When running a business, it is almost inevitable that you will find yourself chasing suppliers or clients for payment of your invoices well beyond your payment terms, even in circumstances where comprehensive legal agreements have been exchanged between the parties. An effective and cost-efficient first step in pursuing any outstanding debtors of your business is to issue a comprehensive letter of demand.
What is a letter of demand, and what should it include?
A letter of demand is a formal-written request to a debtor demanding the payment of an outstanding debt within a specified timeframe, failing which further legal action may be taken by the creditor.
A letter of demand should be carefully drafted by your legal advisers in order to ensure all the relevant facts of the matter and the legal terms of any underlying agreement are appropriately articulated.
This has two main benefits:
- to ensure the letter establishes the legal basis of the debt owing and using such basis with a view to compelling payment; and
- to lay the foundation of any later Court proceedings which may arise in the event of continuing non-payment, including seeking to protect your position as to legal costs.
For a letter of demand to be effective in pursuing a debt, it should include the following information:
- The total quantum of the outstanding debt owing by the debtor, including the particulars of all invoices, their due date for payment, and the attempts by the creditor to follow up those payments;
- The relevant terms of any underlying agreement on which the creditor relies to enforce payment, including any penalty interest which is accruing, enforceable personal guarantees, or any other security held by the creditor such as a deposit;
- The timeframe in which the creditor expects payment to be made by the debtor before further action will be taken; and
- The consequences of further late or non-payment of the debt, including any intention to commence Court proceedings against the debtor and to tender the letter of demand as further evidence in support of the creditor’s claim, including any claim for legal fees incurred in pursuing the debt.
What are the benefits of a letter of demand?
A letter of demand can be a cost-effective alternative to commencing legal proceedings and/or an effective precursor to litigation. Often the threat of commencing legal proceedings against a debtor can be as effective as the act of commencing those proceedings when enticing the debtor to pay, in whole or part, its outstanding debts.
The letter of demand also encourages the opening of a dialogue of negotiation between a debtor and creditor, in which commercial options can be discussed as an alternative to expensive and time-consuming Court proceedings. Some commercial options which could be discussed include:
- Negotiating a payment plan whereby the debtor satisfies its outstanding debt in fixed instalments over a set period;
- Settling a long-outstanding debt for a reduced amount to avoid the financial burden and time cost of pursuing the matter in Court; or
- The parties agreeing to mediation or arbitration as an alternate dispute resolution tool to Court proceedings.
What happens next?
After a letter of demand has been issued, the debtor is placed on notice that it will have a certain time period in which to pay the debt, usually 14 days from the time of receiving the letter. During this period, the debt may be paid in full or part, or a dialogue may be opened to discuss the matter and why the debt remains outstanding. If a response is not received within the timeframe stipulated in the letter, further legal action may be necessary to pursue the debt.
In order to ensure that your letter of demand is crafted with legal effect, is incisive, and has the desired and optimal effect of eliciting payment, it is advisable to engage a commercial lawyer to assist you with the process and the drafting of such letter.
Should you have any outstanding debts and require the assistance of a commercial lawyer, please do not hesitate to contact the commercial team at Long Saad Woodbridge Lawyers.
Important Disclaimer: The content of this article is general in nature and for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.