What Legal Actions Can You Take In Nigeria When a Client Owes You Money and Refuses to Pay?

TAG CHAMBERS | LEGAL INSIGHTS |

Commercial Litigation | Business Law | Debt Collection When a Business Deal Turns into a Debt Recovery Issue

 

Dr Funmi Olatoye

 

You have delivered the goods. You performed the services. You have fulfilled your contractual obligation. But at the time of payment, your customer suddenly goes off the radar. Promises are made at first: ‘I’ll pay next week.’ Then excuses are offered about late transfers, pending contracts, or temporary cash flow problems. Weeks turn into months, and what was once a simple business transaction becomes a frustrating quest to get your money back.

This is a familiar story of business owners in Nigeria. Outstanding commercial debts and unpaid invoices can have a major impact on a business’ financial stability. The consequences of customers not meeting their payment obligations are not just the loss of money in the immediate term. Companies may find it difficult to pay workers, meet operating costs, fulfil commitments to suppliers or finance new deals.

So the question is not only about whether someone owes you money, but also about what legal and effective measures you can take to recover it. Nigerian law provides several means to enforce contractual obligations and to recover outstanding debts, which is fortunate. The success of any recovery action, however, is often dependent on the type of transaction, the evidence available, the law applicable and the steps taken prior to the commencement of the proceeding. 

This article aims to discuss the practical considerations that may affect the successful recovery of an unpaid debt and the legal remedies available to creditors in Nigeria.

1.      Is the money legally recoverable?

Before you begin chasing a customer for money they owe you, it is important to ensure you are legally allowed to do so.

Commercial debt is when one party is obligated to pay another party a certain amount of money. Such obligations may arise from the provision of professional services, commercial loans, credit sales, contractual arrangements or other transactions creating a legally enforceable payment obligation. Let's take, for example, a business that sells construction materials worth ₦4 million to a customer, with the understanding that the payment will be made in 30 days. Materials are delivered and accepted. But the customer does not pay within the time allowed.

If a supplier is owed money and can show they are entitled to it they may be able to reclaim it, subject to the terms of the deal. But disputed payments are not automatically recoverable debts. The customer may dispute the amount claimed or may rely on defective performance or on terms of payment or other defences agreed under the contract.

Therefore, a proper legal assessment is necessary to identify the debtor, the basis of the obligation, the outstanding amount and whether the payment is legally due.
The issue is not whether money is owed, but whether the creditor can establish an enforceable right to payment.

2.     What happens when there is no written contract?

Many business owners ask if they can get their money back if they don’t have a contract. Lack of a written agreement does not necessarily mean that a claim for debt recovery is lost.

Under Nigerian contract law, contracts may be made by written or oral agreements or by conduct which shows the intention of the parties to create legal relations subject to any statutory formalities that may apply. For example, a supplier can get an order on WhatsApp, deliver the goods as per the order and then get a message from the customer confirming the pending payment. While there was never a formal contract signed, the parties’ communications and conduct may indicate that there was a binding commercial contract. Evidence suitable for this purpose may include invoices, purchase orders, delivery notes, receipts, evidence of bank transfer, emails, WhatsApp messages, acknowledgements of debt and evidence of partial payment.

The Evidence Act 2011 (as amended by the Evidence (Amendment) Act 2023) confers recognition to electronic records and prescribes the conditions for their admissibility. Therefore, electronic communications can be important evidence if the relevant legal requirements are met. But the use of informal communication only may give rise to problems of evidence. Rather than relying solely on screenshots, business owners should maintain dependable records of their transactions and preserve original electronic communications. Having a written contract is a good thing, but not having one doesn’t mean you can’t get your money back.

3.     Issue a Letter of Demand: The Initial Formal Step

A formal letter of demand is frequently the subsequent step when repeated payment reminders have been unsuccessful. A letter of demand is a written communication which requires the debtor to fulfil an outstanding obligation within a defined period.

Typically it will state the due date of payment, the parties, the transaction that created the debt, the amount outstanding, and the basis of the demand in the contract or law.
The letter may also threaten the debtor with legal action if payment is not forthcoming.
A demand letter is not itself a court judgement, but it performs a variety of important functions. It gives the debtor an early chance to resolve the dispute without going to court.

Secondly, it provides documentary proof of a formal demand for payment.

Thirdly, it may satisfy the pre-action requirements of the applicable court rules.
If the letter has been sent by a legal practitioner, it also indicates that the creditor has received professional advice and is prepared to consider appropriate legal remedies.
It is important to keep in mind that there is not a universally applicable demand time frame for all debt recovery matters in Nigeria. The appropriate period of time depends on the nature of the claim, the contract and any procedural requirements that apply.
For example, the Lagos State Practice Direction on Small Claims 2023 allows for the presentation of a letter of demand in Form SCA 1, giving the debtor 14 days to comply upon receipt.

A well-crafted demand letter should be professional, accurate, and firm. It shall not contain demands for sums of money which cannot be legally justified, unlawful threats or exaggerated claims.

