Speaking from recent experience here it's clear there should be a nice guide to contracting...?
Firstly most of the replies here are right. LOL. So what do you do in these sticky situations?
When first approached by a client make it clear to them that you are the designer, they are the client. You would go to a builder ask him to build you a wall then go out there poking at the wall saying, "That's not how I would have built it, I want the wal like this"...etc...
We are the designers, make sure your relationship is like this from the start, outline the budget, timescales and scope of the project, without these three things its not a "Project" but an employment.
Once these factors have been established draft a service agreement, you will provide a "service" for a "fee", once that "service" has been fulfilled, the "fee" is payable. A service level agreement is a legally binding contract and once signed will stand up in court. Both parties must agree the terms.
In your SLA you lay out your commitments to the customer within the Budget, Timescale and Scope of the project. I at this point stagger payments to cover myself.
TOTAL VALUE OF PROJECT AGREED FIRST THEN SPLIT AND CHARGED BEFORE EACH PHASE LIKE SO:
Phase 1 - Design = 1/3rd of budget
Phase 2 - Hosting and Development = 1/3 of budget
Phase 3 - Testing / minor changes (non layout) = Final 3rd.
At each stage you show your client and they sign to agree they are happy. Then and only then you move to the next phase. If you are stuck in any phase due to customers not being happy, you recharge the phase, adding 1 3rd to the project value. I'd be happy to do 20 redesigns if they were worth £300 of a total £1000 project!
Add money on to the project for changes, additions, redesigns, movement of scope, movement of time and basically anything that means you need to work harder than originally agreed, at each CHANGE modify and resign the SLA!!!
If you client is saying they don't like the designs and won't pay for a redesign at this point you would have taken 1/3rd and won't care. If they want a redesign use this line that's always worked for me, "In my professional and experienced opinion the designs I have given you are the best available, if you choose to go against my decision fine, give me the designs you want me to copy and I'll move to phase 2, else I'll have to recharge phase 1. I can always copy designs for you but be warned I might not put those designs on my portfolio if they aren't to my high standards".
Usually they take your word for it, adjust your designs slightly and go ahead to phase 2.
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In your particular case OrangeCat, there isn't much you can do, give her her money back, it has cost you time and effort but you have learned a valuable lesson, NEVER work unless you have clearly marked out your boundaries first in writing!!!
Also re: PayPal, using PayPal is fine as long as you don't rely on it, also if I was you and I was using PayPal, I would ensure that you name Phase 1 - Design / Prototyping, that way you can always suggest there was no intention to build the designs and you were merely providing a design service which you were paid for.
(Is it not also Law in the US to use Email as evidence in cases like this? I think as long as you have emails showing whats gone on and provide PayPal a detailed report you should be fine.)
GOOD LUCK!!