💼 Responding to Freelancer & Agency Nonpayment Demand Letters
Strategic Defense Guide for Clients Facing Contractor Payment Disputes
✍️ Need to Send a Freelancer Nonpayment Demand Letter? If a client hasn't paid you for your work, see my guide on How to Write Freelancer Nonpayment Demand Letters →
📋 Understanding the Contract Framework

When you receive a demand letter from a freelancer or agency claiming unpaid invoices, the first step is understanding what legal obligations actually exist. This page provides the employer/client perspective on evaluating and responding to contractor payment demands.

Basic Contract Law Principles

Every freelance or agency relationship involves a contract—whether written, verbal, or implied. The enforceability of a payment demand depends entirely on the contract terms:

  • Offer and acceptance: Did both parties agree to the same terms?
  • Consideration: Was there a mutual exchange of promises (work for payment)?
  • Definiteness: Were the material terms clear enough to enforce?
  • Performance: Did the contractor fulfill their obligations?
  • Breach: Did either party fail to perform as promised?
Key Insight: A contractor's demand for payment is only valid if they performed the agreed-upon work according to the contract terms. Incomplete, defective, or unauthorized work may not entitle them to full payment.
Common Contract Structures

Master Service Agreement (MSA) + Statement of Work (SOW)

Many freelance relationships use a two-tier structure:

  • MSA: The umbrella agreement governing the overall relationship (payment terms, IP ownership, confidentiality, dispute resolution, termination rights)
  • SOW: Project-specific documents detailing scope, deliverables, timeline, milestones, and pricing
Common Issue: Contractors often begin work based on verbal discussions or email exchanges without a signed SOW. If the MSA requires written SOWs for each project, work performed without one may not be enforceable under the contract.

Single Engagement Agreement

For one-off projects, a single contract typically covers:

  • Detailed scope of work and deliverables
  • Acceptance criteria and revision policy
  • Payment terms (fixed fee, hourly, milestone-based)
  • Timeline and deadlines
  • IP ownership and work-for-hire provisions
  • Termination and kill fee provisions
Critical Contract Terms for Payment Disputes
Contract Provision Why It Matters in a Payment Dispute
Scope of Work Defines what the contractor was hired to deliver. If they claim payment for out-of-scope work, you may have no obligation to pay.
Acceptance Criteria Specifies how you determine if deliverables are complete and satisfactory. Without acceptance, payment may not be due.
Revision/Change Order Policy Governs how scope changes are requested and approved. Unauthorized work may not be compensable.
Payment Terms When is payment due? Upon completion? Net 30? After acceptance? The timing matters for late payment claims.
Invoice Requirements Does the contract specify invoice format, required documentation, or approval process? Non-compliant invoices may not trigger payment obligations.
Termination Clause Can you terminate for convenience? For cause? What are the payment obligations upon termination?
Dispute Resolution Does the contract require mediation or arbitration before litigation? What jurisdiction governs?
Warranty/Indemnification Did the contractor warrant the quality of work? Can you offset damages for defective work?
Platform Overlay: Upwork, Fiverr, Toptal

If you hired the contractor through a freelance platform, the platform's Terms of Service create an additional contractual layer:

  • Payment protection: Platforms often escrow funds and have dispute resolution processes
  • Scope enforcement: Many platforms allow you to dispute charges for out-of-scope work
  • Mandatory arbitration: Platform TOS may require binding arbitration for disputes
  • Fee structures: The contractor's demand may not account for platform fees already deducted
Platform Disputes: If the work was performed through Upwork, Fiverr, or similar platforms, always initiate the platform's dispute resolution process BEFORE responding directly to the contractor's demand letter. The platform TOS likely requires this.
What If There's No Written Contract?

Many freelance relationships operate on handshake deals, email exchanges, or implied agreements. Without a written contract:

  • Quantum meruit: Contractor may claim the reasonable value of services rendered, even without an agreed price
  • Implied contract: Courts may infer a contract from conduct and email exchanges
  • Industry custom: Standard practices in the industry may fill gaps in the agreement
  • Good faith and fair dealing: Both parties owe each other a duty of honesty and cooperation
Risk: Without a written contract, you lose many defenses (scope limits, acceptance criteria, change order requirements). Courts will look to email trails, industry standards, and course of dealing to determine obligations.
⏱️ First 72 Hours: Immediate Response Protocol

The first three days after receiving a contractor payment demand are critical. Your initial response sets the tone for the entire dispute and can preserve or waive important defenses.

