Letters of Demand 101: Sending and Receiving Them

When should I send a letter of demand?

A ‘letter of demand’ is a letter formally requesting payment of a debt. For example, a creditor can send a letter of demand to recover payment of an unpaid invoice, or seek a refund if a business has provided faulty goods or deficient services.

When recovering a debt, letters of demand are often sent after more informal requests for payment have been unsuccessful. Issuing a letter of demand in the first instance can come across as unnecessarily hostile and detrimental to  the personal or commercial relationship between the creditor and the debtor, though there is no legal restriction on when to issue a letter of demand in respect of a debt.

Drafting the letter is an important step in the debt recovery process. If drafted well, the letter may have the effect of prompting immediate repayment – or, at the very least, a response from the debtor as to why they have been unable to pay, or otherwise answer the demand. Even if the debtor denies liability for the debt or fails to respond, the creditor can rely on the letter as evidence that they have tried to resolve the matter prior to commencing court proceedings or engaging in more severe enforcement action.

At a minimum, a letter of demand should include the following:

  • The circumstances from which the debt arises;
  • The amount owed and demanded;
  • A reasonable deadline by which payment must be made (though it is worth noting that what is reasonable may depend on the circumstances);
  • The method by which payment can be made (by bank transfer or otherwise.); and
  • Further steps the creditor will take if payment is not received (such as commencing court proceedings).

Often, letters of demand state that the creditor will pursue legal action if the payment is not made by the specified date. It is also useful to attach evidence of the debt to the letter – such as in the form of invoices, contracts, communication between the parties, and records of any earlier payment reminders.

What should I do if I receive a letter of demand?

It is always best for individuals to seek legal advice tailored to their specific circumstances. However, there are a few core options that a solicitor may suggest to recipients of a letter of demand.

Do Not Ignore

There are many reasons why someone may think that ignoring a letter of demand is a good idea – for example, because dealing with adversarial situations is stressful, expensive and time-consuming. However, ignoring a letter of demand is strongly inadvisable.

Failing to respond to a letter of demand by the stated date is likely to result in court proceedings being commenced by the creditor. Responding to the letter provides an opportunity to resolve the issue without the need for costly and drawn-out litigation proceedings.

Likewise, if court proceedings are commenced and ignored, the creditor may apply to the court for default judgment – being a judgment made by the court against a defendant who does not respond to legal proceedings, in that defendant’s absence.

This would occur in a scenario where:

  1. The creditor has initiated court proceedings after the debtor fails to respond to a letter of demand; and
  • The debtor does not respond to the court proceeding in the form of a defence.

Dispute the Demand

If the recipient of a letter of demand believes that they have been incorrectly accused of withholding payment, they can dispute the claim by responding to the letter and setting out the reasons for the dispute. Reasons can be such that, for example, the debtor is the incorrect party, the amount of the debt is incorrect, or the debt has already been paid.

In a similar vein, the recipient of a letter of demand may also reply to the letter and request more information, without stating whether or not they are denying the claim. This kind of information can include an itemised invoice, the contract from which the alleged debt arises, or any other documents which are relevant to establishing the debt.

A legal representative will be best placed to assist with drafting a response.

Propose a Counteroffer

Another option for responding to a letter of demand is to propose a counteroffer to the debt being sought. This can involve seeking a reduction of the initial sum requested – due to personal financial circumstances – or requesting an extension of time in which to pay.

Proposing a counteroffer can indicate to a creditor a willingness to engage with the demand, and hopefully avoid a costly trip to court.

For both creditors wishing to send a letter of demand, and debtors who have received one, obtaining legal advice is a key first step. If you have any questions or wish to discuss your circumstances with a lawyer, please contact the BAL Lawyers Litigation and Dispute Resolution team on 02 6274 0999.

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