Can you withhold payment for unfinished software work?

The dispute before the court

A Hong Kong reseller sold a UK supplier’s system in Asian markets. It alleged failures to develop and localise the software. The supplier claimed monthly user-account fees. The dispute connected promised functionality and expected sales income with payment obligations that had already arisen.

Court and date

High Court, Technology and Construction Court, England and Wales. 13 October 2023.

Decision

[2023] EWHC 2506 (TCC), Mrs Justice Joanna Smith. Summary judgment, without a full trial.

Reseller’s original claim

Approximately USD 312.7 million. This was the amount claimed, not an award.

Appeal permission

Refused by the judge on 13 October and the Court of Appeal on 7 December 2023: the 2024 judgment, paragraphs 11 and 13.

Outcome

The supplier was awarded USD 212,105 and THB 15,517,413, interest and legal costs. The reseller’s claim for direct costs remained to be considered.

At this stage, the court assumed the alleged breaches were capable of proof at trial. It did not find that the supplier had committed them. The question was whether the contractual wording allowed the claims to proceed. Paragraph 81.

Three provisions that shaped the outcome

1. Payment without withholding or set-off

Clause 8.10 required full payment without withholding, deduction or set-off. The court applied it and gave judgment on the supplier’s counterclaim. A reference to taxes within the clause did not narrow the general prohibition. It also covered equitable set-off: the reseller could not use its claim to reduce the amounts payable. Paragraphs 130–135.

The negotiation question is which objections may affect the next payment. Dissatisfaction with the product, an incorrect invoice and a damages claim should not be bundled into one vague provision. Each needs a process and supporting evidence.

2. Excluded losses and surviving claims

Clause 16.2 excluded lost profits and expenditure incurred in reliance on the agreements. The court dismissed the reseller’s claim except for direct costs of carrying out development itself. Recovery remained to be determined, as did the relevant contractual cap. Paragraphs 127–129.

Negotiating only the headline liability cap therefore leaves part of the work undone. Consider several possible consequences: another developer’s fees, repeat configuration, data migration and commitments to your own customers. For each, check the basis of the claim, exclusions and cap. Similar spending can receive different treatment depending on why and when it was incurred.

3. Why the standard-terms argument failed

The parties had materially changed other provisions. The standard-terms argument therefore failed even though the no-set-off and exclusion clauses had not themselves been negotiated. The court did not reach the reasonableness test under the argument advanced under the Unfair Contract Terms Act 1977 (UCTA). Paragraphs 44–55.

Keep drafts and the negotiation record. They show what changed and which risks were discussed. Do not assume that a minor edit automatically removes statutory protection. The applicability of UCTA and the particular ground relied on require separate analysis.

How the dispute developed

1. 2017 and 2019. The parties entered into two agreements covering different territories.
2. October and December 2023. The supplier obtained judgment on its counterclaim; permission to appeal was refused.
3. March 2024. The judgment debt remained unpaid: USD 212,105 and THB 15,517,413, interest and legal costs. The court extended the full-payment deadline to 1 June 2024, with an unless order putting the remaining claim at risk of being struck out.

[2024] EWHC 580 (TCC), paragraphs 9–13, 33 and 55.

Three payment models to negotiate

These are options for allocating risk. They need to work with acceptance, defect correction, liability and termination provisions.

A customer may prefer the second option to a complete prohibition. A supplier will want withholding tied to a specific amount and a clear reason. Check whether one dispute could interrupt all payments or the entire service.

Why Soteria produced a different payment analysis

In Soteria v IBM, the contract allowed a good-faith invoice dispute to be notified within seven business days and the disputed amount to be withheld. The undisputed balance remained payable. Within that period, the customer’s accounts team said it could not accept the £2.9 million invoice without a purchase order number. The court treated the email as notice of a dispute: neither the word “dispute” nor activation of the separate dispute-resolution procedure was required. The customer’s position was wrong on the merits, but the court found it was held in good faith. IBM therefore could not terminate for non-payment of that invoice. [2022] EWCA Civ 440, paragraph 107 and paragraphs 125–145.

After addressing the damages claim and the contractual liability cap, the Court of Appeal held that £80.6 million was due to the customer. Paragraph 180.

A later set-off argument failed. It was distinct from the timely invoice dispute: paragraphs 154–160.

Seven days was a term of that contract, not a general statutory deadline. The comparison matters before signing: an agreed withholding right also needs to be usable by your team. Who receives invoices, checks them and sends notices? Where is the evidence of delivery kept?

What to check before a dispute

If you buy or resell software

• Connect the promised change to defined functionality, a deadline and acceptance criteria.
• Agree the consequences of delay: correction, price adjustment, replacement work or an exit right.
• Check which replacement costs can be claimed and which cap applies.
• Assign responsibility for invoices and notice deadlines. Agree a review period your team can meet.

If you supply software

• Separate recurring access fees from charges for a specific change.
• Define withholding grounds so the team can identify the undisputed balance.
• Agree how invoice errors are corrected and supporting records exchanged.
• Before suspending or terminating, check the ground, notices and any cure period.
• If you use standard terms, check separately whether section 3 of UCTA and its reasonableness requirement apply to the no-set-off clause and liability restrictions. For an international contract, the choice-of-law rules also matter.

This article concerns commercial contracts and decisions of the courts of England and Wales. A no-set-off clause does not settle every question about its effect in another transaction. For an international contract, the governing law and applicable statutory limits need separate consideration.

Sources

• Pinewood [2023] EWHC 2506 (TCC): paragraphs 44–55, 81 and 127–135.
• Pinewood [2024] EWHC 580 (TCC): claims, appeal permission, unpaid debt and payment deadline, paragraphs 4–13, 33 and 55.
• Soteria v IBM [2022] EWCA Civ 440: contractual procedure, paragraph 107; invoice dispute and termination, paragraphs 112 and 125–145; set-off, paragraphs 154–160; amount due, paragraph 180.

UK Supreme Court, UKSC 2022/0085: permission to appeal refused on 13 December 2022.

Sources checked on 28 October 2026.