Hour 0–4: Secure Documents and Preserve Evidence
  • Save everything: Print or PDF the demand letter. Save all emails, Slack messages, project management platform communications
  • Freeze the file: Make read-only copies of all project files, deliverables, and work product
  • Screenshot platform activity: If work was done via Upwork/Fiverr, screenshot all platform communications and invoices before they disappear
  • Identify witnesses: Note anyone who observed the work, discussions, or disputes (team members, project managers)
  • Locate the contract: Find all written agreements, SOWs, MSAs, email exchanges, and proposal documents
Do NOT:
  • Delete any communications or files (looks like spoliation of evidence)
  • Edit or alter any documents after receiving the demand
  • Discuss the dispute on social media or public forums
  • Forward the demand to uninvolved parties without attorney guidance
Hours 4–24: Preliminary Assessment

Understand what they're claiming:

  • What is the total amount demanded?
  • What invoices or projects does it cover?
  • Are they claiming unpaid invoices, change orders, or additional work?
  • What is their stated legal theory? (Breach of contract, quantum meruit, unjust enrichment?)
  • What deadline have they set for response or payment?
  • Have they threatened litigation, liens, or other action?

Compare to your records:

  • Do you have the same invoices in your system?
  • Were any invoices previously disputed or rejected?
  • What does your contract say about when payment is due?
  • Did the contractor comply with invoice submission requirements?
  • Is any claimed work actually within the agreed scope?
Hours 24–48: Determine Your Position

Based on your document review, categorize the claim:

Category Description Recommended Action
Fully Valid You owe the money. The invoices are accurate, work was completed per contract, payment is overdue. Pay immediately and negotiate penalty waiver
Partially Valid Some invoices are legitimate, others are disputed. Or work was incomplete/defective. Offer partial payment with itemized explanation
Substantially Invalid Most of the claim is for out-of-scope work, unapproved change orders, or work that failed acceptance criteria. Detailed rebuttal with supporting documentation
Entirely Meritless No valid contract, work was never authorized, or contractor materially breached. Firm denial with possibility of counterclaim
Bad Faith/Extortion Demand includes threats, false claims, or attempts to leverage unrelated issues. Attorney involvement; potential reporting
Hours 48–72: Craft Your Initial Response

You generally have three options at this stage:

Option 1: Acknowledge and Request Time

If you need more time to investigate, send a brief acknowledgment:

"We received your demand letter dated [date]. We are reviewing the invoices and contract terms you referenced. We will respond substantively within [10 business days]. This acknowledgment does not constitute acceptance of your claims."

Pros: Buys time; shows good faith; avoids default
Cons: May signal weakness if claim is clearly meritless

Option 2: Immediate Partial Payment

If part of the claim is clearly valid, pay that portion immediately:

"We have reviewed your demand. Invoice #[X] for $[Y] was valid and is being paid today. However, invoices #[A], #[B], #[C] are disputed for the following reasons: [itemize]. We are open to discussing these disputed amounts."

Pros: Shows good faith; reduces exposure; isolates dispute
Cons: May be seen as admission if payment was not actually due

Option 3: Immediate Denial

If the claim is clearly invalid, you can deny it outright:

"Your demand letter mischaracterizes our contractual relationship. [Itemize specific factual and legal deficiencies]. We do not owe the amounts claimed and will vigorously defend any action you bring."

Pros: Sets firm boundary; may deter litigation
Cons: Closes door to settlement; may provoke immediate lawsuit

Attorney Involvement Triggers (First 72 Hours)

Involve an attorney IMMEDIATELY if:

  • The demand exceeds $25,000
  • The contractor threatens criminal charges, regulatory complaints, or public exposure
  • The contractor has already filed a lawsuit or lien
  • The claim involves complex IP, trade secret, or confidentiality issues
  • Your contract has a mandatory arbitration or pre-suit notice requirement
  • The contractor is represented by an attorney
🔍 Substance Triage: Evaluating the Claim

After the initial 72-hour response window, conduct a thorough analysis of the contractor's claims against your contractual obligations and defenses.

Step 1: Reconstruct the Contractual Relationship

Document Hierarchy: Assemble all documents in order of precedence:

  1. Signed written agreements (MSA, SOW, engagement letter)
  2. Email exchanges memorializing terms
  3. Proposals and quotes
  4. Invoices and payment records
  5. Project management platform records (Asana, Monday, Trello)
  6. Slack/Teams communications
  7. Deliverable files and version history
Integration Clause: If your written agreement contains language like "This agreement constitutes the entire agreement between the parties," it may exclude prior verbal promises or email representations. This is a powerful defense against claims based on side discussions.
Step 2: Map Claims to Contract Provisions

For each invoice or amount claimed, determine:

