Why you should send a letter of demand
With limited exceptions, a person is not generally obligated by law to send a letter of demand to demand payment of a debt owed. In other words, there is no common law provision demanding that a letter of demand is issued before legal proceedings can be commenced for the recovery of a debt.
However, there are some circumstances in which a creditor may be obligated to send a letter of demand before other legal avenues can be pursued. For instance, a debt may only be payable on demand, which means that a demand for payment must be issued before the debt is considered due and payable. In other circumstances, a contract or agreement between a creditor and a debtor may include a specific provision that creates an obligation on the creditor to first send a letter of demand to the debtor before the creditor will be entitled to commence legal proceedings. Thus, failing to send a letter of demand before pursuing the matter in court can be both detrimental and costly.
Even in circumstances where there is no legal obligation on a party to send a letter of demand, we often see that sending a letter of demand is the most efficient way to force a debtor to make payment of a debt in that it puts immediate pressure on a debtor to comply with a creditor’s demand without having to resort to arguably more expensive and time-consuming measures.
If you are involved in a dispute involving non-payment of a debt, it is important that you seek legal advice before proceeding with any form of legal action to ensure that you are not only pursuing the best course of action in the circumstances, but more importantly, to ensure that you comply with all your legal obligations as they relate to your individual situation.
Reasons for sending a letter of demand before commencing legal proceedings in debt recovery matters
Depending on the specific circumstances of your claim, there are a number of reasons you may wish to send a letter of demand before commencing legal proceedings for the recovery of a debt, such as:
- the debtor might not know exactly what is owing, or even be aware of the debt owed;
- the debtor may pay the debt immediately upon notice, or be willing to enter into a payment plan;
- the debtor may prioritise your debt or obligation over other debts owed;
- you may be able to use the letter of demand as evidence to support your claim in subsequent legal proceedings;
- the debtor may make admissions in their response (if a response is received);
- the debtor may dispute the debt owed (whether on legitimate or baseless grounds); and/or
- a letter of demand may assist your case in an order for costs if legal proceedings are commenced (by showing that the complainant has acted reasonably and attempted to resolve the situation).
Do I have to send a letter of demand?
The general rule at common law is that a debtor must seek out their creditor to pay them. This means that in most cases, you do not have a legal obligation to send a letter of demand.
However, there are some exceptions to this general rule, with the two most common exceptions being debts payable “on demand” and unknown debts.
Debts payable “on demand”
Some debts are only payable “on demand” (i.e. as and when payment is requested by the payee/creditor). This may be because there is no agreed date of payment, or because the parties have agreed that notice is to be given prior to any further action being taken. If a debt is payable on demand, the payee will generally be required to send some form of notice to the payer requesting payment before the debt is considered due and owing.
Unknown debts
A debtor generally needs to know the amount of a debt owed, or alternatively, be provided with a reasonable way to calculate the debt owed, before they can be expected to pay. For example, a debtor would generally have no realistic way to calculate their electricity bill without first being sent an invoice from the electricity provider noting the debtor’s electricity usage and tariffs. Without that invoice being provided, it would be unreasonable to expect the debtor to make payment to the electricity provider towards the unknown debt.
If a debtor is unaware of the exact amount of a debt owed, and the creditor holds information which may enable the debtor to reasonably calculate the debt, this is a good indication that a letter of demand should be issued before the creditor takes any further legal action for recovery. A judge is unlikely to look favourably upon a creditor who deliberately withholds material information relating to a debt owed which, if it had been disclosed to the debtor, may have otherwise avoided the need for legal proceedings altogether.
If neither the debtor nor the creditor is in a position to calculate the debt, it may be the case that there is no clear “debt” at all, and the party seeking to recover from another party may need to use a different cause of action in order to sue for compensation.
How do I send a letter of demand?
There are no standard rules in law as to how a letter of demand must, or should, be set out. However, some contracts may include provisions outlining how, what, and when notices are sent to the other party alerting them to a debt owed, which may be relevant. If there is no contractual clause that governs how the letter needs to be sent you may consider email or registered post. Email and registered post generally provide a way to know when the demand was received and who received it.
What should a letter of demand include?
Although there are no “standard” rules in law setting out the way in which a letter of demand must be structured or presented, a properly drafted letter of demand for payment of a debt will usually include the following information:
- the amount owed;
- why the amount is owed (e.g. unpaid invoice, money owing under a loan contract);
- how the amount has been calculated (either explain your calculations or provide the invoice);
- details of any promises of payment made by a third party;
- a time demanding when payment must be received by (usually 7 to 14 days); and
- what will happen if no payment or response is received.
When should I send a letter of demand?
It is common practice to issue a letter of demand after there has been no response to “friendly” reminders, and typically no earlier than 60 days after the debt becomes due and payable. This is because letters of demand can often be quite confronting.
