Responding Unpaid Invoice Demand Letters
Strategic guidance for businesses responding to unpaid invoice demand letters, evaluating defenses, negotiating settlements, and protecting your financial interests
When you receive a demand letter for unpaid invoices, your first response in the next 48-72 hours will shape your entire defense strategy. Don’t panic—follow this structured checklist to assess the claim objectively and preserve your legal rights.
- Read the demand carefully: Note the claimant’s name, the amount demanded, the deadline for payment, and the stated basis for the claim. Identify any specific contract sections cited.
- Do not admit liability: Do not respond via email, phone, or in writing acknowledging the debt or apologizing. Any admission will be used against you in settlement negotiations and litigation.
- Implement litigation hold: Immediately notify your team to preserve all documents—emails, Slack messages, project files, invoices, and internal notes—related to this vendor and engagement. Failing to preserve evidence can result in serious sanctions.
- Consult with counsel: Contact an attorney before responding. Early legal consultation can save you thousands in avoidable mistakes and protect attorney-client privilege.
Organize all relevant documents in one location (digital folder or physical file):
- Contracts & Agreements: Master service agreement, SOW, purchase orders, email confirmations—anything that establishes the engagement and its terms.
- Invoices: All invoices from the vendor, including dates, amounts, and whether each is paid, partially paid, or unpaid.
- Payment Records: Bank statements, canceled checks, ACH confirmations, credit card statements—proof of what you’ve paid and when.
- Communications: Email threads, Slack messages, meeting notes—especially any discussion of quality issues, deliverables, or payment disputes.
- Deliverables & Proof of Performance: The actual work product, screenshots showing deployment, client sign-offs, acceptance emails, or evidence of use.
- Quality Concerns & Complaints: Internal QA reports, bug logs, client complaints, your own team’s notes about defects or deficiencies.
- Offset Evidence: Invoices for replacement services, costs to fix defects, time tracking for rework, documentation of lost revenue.
- Ignoring the letter: Silence will result in litigation, liens, collection actions, and judgment. A bad response beats no response.
- Admitting liability: Don’t say “we owe you” or apologize. Even partial admissions will be used against you.
- Making partial payment without agreement: Paying part of the invoice can trigger “account stated” claims, where courts treat partial payment as acknowledgment of the full debt.
- Emotional or hostile responses: Keep communication professional and business-focused, even if you believe the claim is frivolous.
- Deleting emails or messages: Once litigation is threatened, document preservation becomes mandatory. Deletion is spoliation and can result in severe sanctions.
- Failing to consult counsel: Early attorney consultation is cheaper than fixing later mistakes.
After 48-72 hours of analysis, you’ll fall into one of three categories:
- You clearly owe it: Negotiate the best terms possible and settle. Look for payment plans, interest forgiveness, or fee waivers.
- You owe some, not all: Prepare a partial payment + negotiation response. Identify your offsets and counterclaims.
- You have legitimate defenses: Document your defenses and develop a comprehensive response strategy with counsel.
Once you’ve triaged the claim, you need a response strategy. Your approach depends on the strength of your position and the cost-benefit analysis of settlement versus litigation.
Yes. A professional written response:
- Demonstrates that you’re taking the matter seriously
- Preserves attorney-client privilege if counsel reviews it
- Creates a record of your position if litigation follows
- Signals willingness to negotiate, which often leads to settlement
- Protects you from default judgment if sued
What NOT to include: Admissions of liability, emotional language, accusations, threats, or unnecessary details beyond your core position.
If the vendor’s deliverables were defective or incomplete:
- Quantify the deficiencies: “The code did not meet the technical specifications outlined in Section 3 of the SOW. Specifically, [describe defects].”
- Calculate your cost to cure: “We incurred $X to fix these deficiencies” (attach invoices for replacement services).
- Propose resolution: “I am willing to pay $[reduced amount] to account for the cost to cure and the defective nature of the work.”
- Offer mutual release: “Upon payment, both parties will execute a mutual release of all claims.”
If the vendor’s work was never accepted or completed:
- Document the lack of acceptance: “We never formally accepted these deliverables. You never requested acceptance, and we raised concerns in [cite emails] that were never addressed.”
- Invoke the contract’s acceptance clause: “Under Section [X] of the contract, delivery and acceptance are separate requirements. Delivery alone does not trigger payment.”
- Propose remedy: “We will accept these deliverables upon [specific revisions/fixes]. Once completed to specification, we will pay.”
If you’ve already paid some or all of the invoice:
- Provide evidence: “Our bank records show payment of $[amount] via [method] on [date]. Please see attached bank statement and ACH confirmation.”