Analysis Question Supporting Evidence Defense If Answer Is "No"
Was this work within the defined scope? SOW, scope section, exclusions list Out-of-scope work not compensable without change order
Was a change order properly authorized? Change order form, written approval, email confirmation Unauthorized work performed at contractor's risk
Did deliverables meet acceptance criteria? Acceptance testing checklist, bug reports, rejection emails Payment not due until acceptance; defective work may be offset
Did contractor comply with invoice requirements? Contract invoice provisions, accounts payable policies Non-compliant invoices do not trigger payment obligation
Has the payment deadline actually passed? Contract payment terms (Net 30, upon completion, etc.) Demand is premature if payment not yet due
Did contractor fulfill all preconditions to payment? Warranty, indemnity, or other conditions precedent Payment not due until all conditions satisfied
Step 3: Identify Affirmative Defenses and Counterclaims

Common Affirmative Defenses:

  • Material breach by contractor: If they failed to perform core obligations, you may be excused from payment entirely
  • Failure of condition precedent: Payment not due until certain events occur (e.g., client approval, project completion)
  • Statute of frauds: In some jurisdictions, contracts over a certain amount must be in writing
  • Untimely claim: Statute of limitations or contractual claim deadline has passed
  • Waiver/estoppel: Contractor previously waived the right to payment or accepted different terms
  • Payment already made: Contractor's records are incorrect; you have proof of payment
  • Offset for damages: You suffered damages from contractor's defective work that offset the amounts owed

Potential Counterclaims:

  • Breach of contract: Contractor failed to deliver on time, delivered defective work, or violated confidentiality/non-compete
  • Breach of warranty: Work does not meet contracted quality standards or contains defects
  • Fraudulent inducement: Contractor misrepresented their qualifications or capabilities to get hired
  • Conversion/IP infringement: Contractor used your materials without authorization or retained your IP
  • Unfair competition: Contractor solicited your customers or employees in violation of agreement
Strategic Consideration: Counterclaims can be powerful settlement leverage, but they also escalate the dispute and increase legal costs. Only assert counterclaims if you genuinely suffered damages and have evidence to support them.
Step 4: Calculate Your True Exposure

Determine the maximum amount you could owe in a worst-case scenario:

Contractor's Claimed Damages:
  • Principal invoice amount: $______
  • Late fees (if in contract): $______
  • Interest (contract or statutory): $______
  • Attorney fees (if in contract): $______
  • Total claimed: $______
Your Potential Offsets:
  • Payments already made: $______
  • Defective work damages: $______
  • Delay damages: $______
  • Re-work costs: $______
  • Total offsets: $______

Net Exposure Calculation: [Total claimed] - [Total offsets] = $______

Settlement Range: In most commercial disputes, settlement occurs between 40-70% of net exposure, depending on the strength of defenses and litigation costs. If your net exposure is $20K, expect settlement discussions in the $8K-$14K range.
Step 5: Assess Litigation Risk vs. Settlement Value

Factors favoring settlement:

  • The contractor has a colorable claim with supporting documentation
  • Your contract is ambiguous or lacks key provisions
  • Litigation costs would exceed the disputed amount
  • You lack time or resources for extended dispute
  • Public litigation could harm your reputation or business relationships
  • The contractor has already filed suit or lien, creating immediate business impact

Factors favoring full defense:

  • The claim is clearly meritless and backed by no credible evidence
  • Your contract strongly supports your position
  • You have substantial counterclaims that offset the contractor's demand
  • The contractor has a pattern of similar disputes (shows bad faith)
  • The principle matters more than the economics (deterring future frivolous claims)
  • Your insurance covers defense costs and potential judgment
✍️ Strategic Response Options & Sample Letters

Based on your case evaluation, choose the response strategy that best aligns with your objectives and risk tolerance.

Strategy 1: Pay in Full (Valid Claim)

When to use: The contractor's claim is entirely accurate, and you simply overlooked or delayed payment.

[Your Company Letterhead] [Date] [Contractor Name] [Address] Re: Payment of Outstanding Invoices Dear [Contractor Name]: We received your demand letter dated [date] regarding unpaid invoices totaling $[amount]. After reviewing our records and the applicable contract terms, we confirm that this amount is due and payable. Payment in the amount of $[amount] is being processed today via [ACH/check/wire] and should reach you within [X business days]. The payment covers the following invoices: • Invoice #[X] dated [date]: $[amount] • Invoice #[Y] dated [date]: $[amount] • [Continue as needed] We apologize for the delay in processing these invoices. [Optional: brief explanation such as "Our accounts payable department experienced staffing transitions that caused processing delays."] [Optional if demanding late fees/interest: "We note that you have claimed $[X] in late fees under Section [Y] of our agreement. We respectfully request that you waive these charges in light of our prompt resolution of this matter upon receiving your notice. However, if you believe the contractual late fee provisions apply, please provide a detailed calculation and we will review."] We value our working relationship and regret any inconvenience this delay may have caused. Sincerely, [Your Name] [Title]
Strategy Tip: Even when paying in full, you may be able to negotiate away penalty fees by showing good faith and prompt resolution. Many contractors will waive late fees to preserve the relationship.
Strategy 2: Partial Payment with Itemized Dispute

When to use: Some invoices are valid, but others are disputed due to scope, quality, or authorization issues.

