Party Not Paying Under a Contract- Here is Your Legal Roadmap for Recovery

Imagine completing a project, delivering your work, and sending the invoice, only to be met with silence. Weeks pass, reminders go unanswered, and promises of payment remain empty. The frustration of not being paid for your efforts is all too real for many freelancers, small business owners, and service providers. If you are facing this challenge, there are clear steps you can take to recover what is owed to you.

Set a Realistic Deadline

The first step is to decide how long you are willing to wait. The often cited reason for delay in remittance is processing issues or disputes regarding the quantum of payment, quality of service rendered/ alleged defects in goods supplied. In some cases there is radio silence and no response at all to the multiple reminders sent for clearance of dues. It is important to set a firm deadline since under the Limitation Act, money recovery suits are generally subject to a three-year period from when the payment becomes due. The exact start of this period can depend on your contract terms, invoice date, acknowledgments of debt, or part payments. Waiting too long can weaken your legal position or even make it impossible to recover the amount in court.

If You Are a Registered Micro, Small or Medium Enterprise: Use MSME Samadhaan

If your business is registered under the Micro, Small and Medium Enterprises Development Act, 2006 and has a valid Udyam Registration, you have an additional legal remedy. For payments delayed beyond forty-five days from the acceptance or deemed acceptance of goods or services, you can approach the Micro and Small Enterprises Facilitation Council (MSEFC). This process is designed to help recover dues faster.

The Council first attempts conciliation between you and the defaulter. If conciliation fails, the matter moves to arbitration. The Arbitral Award is binding and enforceable, even if your original contract did not mention arbitration. Choosing this route means that civil court remedies are no longer available.

If You Are Not a Registered MSME or Do Not Opt for MSEFC

The next step is to send a formal legal demand notice. This is typically drafted by a lawyer and informs the defaulter that payment is overdue. The notice should give a specific period, usually seven to fifteen days, to pay the amount before legal action is initiated.

The notice should include:

• A brief summary of the facts

• A description of the goods or services supplied

• Invoice details

• The total amount due with a breakdown if necessary

• The final deadline for payment and legal consequences of non-payment

Pre-Litigation Mediation

For commercial or contractual disputes, pre-litigation mediation is generally required under the Commercial Courts Act, except in cases where urgent relief is sought. Non-payment of dues is usually not considered urgent, so mediation is often mandatory before filing a suit.

The process works as follows:

Mediation is initiated through a Mediation Centre attached to a court.

The Centre notifies the defaulting party to participate. While appearance is not mandatory, failing to appear is not seen favourably. In case the defaulting party does not appear, the mediation is closed as a non starter and you can proceed to file a civil suit for recovery of dues.

In case the defaulting party appears, a neutral mediator is appointed, who facilitates discussion between the parties to reach a mutually acceptable settlement.

During mediation, the three-year limitation period for filing a suit is paused. The proceedings are confidential, allowing parties to negotiate freely without concern that their statements will be used in court later.

If mediation succeeds, the agreement is recorded in a settlement document signed by both parties and the mediator, making it legally binding. If mediation fails, you can proceed to file a civil suit for recovery of dues.

Which Court to Approach

In Delhi, the appropriate court depends on the amount owed:

• Up to three lakh rupees: Civil Judge before District Court

• Three lakh rupees to two crore rupees: District Judge’s court

• Above two crore rupees: Delhi High Court under original jurisdiction

Documents You Will Need

Before taking legal action, gather all relevant documents like:

• Signed agreements or work orders

• Copies of invoices

• Emails or written communication regarding the work

• Proof of delivery of goods or services

The stronger your documentation, the higher your chances of success in court.

Consider a Summary Suit for Faster Recovery

If the debt is acknowledged in writing or involves a bounced cheque, you can file a Summary Suit under Order 37 of the Civil Procedure Code. This process is faster because the other party cannot contest the claim without court permission, which is only granted if they provide a valid defence. Summary Suits are especially useful when the defaulter is clearly avoiding payment but has no real defence.

Disclaimer:

Every case is different. What works in one situation might not work in another. This guide is meant to simplify the general process, but before taking legal steps, speak to a qualified lawyer who can guide you based on the specific facts of your case.