- Note the discrepancy: “Your demand does not account for this payment, suggesting either a recordkeeping error on your end or a duplicate claim.”
- Propose reconciliation: “Please provide your payment ledger so we can reconcile any discrepancies and resolve this promptly.”
If there is no signed agreement between you and the vendor:
- Note the lack of contract: “I am not aware of a signed contract establishing the scope, price, and payment terms for this engagement.”
- Challenge the enforceability: “Without a written agreement, [applicable statute of frauds] may limit your ability to enforce payment claims for amounts exceeding $[threshold].”
- Request documentation: “Please provide a copy of any written agreement you believe we executed, or provide your documentation of the price and scope agreed to.”
- Caveat: This is a complex legal defense. Consult counsel before asserting statute of frauds claims.
- Admit liability unnecessarily: Don’t write “we owe you” just because you’re disputing the amount. Admit only what you clearly owe.
- Make threats or accusations: Don’t accuse the vendor of fraud, bad faith, or improper conduct unless you have strong documentation.
- Ignore the deadline: Respond before the deadline in the demand letter, even if only to request more time.
- Provide unnecessary detail: Stick to your core defenses. Don’t volunteer additional information that could hurt your position.
- Promise to investigate and respond later: Make a substantive response, not a placeholder.
Beyond simply disputing the amount, you may have legitimate legal defenses that reduce or eliminate your payment obligation. Understanding these defenses helps you evaluate your true liability and negotiating position.
The Principle: A party cannot recover payment for services that fail to meet the contract’s specifications or quality standards.
What you need:
- Written specifications from the contract or SOW
- Evidence that deliverables don’t meet those specifications (screenshots, test results, QA reports, internal emails)
- Documentation that you raised concerns timely (email threads showing when you identified defects)
- Calculation of your cost to fix or replace the defective work
Strength: Very strong if the defects are significant, documented, and timely raised. Weak if only minor issues or if the vendor claims the work was “good enough.”
The Principle: Certain contracts must be in writing to be enforceable. If there’s no signed agreement and the amount is substantial, you may have a defense.
Key thresholds:
- Goods over $500 (UCC § 2-201)
- Services over $2,000 (in some states; varies widely)
- No email confirmations or other written evidence of price and scope
Strength: Highly dependent on state law and the nature of the engagement. Email trails can sometimes substitute for a formal contract. This is a complex legal argument—consult an attorney before relying on it.
The Principle: If the vendor breached the contract first (missed deadlines, failed to meet specs, or breached other obligations), you may be excused from paying.
What you need:
- Contract language establishing the vendor’s obligations
- Evidence that the vendor breached (emails showing missed deadlines, project tracking logs showing incomplete work, your contemporaneous complaints)
- Evidence that you relied on the vendor’s breach (you couldn’t proceed, incurred delays, or paid for replacement services)
Strength: Strong if the vendor’s breach was material (significant and went to the heart of the contract). Weak if the breach was minor or remedied by the time you withheld payment.
The Principle: Contract claims must generally be brought within a certain time period (3-6 years in most states).
Key factors:
- When did you receive the invoices? When did the vendor first demand payment?
- Has more than the applicable limitations period passed since the services were performed or invoices issued?
- Partial payments can “restart the clock” on the statute of limitations for the remainder of the debt in some states.
Strength: Only applicable if the demand is brought years after the services. Most B2B disputes are filed well within the limitations period.
The Principle: If you’ve disputed an invoice timely and documented your objections, the vendor cannot later rely on “account stated” (the claim that partial payment or silence constitutes acceptance).
What you need:
- Written evidence that you disputed the invoice (email objecting to the amount, quality, or scope)
- The dispute must be raised before you make payment (if you pay first, dispute second, account stated may still apply)
- Documentation showing the dispute remained unresolved when payment was due
Strength: Strong if you have clear, timely written objections. Weak if you were silent and then paid part of the invoice.
If the vendor’s work was defective, what did it cost to fix or replace?
- Invoices from replacement vendors or contractors who fixed the vendor’s work
- Your internal labor costs (if you have time tracking, multiply hours × hourly rate)
- Third-party testing or QA costs to identify and document defects
Offset amount: You can offset this against what you owe the vendor, dollar-for-dollar.
If the vendor’s delays prevented you from completing your own work or deploying to market, did you suffer lost revenue?
- Project delay timeline (contract deadline vs. actual delivery date)
- Evidence of lost contracts or revenue (customer emails, project logs, financial records)
- Documentation of alternative costs (expedited shipping, overtime labor, rush fees for replacement work)
Offset amount: Calculate a reasonable amount based on documented delays and damages.
Did the vendor’s defective work damage your relationship with your own clients?