[Your Company Letterhead] [Date] [Contractor Name] [Address] Re: Partial Payment and Disputed Invoices Dear [Contractor Name]: We received your demand letter dated [date] claiming $[total amount] in unpaid invoices. We have completed our review and are prepared to make a partial payment while addressing certain disputed items. UNDISPUTED AMOUNTS – PAYMENT ENCLOSED The following invoices are valid and are being paid today in the total amount of $[amount]: • Invoice #[X] dated [date]: $[amount] – [brief description of work] • Invoice #[Y] dated [date]: $[amount] – [brief description of work] DISPUTED AMOUNTS We dispute the following invoices for the reasons stated below: 1. Invoice #[A] - $[amount] – [Project Name] Reason: This work was outside the scope defined in our Statement of Work dated [date], Section [X]. The SOW explicitly limited deliverables to [describe scope]. Your invoice includes [X hours/items] for [describe out-of-scope work], which was neither authorized nor covered by our agreement. Supporting Documentation: See attached SOW with highlighted scope limitations and email dated [date] where you proposed this additional work as a separate engagement. 2. Invoice #[B] - $[amount] – [Deliverable Name] Reason: These deliverables did not meet the acceptance criteria set forth in Section [Y] of our agreement. Specifically, [describe deficiencies: functionality issues, missing features, quality problems]. We notified you of these deficiencies on [date] and [date], requesting corrections. As of today, the work has not been brought into compliance with contract specifications. Supporting Documentation: See attached acceptance testing checklist with failed items marked, and email correspondence documenting deficiency notices. 3. Invoice #[C] - $[amount] – [Additional Work] Reason: Our agreement requires that all changes to scope be approved in writing via a signed change order (Section [Z]). While we acknowledge that verbal discussions occurred regarding this potential additional work, no written change order was ever executed. Pursuant to our agreement, work performed without an approved change order is not compensable. Supporting Documentation: See attached change order provision and complete file of all executed change orders (none of which cover the work in Invoice #[C]). TOTAL DISPUTED: $[amount] We remain open to discussing these disputed items. If you believe you have documentation that supports your position on any of the disputed invoices, please provide it and we will review. Alternatively, we are willing to discuss a reasonable resolution. Please confirm receipt of the $[payment amount] being sent today. Sincerely, [Your Name] [Title] Enclosures: [List all supporting documents]
Legal Effect: This approach accomplishes three goals: (1) demonstrates good faith by paying undisputed amounts, (2) creates a clear record of your defenses for disputed amounts, and (3) shifts burden to contractor to prove their disputed claims.
Strategy 3: Full Denial with Counterclaim Reservation

When to use: The claim is substantially or entirely meritless, and you have potential damages from the contractor's breach.

