act 2006), distinct from the people who run it. If the invoice or the claim names the wrong party, that party has an answer to it, even though someone else may owe the money.
Abatement, set-off and counterclaim
Abatement means the price itself is reduced because what was supplied was worth less than it should have been. For goods it is statutory: a buyer may set up a breach of warranty 'in diminution or extinction of the price' (section 53(1)(a) of the 1979 Act). For work and materials the courts recognise a similar defence, measured by how far the defective performance reduced the value of the work. It cannot exceed the sum otherwise due and it does not cover losses from delay.
Set-off means the customer deducts a separate sum that the supplier owes them. Legal set-off covers mutual debts for amounts that are fixed or can be worked out without valuation, even if unconnected. Equitable set-off extends to unquantified claims, but only closely connected ones. In Geldof Metaalconstructie NV v Simon Carves Ltd [2010] EWCA Civ 667 the Court of Appeal put the test as cross-claims 'so closely connected with [the plaintiff's] demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim'.
In court, a set-off can be included in the defence (rule 16.6 of the Civil Procedure Rules, or CPR).
A counterclaim is the customer's own claim against the supplier, brought in the same proceedings under CPR Part 20. No permission is needed if it is filed with the defence; at any other time the court's permission is required (rule 20.4). It is treated as if it were a claim, carries its own court fee based on its value, and is not capped at the amount of the invoice.
No set-off clauses
Some suppliers' terms require payment in full without set-off. Between businesses, the Unfair Contract Terms Act 1977 controls such a clause where the customer deals on the supplier's written standard terms of business (section 3, read with section 13(1)(b), which covers terms excluding or restricting any right or remedy). The clause then works only so far as it was a fair and reasonable term to include, having regard to the circumstances known to or contemplated by the parties when the contract was made (section 11(1)). It is for the party relying on the term to show that (section 11(5)).
In Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600 the Court of Appeal held that a no set-off clause is caught by the Act and that reasonableness is judged on the clause as a whole, not only the part relied on. The clause was found unreasonable, and the fact that it would have blocked set-off of admitted credits weighed against it. In FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2012] EWHC 2477 (Comm) the Commercial Court held a no set-off clause reasonable: the seller had a legitimate interest in protecting its cash flow, such clauses were common, this one was confined to the price, and the buyer was a substantial commercial concern. (The judgment was later overturned on a different point, [2013] EWCA Civ 1232; reasonableness was not an issue on the appeal.)
Summary judgment: where the defence has no real prospect
Summary judgment is a decision without a trial. Under CPR rule 24.3 the court may give it on the whole of a claim or on an issue if it considers that the defendant has no real prospect of successfully defending it and there is no other compelling reason for a trial. A claimant cannot normally apply until the defendant has filed an acknowledgment of service or a defence, and the other side must have at least 14 days' notice of the hearing (rule 24.4). The application notice must say that the applicant believes the defence has no real prospect of success, and set out or attach the evidence relied on (rule 24.5).
In Easyair Ltd v Opal Telecom Ltd [2009] EWHC 339 (Ch) the court summarised the approach: the prospect must be realistic rather than fanciful, the court must not conduct a mini-trial, but it need not take at face value assertions contradicted by documents from the time.
Why a genuine dispute changes the route
A disputed debt is the wrong subject for a statutory demand. The court may set aside a demand served on an individual where the debt is disputed on grounds that appear substantial, or where the debtor appears to have a counterclaim, set-off or cross demand that equals or exceeds the debt (rule 10.5(5) of the Insolvency (England and Wales) Rules 2016). A company can ask the court to restrain a winding-up petition. That leaves an ordinary claim: see which court track a debt claim falls into.
What a solicitor will want from you
- The contract, quote, purchase order and terms, including any no set-off or exclusion clause.
- Every invoice, with delivery notes or sign-off showing the goods or work were supplied.
- The customer's complaint in their own words, the date it was first raised, and your replies.
- Evidence of quality: photographs, test results, inspection reports.
- Any credits or invoices the customer says you owe them.
- Which part of the invoice, if any, is not in dispute.
- Whether the customer was acting as a business or as a consumer.
This guide is general information about the law of England and Wales. It is not legal advice. Whether a defence, set-off or counterclaim succeeds depends on the contract terms and the evidence in the particular case.
Frequently asked
Can a customer refuse to pay an invoice because the work or goods were defective?
Defective goods or work can be raised as a defence. In a business contract the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982 imply terms about quality and about reasonable care and skill, and a proved breach can reduce or extinguish the price. If the dispute reaches court, a defendant who denies that the money is owed has to give reasons in the defence.
What is the difference between a set-off and a counterclaim?
A set-off is a defence: the customer says that money the supplier owes them cancels some or all of the invoice. A counterclaim is a claim in its own right, made in the same proceedings under Part 20 of the Civil Procedure Rules, and it can be for more than the invoice. The same facts are often put forward as both.
Does a no set-off clause stop the customer withholding payment?
Not always. Where the customer dealt on the supplier's written standard terms of business, a clause removing the right of set-off works only so far as it satisfies the reasonableness test in the Unfair Contract Terms Act 1977, and it is for the supplier to show that it does. The courts have upheld some no set-off clauses and refused to enforce others.
Is a statutory demand suitable for a disputed invoice?
Generally not. A statutory demand served on an individual can be set aside where the debt is disputed on grounds that appear to the court to be substantial, and the courts do not allow a winding-up petition to be used to decide a substantial dispute raised in good faith. A debt that is genuinely disputed is decided in an ordinary court claim.