- Client complaint emails or support tickets related to the vendor’s work
- Evidence that you had to apologize or offer refunds to your clients
- Documentation of remediation costs (support time, refunds issued, replacement work)
Offset amount: Refunds you issued to your clients; support time spent addressing the defect. Avoid claiming pure reputational harm (courts are skeptical of vague claims).
- Document everything: Offsets must be quantifiable and supported by evidence (invoices, time records, customer communications).
- Don’t overstate: Claim only what you can prove. Inflated offset claims undermine your credibility.
- Distinguish between offset and counterclaim: An offset reduces what you owe; a counterclaim is a separate claim for damages beyond the offset.
- Raise both in your response: Don’t wait until litigation to assert offsets. Mention them in your initial demand letter response to increase negotiation leverage.
Most unpaid invoice disputes settle without litigation. Understanding settlement dynamics and your true cost of litigation helps you make strategic decisions about when to settle and for how much.
- Settlement negotiation: 30-90 days from demand letter to resolution
- Mediation: 60-120 days, often yields 60-75% recovery
- Arbitration: 6-12 months from filing to award (faster than court, but expensive)
- Litigation: 12-36 months from filing to judgment, then potentially years for collection
What will litigation cost you? Be honest:
- Attorney’s fees: $200-$350/hour, average 50-100 hours for a $25K claim = $10K-$35K in legal fees alone
- Management time: Your time spent responding to attorneys, gathering documents, depositions. Often equals or exceeds legal fees in opportunity cost
- Discovery costs: Document production, expert witnesses, depositions
- Trial/hearing: If it reaches trial or arbitration hearing, costs accelerate dramatically
- Judgment collection: If you win, you still have to collect. A judgment is worthless if the vendor is judgment-proof
- Reputational risk: Business disputes can damage vendor relationships and your reputation
Rule of thumb: If the claim is under $50K and the vendor doesn’t have clear assets, litigation often costs more than settlement.
Start with an aggressive counter-offer and work toward the vendor’s number. Examples:
- Vendor demands $100K. You offer $30K. Settlement point: $55-65K, depending on leverage.
- Vendor demands $50K with $5K in accrued interest. Offer $45K (no interest). Settlement: $48K.
If full payment isn’t feasible immediately, propose a payment plan:
- 3-month plan: $X per month for 3 months (often acceptable if first payment is within 10-14 days)
- 6-month plan: Stretched payments (more time for you to arrange cash flow)
- Contingent payment: Payment upon receipt of specific deliverables or milestones if work is ongoing
Critical: Require that once you pay, the vendor releases ALL claims against you, including:
- The disputed invoices
- Interest, late fees, and penalties
- Any counterclaims or cross-claims
- Rights to pursue further collection action
Language: “Upon receipt of payment, Vendor will execute a General Release in the form [attach] releasing all claims arising from the Engagement.”
Consider whether you want the settlement amount kept confidential:
- Pro: Vendor can’t use the settlement as precedent for future claims or tell other vendors what you’ll pay
- Con: Confidentiality agreements add complexity and give vendor “bragging rights” to others
Standard language: “This settlement is made for settlement purposes only and does not constitute an admission of liability by either party.”
Why it matters: Protects you from the settlement being used as evidence of fault in other disputes or with your own customers.
- Counter early: Respond with a counter-offer within 10-14 days. Long silence suggests you’re weakening your position.
- Use third parties: Having your attorney make offers feels more formal and serious than you making them directly.
- Show calculation: When you offer a reduced amount, explain it: “Offset by $X for cost to cure = net obligation of $Y.”
- Offer a deadline: “This offer expires on [DATE]. If you don’t accept by then, we’ll assume litigation is necessary and shift to that approach.”
- Be reasonable: Offering 40% of a $100K claim (when you might owe 60%) is a good starting point. Offering 5% signals bad faith.
- Document all offers: Send all settlement proposals in writing (email or letter) so there’s a clear record.
Sometimes settlement isn’t the right answer. Consider litigation if:
- You have a clear win: Strong defenses, documented quality defects, or prior vendor breach. Litigation risk is low.
- Vendor is judgment-proof: You’re paying to make the demand go away (settlement for nuisance value), not because you owe money.
- Principle is at stake: The vendor is threatening other customers with similar false claims, and a judgment will deter future claims.
- You have insurance: E&O or general liability coverage covers defense costs, reducing your out-of-pocket exposure.
- Attorney thinks you’ll win: If a strong attorney tells you the vendor’s claim is weak and you’re likely to prevail, litigation may be worth it.
Use these templates as starting points for your response. Customize with your specific facts, contract references, and supporting documentation. Always have an attorney review your response before sending.
