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What is a Letter of Demand?

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A letter of demand is a formal letter that sets out a legal demand. If you are in a dispute with another party, sending this letter may be the best first course of action. This article explains what to include in a letter of demand and the advantages of sending one before commencing legal proceedings in court. 

What is a Letter of Demand?

A letter of demand refers to a formal letter which:

  • demands payment of an outstanding debt from a debtor or compliance with another legal obligation; and
  • notifies the recipient that the sender may sue them if they fail to satisfy the demand.

Businesses and individuals usually send a letter of demand in the early stages of a legal matter before initiating court proceedings. A letter of demand is not a court document, and there is no prescribed format for sending such a letter. You can send a letter of demand yourself or get a lawyer to issue one on your behalf.

The exact contents of a letter of demand will vary depending on the situation. However, most of them contain similar elements. We explore these below.

What Should a Letter of Demand Contain?

If you need to send a letter of demand, make sure that you include the following elements.

The Correct Address

If you are sending a demand to a company, you should address the letter to someone in a decision-making position who can respond appropriately. For example, a company director or in-house legal counsel. 

You can often find these contact details online. You can also obtain a company’s registered business address from the New Zealand Companies Office. 

If you have a contact email address, you can send the letter both by:

  • registered post; and
  • email.

Double-checking you have the correct address ensures your letter goes to the right recipient’s attention.

The Demands

The demand should be short and to the point. For example, it should outline the:

  • exact sum of money which you claim is due and owing; 
  • actions that you would like the recipient to refrain from doing; or
  • steps you would like the party to take to meet their contractual obligations.

Legal Basis for the Demand

A demand might not hold much weight if it is not based on a genuine breach of legal obligations. Sometimes, the legal basis for a demand will be simple. For example, there may be unpaid invoices for services that you have provided or goods you supplied.

If the matter appears clear cut, it may be unnecessary to elaborate on the underlying legal reasons in much detail.

In other circumstances, where the situation is more nuanced, it can be appropriate to include:

  • a summary of the factual background of the matter;
  • the key legal conditions that apply (for example, contractual clauses, common law rights or legislative provisions); and
  • a clear argument that sets out why, on the facts, they are in breach of their legal obligations and are, therefore, required to comply with your demand.

Ultimately, the level of detail you need to go into will depend on the specific circumstances of the matter. If your legal position is not clear cut, it is a good idea to go into more detail. If your legal situation is complex, obtain legal advice to help you understand your position and develop a strategy before issuing a demand.

Deadline for Response

It is common practice to provide a timeframe between 5–20 business days for the recipient to pay, comply with, or otherwise respond to the issues raised in your letter. Your deadline is somewhat arbitrary because nothing will legally happen after that date unless you take further steps yourself.

The exact deadline you should set will depend on the urgency of the matter. Keep in mind that if you set an unreasonably short deadline and the matter ultimately goes to court, the court may scrutinise the reasonableness of your conduct.

Consequences of Non-Compliance

A letter of demand usually accompanies a notice that you intend to commence legal proceedings or, in other words, sue the other party if they do not comply with your demand.

Sometimes, legal matters have a prescribed dispute resolution process that sets out steps parties must take before going to court (or instead of court). For example, commercial contracts often require parties to go to mediation or arbitration before court. By way of regulation, some industries and sectors also require that parties attend mandatory mediation before suing. Therefore, you should always check what your next step will be before you prepare a letter of demand.

Notably, you are not bound to follow up with legal proceedings, especially considering the associated costs and risks of litigation. However, keep in mind that if you do not do what you say you will do, the other party may take future correspondence from you less seriously.

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Do You Have to Send a Letter of Demand Before Suing?

Generally, you do not need to send a letter of demand before taking more advanced legal action. However, it is good practice for several reasons.

You May Achieve an Outcome Easily

Sending a letter of demand gives the recipient a final opportunity to address the matter. The threat of being sued may be enough to prompt action. In some cases, the decision-makers at the recipient’s organisation may be genuinely unaware of the issue. Likewise, a letter can spur them into action. In others, the recipient may be in financial trouble and only be prioritising the most ‘urgent’ matters, and your demand may encourage them to prioritise you.

Relationship Considerations

While a sternly worded letter of demand can put a strain on a business relationship, commencing proceedings without notice is likely to be even more damaging. If you want to preserve your commercial relationship, sending a formal letter can be a more tactful approach.

Lower Costs

Preparing a letter of demand requires less work than preparing court pleadings and much less work than engaging in contested proceedings. Even if the matter is complex, you do not need to delve into all of the technicalities in your first letter.

In contrast, once proceedings are underway, you must be very thorough and leave no stone unturned when preparing your arguments and evidence. This preparation takes time, and costs can be high.

Strategy and Risk Considerations

Even if you think the matter is clear cut, you can never guarantee that the other side will not dispute your version of events or interpretation of the relevant law. By sending a letter of demand, you provide an opportunity for the other party to prepare a formal response and raise any disputes.

Accordingly, you will be more informed about whether the other party intends to defend any legal proceedings and how they may do it. It is riskier to commence legal proceedings without attempting to flush this information out first.

Open the Door for Settlement Negotiations

If the matter is disputed, but both parties do not want to bear the costs of litigation, your letter of demand and the response that it receives may set the scene for negotiations on how to resolve the matter commercially and come to a compromise. 

Cost Considerations

By issuing a letter before commencing proceedings, you can demonstrate to a court that you provided a fair and reasonable opportunity to address the demands. This may impact the court’s decision about legal costs awards.

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Key Takeaways

If a client owes you money or you wish to stop someone from breaching your contract, you can send a letter of demand. A letter of demand is a formal letter that sets out a legal demand. If you are in a dispute with another party, sending a letter may be the best first course of action. It should include the other party’s company address, the demand and its legal basis, a deadline for response and the consequences of non-compliance.

If you need assistance drafting and sending a letter of demand, our experienced disputes lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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Simon Hillier

Simon Hillier

Simon is an Associate in LegalVision’s Disputes and Litigation team, where he provides advice and advocacy for a variety of businesses, individuals and not-for-profits. His primary area of practice is commercial dispute resolution, with a focus on contractual, leasing and shareholder disputes. Prior to joining LegalVision, Simon interned for New Zealand’s diplomatic delegation to the United Nations. Simon is an enrolled barrister and solicitor of the High Court of New Zealand and a qualified lawyer in Australia. In his spare time, Simon enjoys freediving and yoga.

Qualifications:  Bachelor of Laws, Bachelor of Arts, Victoria University of Wellington.

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