4.     Can you negotiate instead of litigate?

Not every unpaid bill needs to go to litigation immediately. In some cases, alternative dispute resolution or negotiation may be more effective than contested court proceedings to achieve a commercially satisfactory outcome.

If a customer is in real financial hardship, they may be willing to work to a structured repayment arrangement. Mediation may also be used to resolve disputes between parties who disagree about the amount of the balance owing.

It is recommended that the terms of the negotiated settlement be clearly recorded.
A properly drafted settlement agreement should specify the amount admitted or agreed, the repayment schedule, the consequences of default and the mechanisms available for resolving any future disputes.

In Nigeria, the Arbitration and Mediation Act 2023 provides the statutory framework for mediation and arbitration. Under section 82(2), settlement agreements resulting from mediation are binding and enforceable, subject to the provisions of the Act.

Alternative dispute resolution can be especially useful where there is an intention of the parties to maintain a commercial relationship.

But negotiation should not be a never-ending process of accepting reiterated commitments. If a debtor repeatedly defaults, refuses meaningful engagement or appears to be dissipating assets, the creditor may need to consider formal legal proceedings.

The ultimate aim of debt recovery should be to recover the money legally and commercially and not to just start litigation.

5.     When do you take a customer to court?

Litigation may be compelled when informal efforts, formal demands, and reasonable opportunities to settle have been exhausted. A suit for recovery of debt may be instituted in a court of competent jurisdiction, in conformity with the rules of procedure applicable thereto.

The correct court will depend on the amount claimed, the type of transaction, the parties and the court’s territorial and subject-matter jurisdiction.

Small Claims Procedure in Lagos State.

For qualifying monetary claims, there is a possibly easier path to judicial recovery through the Small Claims Court.

The procedure is applicable to liquidated monetary claims not exceeding 5 million exclusive of interest and costs as provided for in Article 2 of the Lagos State Practice Direction on Small Claims 2023, subject to prior service of a letter of demand and satisfaction of the prescribed territorial requirements. A liquidated monetary demand is a debt the amount of which is fixed or can be calculated with certainty. For example, an unpaid invoice of ₦2.5 million may qualify if the sum is ascertainable and other procedural requirements are met.

The procedure also allows for applications for summary judgement in appropriate cases where, for instance, the creditor argues that no valid defence exists for the debtor. The Practice Direction anticipates that proceedings will be concluded within 60 days of filing, but this is a procedural objective and not a forecast as to the length of any particular case.

Not all commercial disputes can be dealt with in the small claims procedure. Claims above the applicable threshold, claims involving unliquidated damages and matters outside its jurisdiction may require proceedings in another competent court.

Other relevant court rules may also provide procedures for obtaining a judgement without a full conventional trial in the case of a debt which is proved by clear documentary evidence and the debtor does not have a substantial defence.

Therefore, before selecting the appropriate procedure, a careful assessment of the specific claim should be undertaken.

6.                 What if the debtor refuses to pay even after you have won the case?

Obtaining a judgement is a big legal win, but it does not guarantee the money will be paid voluntarily. If a debtor fails to comply with a court order to pay a specific sum, a creditor may take lawful enforcement measures.

Enforcement mechanisms under the Sheriffs and Civil Process Act and relevant Judgement (Enforcement) Rules may include garnishee proceedings and execution against qualifying property. Garnishee proceedings allow a judgement creditor to apply for an order attaching funds owned by the judgement debtor but held by a third party, usually a bank.

Another enforcement mechanism is the writ of fieri facias which may authorise the attachment and sale of specific property belonging to the judgement debtor so as to satisfy the judgement, subject to the governing legal requirements being met.

These procedures need to be performed in accordance with the applicable regulations and, where appropriate, the proper judicial orders. Payment is still due, and a creditor cannot take any property or access a customer’s bank account. It is equally important to realise that a successful judgement does not guarantee actual recovery. Enforcement can be highly dependent on the debtor’s financial situation, identifiable assets and legal limitations. It is therefore important that an effective debt recovery strategy should consider enforceability from the outset and not wait until after judgement.

7.     Could you please inform the police about the debtor?

It’s no wonder a debtor might be tempted to involve law enforcement authorities when they repeatedly promise to pay and don’t.

However, the Nigeria Police is not a debt collection agency. The fundamental difference between a criminal offence and a civil debt.

In Kure v Commissioner of Police (2020) LPELR-49378(SC), the Supreme Court reiterated the principle that the police should not be used to enforce purely civil contractual obligations.

The mere failure of a person to pay an ordinary commercial debt does not itself establish criminal liability.

If there is credible evidence of a specific criminal offence such as fraud or obtaining property by deception, a criminal investigation may be warranted. But the existence of an unpaid debt is not a substitute for proof of the ingredients of a criminal offence.
Therefore, business owners should not resort to threats of arrest, detention or criminal prosecution to force the payment of a civil debt.

The parties involved may face legal consequences, such as claims based on infringements of fundamental rights, if law enforcement powers are exercised in an inappropriate manner. The right thing to do is to ascertain what the transaction actually is in legal terms and pursue the remedy to which the facts entitle you.

