How do I respond to client asking for retainer back?

After deciding on a list of requirements with a client and agreeing on a price, the client sent me 50% of the total before work was started, and we agreed the remaining was to be paid at delivery.

I did what I believe to be about 80% of the work, when the client decided he did not like my services and asked to cancel the order. To leave in good terms, I decided to send him the work I've done anyways and not ask for any extra payment.

However the client is asking me to reimburse the first 50% and threatening to use lawyers.

Am I wrong to ask to keep the initial payment? I did a lot of work, paid for products and services. I did not break anything in our arrangement and was following the requirements.

What should I do? I can't really afford a lawyer.

All of this depends on the wording of your agreement.

Let me make a couple assumptions:

• Your agreement did not include a clear process for cancellation
• Your agreement was with a company, not you as a person
• The amount of the retainer was less than $10,000 (or so)
• That you are located in the United States.
• That the agreement had an agreed upon jurisdiction for resolution of issues
• That you live in the location

If that is the case, then:

• Send him a letter telling him that you are sorry he was not happy with the work, and that you fulfilled your responsibilities under the terms of the agreement and that there is no option for a refund.
• Let him sue your company. You won't need a lawyer. It will go to small claims court. Go to court. If he tried to sue you rather than your company, make sure that you point out to the judge that you were not as a person a party to the contract, that your company was.
• File a counter claim for 50% of the remaining balance due.
• Bring the agreement. The work and documentation of all communications. Also include a complete financial registry which shows products and services paid for -- and your own compensation. Since you finished more than 50% your expenses should exceed that which he paid for. The amount over should be the amount of your counter claim.
• If he wins a judgement against your company, shut down your company and start over.

Of course -- if any of the assumptions are wrong-- then the advice may not be correct. Usually a client like this blusters-- but in the end doesn't move forward.

(Ask another question about how to avoid this situation in the future.)

This is an example why a contractor should always insist on getting paid by milestones. Establish at least 3 or 4 different milestones during the course of the project. This way, if they will have a hard time explaining in court that they were not happy with the entire project after having sent you several payments, also if you have to take a loss because client is fishy then it's not as much of a loss as 50% of the project.

I'd probably give the money back but be clear that you will sue for damages if they use the IP.

It is sunk cost. Nothing good can come out of this.

It is unlikely to come to "lawyers" if the amount is less than $7,000 or so. However, they may take you to small claims court. (if in the US) You'll likely win, but if it comes to that everyone loses anyway. It is a huge waste of time and effort and goodwill.

The energy should be spent on how to avoid this in the future.

Fix your policy or process or acceptance of clients so that it does not happen again.