[Your Company Letterhead] [Date] [Contractor Name] [Address] Re: Response to Demand Letter Dated [Date] Dear [Contractor Name]: We are in receipt of your demand letter dated [date] claiming $[amount] in allegedly unpaid invoices. After thorough review of the contract, project records, and applicable law, we categorically deny your claims for the following reasons. NO ENFORCEABLE CONTRACT FOR CLAIMED WORK [Option A – No written agreement:] Your demand references work allegedly performed between [dates]. However, our Master Service Agreement dated [date] expressly requires that all projects be authorized via a written and fully executed Statement of Work (Section [X]). No SOW was ever executed for the work you describe. Accordingly, there is no enforceable contract requiring payment. [Option B – Work outside scope:] The work described in your invoices falls entirely outside the scope of our Statement of Work dated [date]. That SOW limited deliverables to [describe]. Your invoices claim payment for [describe out-of-scope work]. This work was neither requested nor authorized, and we derive no benefit from it. [Option C – Failed acceptance:] Our agreement conditions all payments on successful completion and acceptance of deliverables per Section [Y]. The work you invoiced failed to meet the acceptance criteria for the following reasons: [itemize deficiencies]. We provided formal notice of rejection on [date] and offered you an opportunity to cure, which you declined. Payment is not due for work that fails acceptance. CONTRACTOR'S MATERIAL BREACHES Additionally, you materially breached our agreement in the following respects: • [Example: Late delivery – "You failed to deliver the final project by the [date] deadline specified in Section [X], causing us to miss our client launch date and incur $[X] in damages."] • [Example: Defective work – "The code you delivered contained critical security vulnerabilities that required $[X] to remediate through a third-party vendor."] • [Example: Confidentiality breach – "You disclosed our confidential project information to [third party] in violation of Section [Z], causing competitive harm."] We reserve all rights to pursue claims against you for these breaches, including but not limited to damages, return of any payments already made, and attorney fees as provided in our agreement. NO AMOUNT IS OWED For the foregoing reasons, we owe you nothing under the contract or applicable law. If you disagree, please provide specific documentation supporting your legal entitlement to payment, including: 1. The specific contract provision obligating us to pay for the work claimed 2. Evidence that the work met all contractual requirements for payment 3. Evidence that you complied with all preconditions to payment (invoicing requirements, deliverable acceptance, etc.) We trust this matter is now closed. However, if you proceed with litigation, we will vigorously defend and assert all counterclaims available to us. Sincerely, [Your Name] [Title]
Risk Warning: This aggressive approach closes the door to amicable settlement and may provoke immediate litigation. Only use this strategy when: (1) you are confident in your defenses, (2) you have documentation to support your position, and (3) you are prepared for the time and expense of litigation.
Strategy 4: Settlement Offer

When to use: You want to resolve the dispute quickly and economically, even if you could prevail in litigation.

[Your Company Letterhead] [Date] [Contractor Name] [Address] Re: Settlement Proposal – Invoice Dispute Dear [Contractor Name]: We have reviewed your demand letter dated [date] regarding $[amount] in disputed invoices. While we believe we have substantial defenses to your claims [optional: "as detailed in the enclosed analysis"], we recognize that litigation would be costly and time-consuming for both parties. In the interest of resolving this matter efficiently and preserving our professional relationship, we propose the following settlement: SETTLEMENT TERMS 1. Payment: We will pay you $[settlement amount] in full settlement of all claims related to the invoices dated [date range] and any other claims arising from our contractual relationship through today's date. 2. Mutual Release: Upon our payment, you agree to release us from any and all claims, known or unknown, related to our contractual relationship. We will similarly release you from any counterclaims we might assert. 3. Confidentiality: Both parties agree not to disclose the terms of this settlement to any third party except as required by law or to our respective accountants and attorneys. 4. No Admission: This settlement is a compromise of disputed claims and does not constitute an admission of liability by either party. This offer is contingent on your execution of a mutual release and settlement agreement in a form acceptable to both parties. The offer expires on [date – typically 14 days], after which it is withdrawn and we will evaluate all available defenses and counterclaims. If you wish to accept this proposal or discuss modifications, please contact me at [phone/email] by [date]. Sincerely, [Your Name] [Title]
Settlement Negotiation: Your initial settlement offer should typically be 40-60% of the claimed amount (adjusted based on the strength of your defenses). Expect the contractor to counter, and be prepared to negotiate toward a middle ground. Most disputes settle between 50-70% of the original demand.
Strategy 5: Ignore (High Risk)

When to use: Almost never. Ignoring a demand letter is generally inadvisable.

Risks of Ignoring a Demand Letter:
  • Default judgment: If contractor sues and you don't respond, they can obtain a default judgment for the full amount plus fees
  • Mechanics lien: In some jurisdictions, contractors can file liens against your property even before suing
  • Waiver of defenses: Silence may waive certain defenses or be used as evidence of admission
  • Escalation: Contractor may interpret silence as bad faith and pursue maximum damages
  • Attorney fees: Your contract may require you to pay contractor's attorney fees if they prevail, which increases with litigation

The ONLY scenarios where ignoring may be appropriate:

  • The demand is clearly a scam from someone you never hired
  • The statute of limitations has run and the claim is time-barred
  • The contractor has no legal standing (wrong party, assignment issue, etc.)

Even in these cases, a brief denial letter is safer than silence.

⚠️ Risk Management: Avoiding Pitfalls

When responding to a contractor payment dispute, several common mistakes can turn a manageable dispute into a costly legal nightmare.

Risk Point 1: Defamation and Tortious Interference

While defending against a payment claim, you may be tempted to publicly criticize the contractor or warn others about them. This is dangerous.

