An unpaid invoice can affect more than a business’s cash flow. When a customer or commercial partner fails to pay, the business may have to decide whether to continue providing services, extend more credit, negotiate payment terms or begin a formal recovery process.
Businesses in Canada and the United States may have several options for recovering overdue commercial payments, including payment negotiations, demand letters, mediation, arbitration and court proceedings. The available remedies depend on the agreement, the circumstances of non-payment and the law that applies to the transaction.
For companies operating across the border, recovering an unpaid invoice may also involve questions about jurisdiction, governing law, currency, service of legal documents and enforcement of judgments.
The starting point is to establish what is owed, why payment is overdue and what the parties agreed would happen if payment was not made.
An invoice records the amount a business is seeking to collect, but it does not necessarily establish every legal obligation between the parties.
The underlying agreement may determine when payment becomes due, whether payment depends on certain conditions, how disputes must be handled and what remedies are available following a breach.
Businesses should review purchase orders, service agreements, supply contracts, credit applications and any other documents forming part of the commercial relationship.
The relevant terms may address:
A customer may have agreed to pay within 30 days of receiving an invoice. Another contract may require the supplier to complete specified work or submit supporting documentation before payment is due.
Those differences can affect whether payment is legally overdue and which recovery steps are appropriate.
A signed contract is useful, but its absence does not automatically prevent a business from pursuing an unpaid invoice.
Depending on the circumstances, an enforceable agreement may be established through emails, purchase orders, quotations, accepted proposals, previous dealings or other communications showing what the parties agreed to.
For example, a business may have delivered products after receiving a purchase order, or provided services following written approval of a quotation. Delivery confirmations, correspondence and records of partial payments may help establish the contractual relationship.
The difficulty is often determining which terms were agreed upon. Without clear payment provisions, the parties may disagree about the due date, interest, scope of work or whether additional charges were authorized.
A business considering recovery should preserve the documents that explain how the transaction arose and what each party understood its obligations to be.
Payment terms provide the foundation for determining whether a commercial customer has breached an obligation.
A well-drafted agreement generally identifies when payment is due and what must happen before the customer is required to pay. It may also address disputed invoices, withholding rights, currency and the consequences of late payment.
Problems can arise when terms are unclear or inconsistent across documents. An agreement may say payment is due upon completion, while the invoice specifies 30 days. A purchase order may contain different conditions from the supplier’s standard terms. A business may also rely on payment practices established over several years.
When a dispute develops, these differences may need to be resolved before determining the amount recoverable.
For companies using standard contracts, clear payment terms can reduce uncertainty about future transactions and provide a better record if collection becomes necessary.
Interest may be recoverable on overdue commercial invoices, but businesses should not assume they can impose any rate simply by adding it to an invoice.
A contractual interest provision is generally more useful when it was properly incorporated into the parties’ agreement before the payment obligation arose.
In Canada, interest provisions may be subject to federal and provincial legislation, including the federal Interest Act, applicable criminal interest restrictions and rules governing particular transactions.
In Ontario, the Courts of Justice Act also addresses prejudgment and postjudgment interest. Whether interest is available, and at what rate, depends on the contractual terms, applicable legislation and circumstances of the claim.
U.S. rules vary by state and transaction. Some states impose restrictions on contractual interest or late fees, while statutory prejudgment and postjudgment interest may also be available in certain proceedings.
The distinction between contractual interest and court-awarded interest matters.
A business may have a contractual right to charge interest on an overdue amount, or it may seek interest as part of a legal claim. Those rights are not necessarily identical.
Before adding interest or collection charges to a demand, the business should confirm that the amounts are legally supportable.
A formal demand letter is often an important step before a commercial payment dispute proceeds to litigation.
The letter generally identifies the parties, the agreement, the amount claimed, the basis for payment and the action requested. Depending on the circumstances, it may also refer to interest, contractual remedies, disputed charges and a deadline for responding.
A demand letter serves several purposes. It provides a clear record of the outstanding claim, gives the debtor an opportunity to respond and may help determine whether the dispute can be resolved without court proceedings.
It can also reveal issues that were not apparent from earlier payment reminders. A customer may dispute the quality of delivered goods, allege incomplete services, question additional charges or claim that payment was made.
Those issues should be assessed before deciding whether to commence proceedings. A demand letter does not guarantee payment. Nor is it universally required before filing a commercial claim. Certain contracts or legal procedures may require notice or other preliminary steps, while others may not.
The wording should reflect the actual legal position rather than relying on threats or unsupported claims about the consequences of non-payment.
Commercial disputes do not always require immediate court involvement.