I represent businesses receiving unpaid invoice demands, helping you evaluate your actual liability, develop defense strategies, and negotiate favorable settlements—or defend vigorously if litigation becomes necessary.
First step: I review the demand letter, your contract with the vendor, your records (invoices received, payments made, deliverables), and your documentation of any quality issues or disputes.
What I deliver:
- A candid assessment of your liability (do you actually owe this money?)
- Evaluation of defenses and offsets you may have
- Estimated litigation risk if the matter escalates
- Realistic settlement range (what should you pay to resolve this?)
- Timeline for different resolution paths (settlement, mediation, litigation)
I draft a professional response to the demand that:
- Protects your legal interests without making unnecessary admissions
- Articulates your defenses and offsets clearly
- Signals that you’re taking the claim seriously and willing to negotiate
- Preserves your litigation options if settlement negotiations fail
- Requests additional documentation from the vendor to support their claim
Result: A professional, strategic response that increases your negotiating leverage and creates a strong record if litigation follows.
Once we’ve assessed your position, I handle negotiation with the vendor or their counsel:
- Making and countering settlement offers based on your true liability and risk tolerance
- Structuring payment plans if you can’t pay lump-sum
- Negotiating mutual releases, confidentiality terms, and liability waivers
- Documenting the settlement in a binding agreement
Goal: Achieve maximum reduction of your exposure, often 30-50% off the claimed amount when legitimate defenses or offsets exist.
If the vendor sues or files arbitration:
- Drafting your answer or response to the complaint
- Asserting defenses and counterclaims (quality defects, offsets, prior breach)
- Discovery (exchanging documents and information with the vendor’s counsel)
- Motion practice (fighting preliminary motions or seeking summary judgment)
- Representing you in settlement conferences, mediation, or at trial/hearing
- A $1,500 initial consultation often leads to a $10K-$20K settlement reduction vs. paying without evaluation
- Early identification of defenses and offsets strengthens your negotiating position exponentially
- A well-drafted response can deter further vendor action and lead to quick settlement
- Late consultation (after you’ve made admissions or missed deadlines) is much more expensive
If you’ve received a demand letter for unpaid invoices, I can help you understand your real liability, evaluate your defenses, and develop a cost-effective response strategy.
Use the Calendly link below to schedule a strategy call, or email me directly at owner@terms.law.
Schedule Strategy CallAn initial consultation and response strategy typically costs $1,500-$3,000. This includes reviewing your contract, analyzing the vendor’s claim, evaluating your defenses and offsets, assessing litigation risk, and providing a written recommendation on next steps. Many clients recover 2-3x this amount through better negotiation based on that initial assessment.
The deadline is set by the demand letter itself, typically 10-30 days. However, you don’t need a final answer by that date. Responding with “We are evaluating your claim and will provide a detailed response by [DATE + 10-14 days]” is perfectly acceptable and buys you time to gather documents and consult with counsel. Missing the deadline entirely is a serious mistake and will trigger litigation.
Quality defects are a complete defense to payment. If the vendor’s work failed to meet contractual specifications, you’re not obligated to pay in full—and may not be obligated to pay at all. What matters is: (1) did the work fail to meet the contract’s specifications? (2) can you document this failure? (3) did you raise the defect timely? If yes to all three, you have strong leverage to settle for a reduced amount or no payment plus offset for your cost to fix.
No. Ignoring a demand letter is a serious mistake. The vendor will likely sue or pursue collection action, and your non-response will be used against you as evidence that the claim is valid or that you were avoiding service. A professional response—even if it disputes the claim—signals that you’re engaged and willing to resolve the matter, which often leads to settlement. Litigation is exponentially more expensive than negotiated settlement.
Don’t accuse the vendor of fraud in your response letter unless you have strong documentation. Fraud claims are serious and if you’re wrong, they can backfire. Instead, focus on documenting factual defenses: “The services did not meet specifications,” “We’ve already paid this invoice,” “Your prior breach excuses payment.” Let the facts speak for themselves. Your attorney can help you determine whether any statements in the demand are provably false and warrant confrontation.
Not if you structure the settlement properly. Standard language in settlement agreements states: “This settlement is made for settlement purposes only and does not constitute an admission of liability by either party.” This means you can offer to pay $25K to settle a $100K claim without admitting you owe anything. However, this protection only works if both parties agree to it. Don’t make settlement offers in a way that sounds like admissions—always include the “no admission” language.
Yes. In fact, most cases that go to court settle before trial. Once litigation has begun, both sides’ exposure is higher (litigation costs are running), so settlement leverage often increases. You can settle at any point—during negotiation before filing, after the lawsuit is filed, during discovery, or even after trial begins. The earlier you settle, the cheaper it is.