Creditors’ Rights, Remedies when Accounts Unpaid

Business relationships are built on trust. While handshake deals may no longer be the norm, the expectation that each party will act in good faith to fulfill their respective contractual obligations has only become more entrenched as written agreements have become more commonplace.

What, then, is to be done when one party attempts to avoid their contractual obligations?

Let’s look at a situation involving a customer that has recently refused to satisfy their accounts for services rendered. Previously, work has been done for this customer with no delay in payment. But on this occasion, the recent invoice is met with empty promises to pay while the customer pleads for accommodations during difficult times. This example is only becoming more ubiquitous in the context of the Covid-19 pandemic, which has disrupted businesses and business relationships alike.

Early and timely communication, setting out each party’s expectations, is critical to mitigating against this unfortunate situation. A clearly defined contract, which has been vetted by both parties (and their respective legal counsel), might set out in detail a customer’s obligation to pay even when times are tough and the amount of interest owed in the context of late payments.

Another potential way to clarify expectations is to bill regularly and not send sporadic accounts. This prevents the customer from feigning surprise, either by the bill itself or by an unexpectedly large amount (which could have otherwise been delivered more frequently in smaller sums as the project developed). Delivering regular accounts may also flag potential issues with payment, thereby preventing investing money and time in a customer that is otherwise unable or unwilling to pay for services rendered.

Should the need arise to commence collection proceedings, there are two primary legal considerations to consider.

First, why has the debtor refused to pay? And second, how long has the debt been outstanding?

Both would have implications for the merits of a claim.

As soon as such a situation arises, consult with a litigation lawyer who specializes in debt enforcement to obtain the appropriate and timely legal advice.

The legal process through which to potentially collect on an outstanding account is called an ‘action,’ which involves suing the debtor in court. The time and cost of getting an action before a judge depends in large part on how the debtor responds to a claim.

Those successful in obtaining judgment against a debtor are potentially entitled to claim back the amount owing plus a portion of legal fees. All litigation is costly and unpredictable, and the ultimate decision on entitlement to reimbursement will be with the presiding judge, assuming a settlement is not reached beforehand.

This brings to mind a final consideration: Is it practical to be able to collect on that judgment?

The enforcement of rights depends on the financial status of the debtor and a company’s status as a secured or unsecured creditor. If one of many unsecured creditors, there may be a lengthy and expensive litigation proceeding solely to obtain a paper judgment against the debtor. These very serious practical considerations should be considered when determining whether a lawsuit is in a company’s best interests or if it is first advisable to try and resolve the debt in a more amicable manner. This is especially so if the business relationship with this customer is valued and not worth the expense of sacrificing for the sake of whatever is owed on the existing accounts.

Jonah Waxman is a litigation associate at Lawrence, Lawrence, Stevenson LLP, a Burlington, Ont.-based law firm. He can be reached at [email protected].