8.    Can I charge interest on a debt that is unpaid?

Creditors frequently ask if they can collect interest on the original debt.
It is contingent upon applicable court rules, accepted commercial practices, statutes and contractual provisions.

The mere fact that a customer delayed payment does not mean that pre-judgement interest is automatically recoverable.

Usually, a claimant who wants to acquire such an interest must demonstrate a legally recognised basis, for example an express contractual term, an applicable statute, established mercantile usage or other legally recognised basis.

Interest awarded subsequent to a judgement is subject to the terms of the judgement, the rules of the court and applicable law. Thus it is suggested that businesses should have clear and legal clauses in their commercial agreements on the payment deadlines and late payment interest.

Likewise, creditors should obtain legal advice before applying heavy interest or penalties to an outstanding invoice without a corresponding right.

9.     Don’t Wait Until It Is Too Late: Limitation Periods Count

A valid claim may become legally unenforceable through court proceedings if the creditor allows the relevant statutory limitation period to lapse.
The time allowed to bring a claim will depend on the nature of the claim and where it is brought.

Actions founded on simple contracts are usually caught by the six-year limitation period under the limitation regimes operative in Lagos State and a number of other Nigerian jurisdictions.

Typically, the calculation involves determining the date the cause of action accrued, which is based on the contractual obligation and the circumstances necessitating payment. Rules differ depending on the type of claim and the legal context.

Creditors should be aware that repeated reminders, negotiations or new demand letters do not automatically restart or suspend the limitation period. The legal consequences of any such admission, part payment, compromise or other relevant fact shall be considered as per the applicable law. This shows how important it is to act quickly. If a business waits too long to recover, it may find that its legal options are severely constrained.

8.    How to protect your business from bad debts: Prevention is better than the cure.

Although legal remedies are available, it is usually more cost-effective to prevent avoidable payment disputes than to pursue recovery after a customer has defaulted.

Procedures for contracts and credit control should be clearly laid out for companies that offer goods and services on a deferred payment basis or extend significant credit.
Commercial agreements must state the parties to the contract, specify the goods or services to be supplied, state the agreed price and give a date for payment.

Businesses should also consider deposits, milestone payments, credit limits, guarantees, appropriate security arrangements and express dispute-resolution provisions where relevant. It is also important to keep exact records of the transaction.
An invoice is not the only document evidencing a commercial relationship. In the event of a dispute, it may be crucial to possess proof of the customer's order, acceptance of delivery, acknowledgement of completed services, and subsequent payment communications.

It may be wise to verify the customer's corporate identity, credit standing and authority to enter into the agreement for larger transactions. Creditors need to develop a consistent process for the escalation of persistent defaults and monitoring of overdue accounts. A business that acts quickly to resolve payment problems is generally better placed to protect its interests than a business that allows debts to remain outstanding for a long period of time.

Conclusion: You have legal rights, but your recovery strategy is critical.
An unpaid debt may place significant pressure on the organisation, particularly where the debt constitutes a substantial proportion of the business’s working capital.
However, if a customer refuses to pay, the loss is not borne by the creditor.
Nigerian law recognises contractual obligations and provides for enforcement of judgements and pursuit of qualifying debts.

The answer depends on the situation. A properly drafted demand letter or negotiated payment arrangement can resolve some disputes. Others require formal litigation, mediation or enforcement of judgements.

It is essential to follow a course of action that is legally sound, evidence-based and measured.

The most aggressively pursued debt recovery case is not necessarily the strongest one. Rather, the strongest case is backed by clear evidence, sound legal advice and an enforceable plan for recovery.

How TAG Chambers Can Assist

At TAG Chambers we know that unpaid debts are more than just accounting entries. These are funds that businesses count on to meet their obligations, continue their operations and grow.

Our commercial law and dispute resolution practice assists businesses, entrepreneurs and creditors in the legal assessment of outstanding debts, drafting of formal demand letters, negotiation of repayment arrangements, enforcement of judgements and debt recovery proceedings.

In addition, we give advice to businesses on contractual protections and commercial agreements which are designed to minimise payment disputes.

If your business has dealings with a client, contractor or commercial partner who has failed to meet a payment commitment, it is vital that you seek legal advice in time to understand what your options are and how to proceed correctly.

Please get in touch with TAG Chambers to discuss your debt recovery concerns and to explore the legal options open to you.

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Disclaimer: This article is for general informational purposes only and does not constitute legal advice regarding any particular transaction or dispute. The facts and jurisdiction will dictate the applicable law, rules of court and remedies available. Readers should seek the advice of an attorney before beginning any recovery or enforcement action.

Selected Legal References

·         Kure v Commissioner of Police (2020) LPELR-49378(SC)

·         The Evidence Act 2011 (as amended by the Evidence (Amendment) Act 2023).

·         Section 82 of the Arbitration and Mediation Act 2023

·         The Practice Direction on Small Claims before the Magistrates’ Courts in Lagos State, 2023.

·         Sheriffs and Civil Process Act, Cap S6, Laws of Federation of Nigeria 2004.

·         Applicable state statutes of limitations and rules of civil procedure.