A business may decide that a negotiated resolution is commercially preferable, particularly where the customer acknowledges the debt but cannot pay the full amount immediately.
Possible arrangements include an agreed payment schedule, settlement of a disputed amount or other written terms addressing how the outstanding balance will be paid.
Any arrangement should identify the amount being paid, applicable deadlines, consequences of default and whether the agreement resolves the entire claim.
Businesses should also consider whether accepting partial payment or agreeing to revised terms could affect existing rights.
The parties’ financial circumstances matter as well. An agreement to pay in instalments may have limited value if the debtor lacks the resources to satisfy it.
Legal review can help clarify the consequences of a proposed settlement before the business agrees to compromise its claim.
Where payment remains unresolved, the contract may determine which dispute resolution process is available or required.
Mediation allows the parties to work with a neutral mediator to explore settlement. The mediator generally does not impose a binding decision. Mediation may be useful where there is a genuine disagreement about performance, payment calculations or the parties’ continuing commercial relationship.
Arbitration involves referring the dispute to a neutral decision-maker whose award is generally binding, subject to the applicable law and agreement. Some commercial contracts require arbitration rather than litigation.
Court proceedings may be appropriate when the debt is disputed, negotiations have failed or a formal judgment is needed.
The choice depends on the contract, value of the claim, location of the parties, available evidence, applicable legal rules and practical cost of recovery.
Businesses should confirm any mandatory dispute resolution requirements before commencing proceedings. Filing in the wrong forum can create additional expense and procedural complications.
For an Ontario business dealing with an unpaid commercial invoice, court proceedings may be available where the claim falls within the court’s jurisdiction and other legal requirements are met.
As of October 1, 2025, Ontario’s Small Claims Court has monetary jurisdiction over eligible claims of up to $50,000. Claims exceeding that amount may need to proceed in the Superior Court of Justice, although a claimant may be able to abandon the portion exceeding the Small Claims Court limit.
The amount claimed is not the only consideration. Businesses should also assess the legal basis of the debt, available evidence, applicable limitation periods and the likelihood of collecting after judgment.
In Ontario, the Limitations Act, 2002 generally establishes a two-year basic limitation period running from discovery of the claim, subject to applicable rules and exceptions.
The limitation analysis can become more complicated where payments are made in instalments, a debt is acknowledged, the breach is disputed or the transaction involves another jurisdiction.
Delaying recovery discussions for months or years without understanding the applicable deadline may affect the business’s ability to pursue legal proceedings.
In the United States, commercial debt recovery is governed by a combination of state contract law, applicable federal law and, for certain transactions involving goods, state enactments of the Uniform Commercial Code.
The distinction between goods and services can be important. For example, UCC Article 2 may govern certain commercial sales of goods. Section 2-709 addresses circumstances in which a seller may bring an action for the price, while section 2-725 provides a model four-year limitation period for contracts for sale, subject to the enacted state law and permitted contractual modifications.
Service agreements may be governed by different contract rules. U.S. states also have different procedural requirements, court thresholds, limitation periods and rules concerning contractual interest and recoverable legal fees.
A business seeking payment from a U.S. customer should therefore identify the relevant state and transaction rather than assuming that one federal rule governs every commercial invoice.
A collection process appropriate for an Ontario customer may require substantial changes when the debtor is located in New York, California, Texas or another U.S. jurisdiction.
Cross-border payment disputes can become more complicated when the supplier and customer operate in different countries.
A Canadian company may provide services to a U.S. business under a contract drafted by the customer. The invoices may be issued in U.S. dollars, the services may be performed remotely and the agreement may identify the laws and courts of a particular U.S. state.
If payment stops, the parties may disagree about where proceedings should take place.
Two contractual provisions deserve particular attention.
A governing law clause identifies the law intended to govern the agreement. It may affect how contractual obligations, remedies and interest provisions are interpreted.
A jurisdiction or forum selection clause identifies where disputes must or may be heard.
These clauses address related but different issues. Selecting Ontario law does not necessarily mean every dispute must be heard in an Ontario court. Likewise, choosing a particular court does not automatically determine every substantive law applicable to the transaction.
The enforceability and effect of these provisions depend on the applicable legal framework.
Where an agreement contains no clear governing law or jurisdiction provision, additional legal analysis may be required to determine the appropriate forum and applicable law.
Obtaining a judgment does not necessarily mean the business will receive payment.
If an Ontario business obtains a judgment against a U.S. customer, the next issue may be whether that judgment can be recognized and enforced in the state where the debtor has assets.
In the United States, recognition of foreign-country money judgments is generally addressed through applicable state law. Procedures and grounds for refusing recognition can differ by jurisdiction.
