Agreed. I had a project a couple years ago, just like this. Everything started off fine -- solid contract, good communication, etc. Payment was solid for the first few months, then it stopped. I was accused of putting together templates with no functionality behind them, and they demanded their money back. When I informed them where they could put their demands, so to speak, they threatened litigation. I had done the work and knew the contract was solid, but I couldn't have afforded a lawyer. Thankfully, they soon disappeared... But not before stealing their customers' funds. Ugh.
In retrospect, there were a few warning signs fairly early on, but it's hard to see that when you need the money to eat.
How much are we talking here? Many states have to be above $5 to 7.5 thousand to get lawyers involved out of small claims court. Also, many lawyers will do brief consultations on your case without charging you.
For future reference, don't back down when threatened with litigation. If it's actually a bullshit claim, they'll either settle out of court (on their own lawyer's recommendation) or they'll end up paying your lawyer for you when you win your case.
Hindsight is 20/20, but typically any sign that they're weird and irrational (trail of angry developers/no business model), or that they'll try and screw you out of a fair payment (won't do commencement payments) are a red flag.
Even if you can't afford a lawyer, I would have something along the lines of terms and conditions, what happens on non-payment (usually work stops), etc. The "Fuck you, pay me" is a pretty good introduction to the field.
For web design you'll have milestone payments on commencement, initial design (with a couple of rounds of changes), conversion to HTML (with no changes) and installation on the site. Payment terms are 7 days, or as short as you can get away with. If they need more changes than agreed, or they change their mind, then they pay the balance and you requote for the new work. If they decide not to use your work, then they pay the balance. If they delay on any part of the work (eg. won't provide content for six months) then they pay the balance and you do the work later on. You get the idea, I'm sure.
If they balk at any of your conditions without a good reason, that's usually a sign that they'll be trouble and that you'll need to keep them on a tight leash and/or handle them with kid gloves.
On the flip side, if they're a good client, good payer and you're happy to work for them, then give them a lot of leeway. But the deadbeats get held to the letter of the agreement.
Hehe. Reminds me of a former client (sorta) who would always wind up working for assholes. Everyone he had worked with turned out to be an asshole would couldn't do what he wanted. Turns out he was the asshole.
It's almost impossible for everyone else to be an asshole. It's like the old poker tip. If you look around the table and can't find the sucker, it's you. If you think everyone is an asshole, you're probably an asshole.
In retrospect, there were a few warning signs fairly early on, but it's hard to see that when you need the money to eat.