What to Do If Your Contract Partner Refuses to Pay Up

Effective debt collection practices are integral to operating a successful business...

Effective debt collection practices are integral to operating a successful business. In challenging economic conditions, it is even more important to ensure that you are not leaving money on the table. 

Breach of Contract Remedies

In most cases, your legal remedies depend on the circumstances of the unpaid debt and the terms of the underlying contract. Failure to make timely payments will generally be considered a breach of contract or default, so those are the provisions that will guide your recourse. Below are a few additional issues to review:

• Notification: The contract will likely specify how and when to notify the other party of the alleged breach. Even if not required, it is always wise to provide notification promptly and in writing.
• Opportunity to Cure: Contracts often allow the breaching party a reasonable amount of time to cure an alleged contract breach. While it may be frustrating to allow additional time to pay a debt, it can often lead to a successful resolution without the time and expense of legal proceedings. 
• Damages: In addition to recovering the cost of the good and services provided, the contract may also expressly provide for additional damages. For instance, liquidated damages are agreed in the contract between the parties and payable under specific circumstances.
• Mitigation: The non-breaching party often has an obligation to “mitigate” its losses, which may include re-selling goods/services to another party.
• Right to Terminate: A contract might include an express right to terminate if payment is not made on time. However, before electing to pursue this nuclear option, it is important to determine whether the other party plans to abandon the contract or has simply fallen behind on its payments.

Drafting a Demand Letter

A well-crafted demand letter can be an effective debt collection tool. In many cases, it can facilitate a successful resolution without the need for litigation.

In essence, a demand letter outlines the nature of the dispute and states that you are prepared to take legal action, should the other party fail to take appropriate action. The goal of a demand letter is to put the other party on notice of the claim, memorialize the nature of the dispute in writing, and encourage the other party to settle the matter without going to court.

In the case of a contract breach involving the failure to pay, your letter should provide a factual account of what happened, including dates upon which services/goods were provided, the dates upon which payment was due, and how much is outstanding and owed. Your letter should also detail the contract provisions that were violated and the remedies available under the contract.

To facilitate a resolution, the demand letter should also set forth how the other party can settle the dispute, such as paying a certain amount of money by a specified date. Providing a clear deadline helps ensure that you are not left wondering whether the other party is willing to negotiate or whether you should move forward with a lawsuit.

Pursuing Litigation

In some cases, litigation simply can’t be avoided. However, before filing a lawsuit, it is important to evaluate whether your legal expenses will be more than what the other party owes you. The financial condition of the other party is also relevant – is the company struggling financially or just seeking to avoid payment? You should also review the contract to determine if it requires mediation or arbitration.

Once you file a complaint, in certain situations, you may also be entitled to seek relief  in the form of a writ of attachment, which will allow you to place a lien on the defendant’s assets. If the other party provided collateral in the initial contract, you may even be able to obtain control over those assets.

Once served with breach of contract suit, the other party must respond within a certain amount of time. If they don’t, you can seek a default judgment, which allows you to seize the party’s personal and real property (land, equipment, lease interests, inventory, etc.) to satisfy the judgment.

How We Can Help

Given the many remedies that are available, it is essential that business owners consult with an experienced New York and New Jersey business attorney to determine the best approach. Scarinci Hollenbeck’s Creditor Collections Group has decades of combined experience in handling the myriad of financial and legal issues related to debt collection, ranging from simple demand letters to sophisticated business matters.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Ajoe Abraham, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.