Defamation Red Flags – DO NOT:
  • Post negative reviews: Posting a review on Google, Yelp, or Upwork saying "This contractor is a scammer who does shoddy work and then tries to extort payment" can be actionable defamation
  • Blast email industry contacts: Sending a group email warning colleagues about the contractor can constitute tortious interference with business relations
  • Social media attacks: Tweeting or posting about the dispute can create evidence of malice and increase damages
  • Contact their other clients: Reaching out to the contractor's other clients to "warn" them can be tortious interference

What you CAN do:

  • Truthful, factual statements in legal documents: Statements made in court filings, demand letters, or settlement negotiations are generally privileged
  • Private communications with counsel: Discussing the dispute with your attorney is protected by attorney-client privilege
  • Truthful review if requested: If the contractor's profile on a platform requests feedback, you can provide truthful, factual feedback (e.g., "Project was not completed per contract specifications" is safer than "This person is a fraud")
Safe Harbor: Stick to objective facts, avoid inflammatory language, and don't make statements you can't prove. "The deliverables did not meet our acceptance criteria" is defensible. "This contractor is incompetent and a thief" is defamation waiting to happen.
Risk Point 2: Extortion and Bad Faith Threats

If the contractor's demand letter includes threats to harm your business unless you pay, they may have crossed into extortion territory.

Red flags that may constitute extortion or bad faith:

  • "Pay within 48 hours or I will post this dispute on social media and destroy your reputation"
  • "If you don't pay, I'll report you to the BBB, FTC, and every review site I can find"
  • "Pay me $X or I'll contact all your clients and tell them you're a scam"
  • "I'll go to the press/media if you don't settle"
  • "Pay me or I'll file a criminal complaint with the police/DA"
Borderline Threats (Legal but Aggressive):
  • "If not paid within 10 days, I will pursue all legal remedies including filing a lien and lawsuit"
  • "Failure to pay may result in additional interest and attorney fees under our contract"
  • "I will report this debt to credit agencies if not resolved"

These are generally lawful threats of legal action, even if aggressive in tone.

If you receive an extortionate threat:

  1. Document it: Save the communication exactly as received
  2. Consult an attorney immediately: Extortion is criminal; you may have grounds for a police report or counterclaim
  3. Do not negotiate under duress: Paying in response to threats can be used as evidence of the threat's effectiveness
  4. Consider reporting: In egregious cases, report to local law enforcement or state bar (if demand is from an attorney)
Risk Point 3: Intellectual Property Leverage

A common tactic in freelance disputes is for the contractor to claim they retain IP rights until paid in full.

The contractor's threat: "I own the copyright to the logo/code/content I created for you. If you don't pay, you're infringing my IP and I'll file a DMCA takedown / send a cease and desist."

Your defense depends on the contract:

Contract Language IP Ownership Contractor's Leverage
"Work for hire" provision You own the IP from creation; contractor never had ownership Contractor has no IP leverage; threat is baseless
"Assignment upon payment" provision Contractor owns IP until you pay; then ownership transfers Contractor can withhold deliverables or threaten infringement claim
"Assignment upon final payment" provision You own IP from creation, but contractor has a security interest until paid Moderate leverage; depends on jurisdiction
No IP provision (silent) Depends on jurisdiction; may be work for hire by default if contractor is employee-like Ambiguous; both parties have risk
Work-for-Hire Safe Harbor: If your contract includes language like "All work product shall be considered a work made for hire under U.S. copyright law, with ownership vesting in Client upon creation," you own the IP regardless of payment status. The contractor cannot use IP ownership as leverage.

If contractor threatens IP withholding:

  • Review your contract immediately: Determine who actually owns the IP
  • Demand delivery if you own IP: If contract provides for work-for-hire, the contractor's retention is conversion/theft
  • Stop using disputed IP if contractor owns it: Using IP you don't own is infringement, even if you believe you'll eventually own it after payment
  • Negotiate a license pending resolution: "We dispute the payment claim, but to avoid business disruption, we propose a temporary license to use the deliverables pending resolution"
Risk Point 4: Mechanics Liens and UCC Filings

In some jurisdictions and contexts, contractors may be able to file liens against your property or UCC financing statements to secure their claim.

Mechanics Liens (Construction/Improvement Work):

  • If the contractor performed work that improved your real property (e.g., construction, installation, design of building improvements), they may be able to file a mechanics lien
  • Mechanics liens attach to the property and can prevent sale or refinancing until resolved
  • Most states require notice within a strict timeframe (30-90 days after work completion)
  • You can often bond around a lien (post a bond to release the lien while disputing the claim)

UCC Filings (Personal Property):

  • Less common, but some contractors may file a UCC-1 financing statement claiming a security interest in deliverables
  • This is typically only valid if your contract grants a security interest
  • You can challenge fraudulent or unauthorized UCC filings
If a lien is filed against your property:
  1. Obtain a copy of the lien filing and review for procedural defects
  2. Consult a real estate or construction attorney immediately
  3. Determine if you can bond around the lien or if you must pay into escrow
  4. File a lien release bond or challenge the lien's validity if appropriate
  5. Consider expedited settlement to clear title if you need to sell or refinance
Risk Point 5: Attorney Fee Shifting

Many freelance contracts include attorney fee provisions that can dramatically increase your exposure.