For creditors looking to recover a debt from a debtor with whom they have an ongoing relationship (e.g. a supplier seeking to recover payment of an unpaid invoice from a customer that is likely to reorder with the creditor in the future), friendly reminders and a phone call to the debtor before sending a letter of demand may be the best course of action to preserve the relationship. If there is an ongoing relationship between the parties, aggressively pursuing a debt may cause more harm than good.
Even if a debtor is unlikely to provide a creditor with future business, it may be the case that payment of the invoice was simply missed or overlooked, in which case the debtor is more likely to appreciate an informal approach and being given the chance to remedy the missed payments rather than being served with an aggressive letter of demand threatening legal proceedings if the matter is not attended to immediately.
However, in circumstances such as where the parties are in dispute about the amount owed, where the debtor has refused to pay, where a debtor has made continual promises of payment that have not been fulfilled, or where a substantial amount of time has passed without any action being taken by the debtor in relation to a debt, a letter of demand can be a good alternative step to take prior to commencing legal proceedings – and if the letter results in the debtor paying up, which is often the case, it may save the need for the creditor to enter into long and costly legal proceedings or negotiations.
Types of letters of demand
There are many different types of letters of demand depending on the nature and complexity of the demand to be made. The most common types of letters of demand can generally be classified into three separate categories:
Letters for simple debts
Letters of demand for simple debts are generally quite short and simple and may simply state that a debt is owed and that payment of that debt has yet to be made, attaching the outstanding invoice for the debt. If the invoice does not fully particularise the source of the debt (e.g. the specific goods or services provided to the debtor causing the debt to be owed), this should also be included in the letter itself for clarity.
Letters for complicated debts
For complex debts where the amount owed cannot easily be calculated, a letter of demand generally needs to be a bit more comprehensive. To avoid confusion and unnecessary further conflict and delay, the letter should break down the total amount owed, as well as the method used to calculate the amount owed, so that the debtor may make an informed decision about the debt claimed and how to adequately respond to it.
Letters demanding compliance with contractual provisions
A letter of demand for specific performance of a contractual provision tends to be both longer and more complex than other types of letters of demand purely involving claims for payment of monetary debts. In the interest of limiting potential ambiguity, a letter of demand for specific performance should outline not only what provision of the contract or agreement the issuer of the letter (the claimant) claims that the defaulting party has failed to comply with, but also the obligations imposed on the defaulting party by that provision, the reasons the claimant considers the obligation has yet to be fulfilled by the defaulting party, and the exact steps required to be taken by the defaulting party to remedy the situation.
When should I get a lawyer?
If you find yourself in a situation where you are owed a debt that is relatively straightforward, and easily quantifiable, and the existence of the debt is unlikely to be disputed, the easiest thing to do may be to contact the debtor directly to request payment of the debt. It may simply be the case that the debtor has forgotten about the payment and would be happy to pay upon receiving a friendly reminder.
If, however, a debt owed to you is significant or particularly complex, the debtor is disputing the existence of the debt, you have already made multiple failed attempts to contact the debtor and the debtor has refused to pay, or alternatively where you seek to demand rectification of another party’s failure to comply with a specific obligation under a contract or agreement entered into, it may be time to seek legal advice to explore your legal options. Usually, a lawyer will be able to draft a professional letter of demand for a small, fixed fee – a worthwhile investment in many circumstances because the receipt of an official legal letter on a law firm’s letterhead may simply be all the persuasion a debtor needs in order to pay.
Example letter of demand
Although there are unlimited ways in which a letter of demand may be structured, we have provided a simple template letter of demand below which can serve as an example of a bare-bones letter demanding payment of an unpaid invoice.
This is only one of many examples as to how a letter of demand can be set out.
Are you seeking to recover an unpaid debt? Are you involved in a dispute with a difficult debtor and need help from an experienced solicitor to put pressure on the debtor to pay the debt? Are you a party to a contract and wish to demand that another party to the contract complies with a specific obligation they have failed to adhere to under the agreement?
Unco-operative debtors can be extremely difficult to deal with, and sometimes it may feel as though no matter how much pressure you put on them to pay up, it all eventuates into nothing. In these circumstances, there are advantages to having a lawyer draft and issue a letter of demand on your behalf to further pressure the debtor into paying.
Although it may be tempting to draft a simple letter of demand yourself in order to save on legal costs, even in situations involving complex debts or contractual obligations, a demand is commonly found to be a lot more powerful coming from a lawyer. Nothing says urgent like a letter on a law firm’s letterhead informing a person that someone is about to commence legal proceedings against them. Further, the chances of recovery without the need for further legal action tend to increase exponentially when solicitors are involved because this involvement shows that the creditor is serious in their demand and is prepared to take the steps to ensure their demand is met. And, if you’ve made the decision to get a lawyer on your team to fight the fight on your behalf, why not have the letter sent on the letterhead of a firm which is known for its superior litigation skills and relentless pursuit of successful outcomes for clients? Contact Gibbs Wright Litigation Lawyers today for a confidential consultation to discuss your legal rights and options.
