Should I send a letter of demand?
Updated: Mar 24, 2021
At some point we all encounter someone who refuses to pay up, even after you cajole, annoy or threaten them. You're at your wits end, and you're ready to fire the nuclear salvo of bringing the debtor into court. But just before you press the button, you want to fire one last warning shot by issuing a letter of demand, complete with a law firm's letter head to scare the living daylights out of the other party.
Unfortunately letters of demand do not have the same impact as most people would expect. There are some situations where sending a letter of demand will not produce any substantive result:
1. Some people ask me if letters of demand have any "legal effect". The truth is that it has very little bearing on how the case proceeds, unless the other party flips and flops on his position. Yes, getting the debtor into this situation will help paint him as an unreliable character. But even then you would not be able to leverage on this lack of reliability until trial, because the court does not want to make a premature judgment.
2. If the other party is used to getting letters of demand, there is not much shock and awe value in a law firm's letterhead. Of course, certain firms have a certain reputation for aggression, but you have to be prepared to follow up with proceedings if you are ignored, or it just creates a situation where you cried wolf and your later actions are not going to have any effect.
3. If the other party is simply insolvent, how can you scare more money out of him?
So sometimes I might even advise a client to skip straight to starting court proceedings, especially when time is running and there is a chance that the debtor will skip town.
Having said that, letters of demand are good for certain things:
1. Confirming that the other side can indeed be contacted at the address: very important if you need to sue him later, since you have to serve court documents on him personally. (Though different considerations would apply if you thought he might abscond!)
2. Knowing whether the other side will be fighting (represented or otherwise): if a strong response comes back, that gives you a good gauge of whether you have to spend more time and money to fight the other side in order ot get what you want. Some clients may take the view that the other side has a weak case, but that is not enough to immediately get judgment. However, that would be useful in settlement discussions, especially if there is a mediator to provide a reality check.
3. Knowing what the other side's position will likely be: the response to the letter of demand gives us lawyers some material to figure out what issues to avoid and what documents or evidence we want to rely on, if we have to fight all the way. This may help with generating time and cost estimates of having to push the case to trial for both sides, and presenting mediation as a less costly alternative.
In all, letters of demand are not necessary, nor are they sufficient. They are only one
of the options available when a dispute occurs, and like any method, they must be judged by the desired outcome.