Typical attorney fee clauses:

"In any dispute arising under this Agreement, the prevailing party shall be entitled to recover reasonable attorney fees and costs."

Strategic implications:

  • If you're clearly right: Attorney fee provisions favor you; the threat of paying your fees may deter contractor from suing
  • If liability is uncertain: Both parties face risk; this often drives settlement
  • If you're likely wrong: You may owe not only the principal amount but also the contractor's attorney fees, which can double or triple your exposure
Fee Shifting Reality Check: A $10,000 invoice dispute can balloon into $30,000+ if it goes to trial and you lose (principal + interest + your attorney fees + their attorney fees). This math usually makes settlement the economically rational choice, even when you believe you'd ultimately prevail.
When to Involve Counsel

Immediate attorney involvement if:

  • Claim exceeds $25,000
  • Contractor has filed or threatened a lawsuit, lien, or arbitration
  • Contractor is represented by an attorney
  • Contract has mandatory arbitration or pre-suit procedures you must follow
  • Claim involves IP disputes, trade secret allegations, or regulatory issues
  • You intend to assert substantial counterclaims
  • Contractor threatens criminal complaints, defamatory statements, or regulatory action

Consider attorney consultation if:

  • Claim is $10,000-$25,000 and you're unsure of your defenses
  • Contract is ambiguous or silent on key issues
  • You need help drafting a response that preserves all defenses
  • Settlement negotiations are stalled

Probably can handle yourself if:

  • Claim is under $10,000
  • Your contract clearly supports your position
  • Contractor has provided no credible documentation
  • You're comfortable with small claims court if it comes to that
⚖️ How I Help Clients Respond to Contractor Disputes

I represent businesses and clients facing payment demands from freelancers, agencies, and contractors. My goal is to resolve these disputes efficiently and economically while protecting your legal rights.

Services I Provide
📋 Contract Analysis & Defense Strategy
  • Review all contracts, emails, and project documentation
  • Identify defenses, offsets, and counterclaims
  • Assess litigation risk vs. settlement value
  • Develop response strategy aligned with your business objectives
✍️ Response Letter Drafting
  • Draft tailored response preserving all legal defenses
  • Itemize disputes with supporting documentation
  • Assert affirmative defenses and counterclaims where appropriate
  • Set strategic tone (firm denial vs. settlement-oriented)
🤝 Settlement Negotiation
  • Negotiate directly with contractor or their counsel
  • Develop creative settlement structures (payment plans, mutual releases, IP licenses)
    • li>Draft settlement agreements that fully resolve all claims
  • Minimize business disruption and reputational risk
⚖️ Litigation Defense
  • Defend lawsuits in state or federal court
  • Handle arbitration proceedings
  • File counterclaims for contractor breaches
  • Challenge mechanics liens and fraudulent UCC filings
Why Clients Choose Me
  • Business-first approach: I focus on your business objectives, not just legal rights. Sometimes paying a questionable claim is smarter than spending 10x in legal fees to fight it.
  • Industry experience: I understand the freelance and agency ecosystem, including platform disputes (Upwork, Fiverr, Toptal), common contract gaps, and industry practices.
  • Efficient resolution: Most contractor disputes can be resolved through a well-crafted response letter or brief negotiation. I don't over-lawyer simple cases.
  • Litigation readiness: When settlement isn't possible, I have extensive experience defending contract disputes through trial and appeal.
Facing a Contractor Payment Demand?
Get a strategic evaluation of your case. I'll review the demand, your contract, and your options—typically within 48 hours.
Email owner@terms.law
Typical Engagement Models

Demand Letter Response (Fixed Fee): For straightforward cases where you need a response letter drafted, I typically offer a fixed fee covering contract review, response drafting, and one round of revisions.

Dispute Resolution (Hourly): For cases requiring negotiation, discovery, or ongoing strategy, I work on an hourly basis with transparent billing and regular updates.

Litigation Defense (Hybrid): For cases that proceed to litigation or arbitration, I typically use a combination of flat fees for discrete tasks (filing answer, motion practice) and hourly billing for discovery and trial prep.