A creditor may need to bring proceedings to have the Canadian judgment recognized before using local enforcement mechanisms. The debtor may also have limited recoverable assets, be insolvent or dispute recognition on grounds permitted under the applicable law.
The reverse situation can also arise. A U.S. business with a judgment against a Canadian customer may need to seek recognition and enforcement in the relevant Canadian province.
Canadian courts apply rules governing foreign judgments, including principles addressing jurisdiction, finality and recognized defences.
Cross-border enforcement should therefore be considered before litigation begins. A business may have a supportable claim but face significant costs enforcing a judgment in another country.
International arbitration may be relevant where the parties agreed to arbitrate their commercial disputes.
Canada and the United States are parties to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Convention provides an international framework for recognizing arbitration agreements and enforcing qualifying foreign arbitral awards, subject to its requirements and available defences.
That may offer an enforcement route in appropriate commercial disputes. However, arbitration is not automatically simpler or less expensive than litigation. The value of the claim, arbitration rules, location of proceedings, arbitrator fees and other procedural requirements can affect its practicality.
The dispute resolution clause should be assessed in light of the transaction, particularly where the parties expect to operate in different jurisdictions.
Businesses sometimes assume that a successful recovery claim allows them to recover every cost associated with collecting payment.
That is not necessarily the case. Interest, legal fees and other collection expenses may depend on the contract, the governing law, the court or arbitral rules and the outcome of the proceedings.
Some agreements include provisions allowing recovery of reasonable collection costs or legal expenses following default. Whether those provisions are enforceable and how they operate depends on the applicable law.
Courts may also have discretion over costs and interest. A business considering formal recovery should assess the likely legal expenses against the amount outstanding and the debtor’s ability to pay.
A legally supportable claim may still require a commercial judgment about the most proportionate way to pursue payment.
Before escalating an overdue commercial invoice, businesses should clarify:
These questions can help the business distinguish a payment delay from a contractual dispute and determine whether formal recovery is appropriate.
Unpaid commercial invoices can be difficult to resolve when the parties have incomplete records, inconsistent payment terms or no clear process for handling disputes.
Businesses can reduce uncertainty by reviewing their contracts before transactions begin. Payment deadlines, interest provisions, acceptance requirements, dispute resolution procedures and cross-border jurisdiction clauses should reflect the way the business actually operates.
When payment becomes overdue, early legal review may help identify available remedies, preserve evidence and clarify whether negotiation, a demand letter or formal proceedings are appropriate.
For businesses operating in Canada and the United States, those decisions should also account for the cost and practical difficulty of enforcing a claim across borders.
Dealing with unpaid business invoices or reviewing payment terms for cross-border transactions? Pace Law Firm’s Corporate Commercial team can help businesses assess contractual payment rights, review recovery options and address the legal issues that may arise when commercial customers or partners fail to pay.
Depending on the agreement and circumstances, a business may pursue payment negotiations, issue a formal demand letter, use mediation or arbitration, or commence court proceedings. The appropriate option depends on the contractual terms, applicable law and nature of the dispute.
Interest may be recoverable if supported by an enforceable contractual provision or applicable law. Canadian and U.S. rules differ, and some interest rates or charges may be restricted. Businesses should review the agreement and relevant legal requirements before adding interest to a claim.
Not always. A contract or applicable procedure may require notice or other preliminary steps, but there is no universal rule requiring a demand letter before every commercial collection claim. A demand letter can nevertheless help clarify the debt and provide an opportunity for resolution.
Potentially. The appropriate court and governing law depend on the contract, the parties’ connections to each jurisdiction and applicable legal rules. A Canadian business should also consider where a judgment would need to be enforced.
Limitation periods depend on the applicable jurisdiction, type of agreement and when the claim arose or was discovered. Ontario generally has a two-year basic limitation period, subject to exceptions. U.S. limitation periods vary by state and transaction.
Possibly. Recovery of legal fees and collection expenses depends on the contract, governing law, applicable court or arbitration rules and circumstances of the claim. A business should not assume that every collection expense will be recoverable.
It may be possible to seek recognition and enforcement of a Canadian judgment in the relevant U.S. state. The process depends on that state’s law and the circumstances of the judgment. Recognition and enforcement are not automatic.
The appropriate process depends on the contract, claim value, evidence, location of the parties and likely enforcement requirements. Mediation may help parties negotiate a resolution, while arbitration or litigation may provide a binding determination. Neither process is necessarily preferable in every dispute.
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191 The West Mall, Suite 1100
Toronto, ON M9C 5K8
Phone: 1-877-236-3060
Fax: 416-236-1809