Frequently Asked Questions
You should almost always respond in some fashion. Ignoring a demand letter can result in: (1) a default judgment if the contractor sues, (2) waiver of certain defenses, (3) a mechanics lien being filed against your property, and (4) escalation to litigation. Even if the claim is completely meritless, a brief denial letter is safer than silence. The only exception is if the demand is clearly a scam from someone you never hired.
No. The contractor's unilateral deadline has no legal force. Your payment obligations are governed by the contract terms, not their demand letter. That said, you should respond within a reasonable time (typically 10-14 business days) to show good faith and avoid giving them grounds to claim you're ignoring the dispute. You can acknowledge receipt and request time to investigate, which is standard practice.
It depends on the type of work. If the contractor performed work that improved your real property (construction, installation, architectural/engineering services, etc.), they may have mechanics lien rights in most states. However, if the work was purely digital (software development, graphic design, content writing) with no connection to real property, mechanics liens typically don't apply. If a lien is filed, you have options to challenge it, bond around it, or pay into escrow while disputing the underlying claim.
It depends entirely on your contract. If the contract includes a "work for hire" provision, you typically own the copyright from creation, regardless of payment. If the contract says ownership transfers "upon payment" or "upon final payment," then the contractor may retain ownership until you pay. If there's no written agreement, it depends on the nature of the relationship and applicable copyright law—but the contractor likely has a colorable claim to ownership. Review your contract's IP provisions carefully, and if the contractor owns the IP, avoid using it until the dispute is resolved or you negotiate a license.
Use the platform first. Upwork, Fiverr, Toptal, and similar platforms have built-in dispute resolution processes that are typically faster and cheaper than litigation. The platform's Terms of Service likely require you to use their process before pursuing external legal action. Initiate a dispute through the platform, provide your documentation, and let the platform mediate. Only if the platform process fails to resolve the issue should you consider direct negotiation or litigation. Responding directly to a demand letter while a platform dispute is pending can complicate matters.
Potentially, yes. If the contractor materially breached the contract by delivering defective work, you may have a right to offset your damages (the cost of correction/replacement) against amounts you owe. However, you need to establish: (1) the work failed to meet contract specifications, (2) you provided notice of the deficiency and opportunity to cure (if required by contract), and (3) you incurred actual damages to fix the problem. Document everything: the deficiencies, your notice to the contractor, the contractor's response (or lack thereof), and the cost to remediate. Offset rights vary by jurisdiction and contract terms, so consult an attorney before unilaterally withholding payment based on offset.
Sometimes, yes. Even if you're confident you'd win in court, litigation is expensive, time-consuming, and unpredictable. If the contractor is demanding $15,000 and you'd spend $20,000 in attorney fees to fight it, settling for $7,000-$10,000 may be the economically rational choice. Factors to consider: (1) litigation costs vs. settlement amount, (2) your time and distraction from business, (3) reputational risks of public dispute, (4) strength of your defenses vs. uncertainty of litigation, and (5) whether the contractor has attorney fee recovery rights. Many businesses adopt a "nuisance value settlement" approach for small claims, paying 30-50% to make the problem go away.
No, that's likely extortion or blackmail, which is illegal. Threatening to harm someone's reputation unless they pay money is a crime in most jurisdictions. Document the threat immediately (screenshot, save email, etc.) and consult an attorney. You may have grounds to: (1) report the conduct to law enforcement, (2) seek a restraining order, (3) file a counterclaim for attempted extortion, or (4) report the contractor to their professional licensing board or freelance platform. Do not negotiate or pay in response to threats—that only reinforces the behavior and can be used as evidence that the threat was effective. However, distinguish between illegal threats ("Pay or I'll destroy you online") and legal warnings of consequences ("If not paid, I will pursue all legal remedies including filing a lawsuit").
Hire an attorney if: (1) the claim exceeds $25,000, (2) the contractor has already filed a lawsuit or lien, (3) your contract has mandatory arbitration or procedural requirements you must follow, (4) the dispute involves IP, trade secrets, or other complex legal issues, (5) you have significant counterclaims, or (6) the contractor is represented by counsel. You can likely handle it yourself if: (1) the claim is under $10,000, (2) your contract clearly supports your position, (3) you're comfortable negotiating and potentially going to small claims court, and (4) there are no complex legal issues. For claims in the $10K-$25K range, consider an initial attorney consultation to assess your options, then decide whether to hire full representation or handle it yourself with some legal guidance.
Next Steps: If you've received a payment demand from a contractor, gather your contract, invoices, emails, and any other documentation, then reach out to discuss your options. I offer a streamlined case evaluation to help you understand your exposure and the most cost-effective path forward.

Contact: owner@terms.law