Writing a Letter of Demand: A Step-by-Step Guide

What can a creditor do, aside from taking legal action, when they are owed money by the debtor but have failed to receive the performance of some obligation or payment? They could send a letter of demand, which is a letter setting out a legal claim demanding restitution or performance. A good demand letter can ensure that the creditor receives the sum of money or obligation they are owed without commencing legal proceedings. Despite the obvious utility of these letters that help creditors issue their demand for payment, few know what they are and how they can write one. Here is your guide to writing an effective letter of demand.  

What is a letter of demand?

A letter of demand is a letter sent by a creditor after they have tried but failed, to get an invoice or loan payment repaid. The letter allows the creditor to demand repayment in written form and allows the purported debtor to act and meet the demands before further legal proceedings are instituted.

Usually, a letter of demand is preceded by informal notices by the creditor asking for payment. Informal notices may include things like phone calls, emails, and other communications with the purported debtor. Sending a letter of demand, therefore, is usually the last step to secure the creditor's legal rights before formal legal proceedings are commenced against the debtor. However, this does not mean that sending a letter of demand is a prerequisite to instituting formal legal proceedings.

A letter of demand will give the debtor details of the demand. It will state things like how much money is owed, what the money is owed for, and when payment will need to be made (see below).

When should I send a letter of demand?

A demand letter serves as a formal reminder of the need for repayment. As such, demand letters should only be used as a last resort before legal proceedings are instituted.

As touched upon, before sending a demand letter, a creditor should make informal attempts to obtain repayment. These informal attempts can take various forms. One kind of informal notice can take the form of an informal conversation, where the creditor can remind the debtor of their outstanding obligations.

Another informal way of obtaining repayment is by writing a reminder letter. A reminder letter is a letter that intends to remind the debtor about an outstanding payment obligation. It solely serves as a reminder and is not intended to warn the debtor about possible legal proceedings.

By using a reminder letter, the creditor can obtain payment from the debtor without escalating the issue and possibly damaging their business relationship. After all, the debtor may not have malicious intentions and might have just forgotten the due date for payment or is struggling with temporary cash flow problems.

So, is there any difference between a reminder letter and a letter of demand? Are they interchangeable?

A reminder letter, therefore, might seem quite like a letter of demand as they include a lot of the same information. Both letters inform the debtor that they owe money to the creditor, inform the debtor how much is owed, and inform the debtor when payment was due. They are different, though, as a reminder letter does not threaten legal action, whereas a letter of demand does threaten legal action as it aims to send a severe warning.

Just like a letter of demand, reminder letters can be difficult to draft. If you think that a reminder letter is more suitable for your needs, you can refer to our sample reminder letter templates to ensure that the crucial elements of the letter are included. We have two samples: a first reminder letter, which you can find here, and a second reminder letter, which you can find here.

Who can send a letter of demand?

Usually, companies or individuals will get their lawyers to draft and send the letter on their behalf.

A lawyer is not necessary, however. Anyone can send a letter of demand, regardless of whether they are a person or a company.

How to write a letter of demand?

There are many things to remember to include when writing a letter of demand. At the very least, the typical demand letter should include the essentials:

• The fact that the debtor owes you (the creditor) money
• How much money is owed and what it is owed for. A clear explanation should be provided as to how this figure was arrived at. This is normally done by itemising each part of the total amount owed.
• The original payment date
• When the debtor should repay the money to the creditor
• The payment method for repaying the money.
• Where the payment should be made. This might be in the form of bank details.

You should also attach other relevant documentation to the letter, which might include contracts you have entered with the debtor. Other examples of relevant documentation include correspondence such as reminder letters and invoices. These documents will help substantiate your claims and convince the debtor of their wrongdoing.

Secondly, you should set a clear deadline by which your demands should be met. You should also state that should your demands not be met by such date that you will institute legal proceedings against the debtor. It is best to be specific when setting a deadline by including the actual date to ensure the recipient is as clearly informed as possible.

Normally, a deadline of 1-3 weeks from the date of sending the letter is best. If you set the deadline too short, the debtor will not have a proper opportunity to consider their legal position, reducing the chance that a settlement is reached.

Finally, you should include certain key details that all letters have. This includes the date, your full name, and your contact details (email, address, telephone number).

You have probably realised that writing a letter of demand is no easy task. To make sure you don’t leave anything essential out, you can use our sample letter of demand for the payment of goods and services here. We also have a letter of demand for loan repayment or purchase reimbursements here.

What are the benefits of using a letter of demand?

1. Increases the likelihood of reaching a settlement

A letter of demand may enable you to avoid instituting formal legal proceedings altogether against the debtor. Since the letter of demand is in writing, it adds an element of formality to your demand to get repayment. It tells the debtor that the creditor is serious about his or her efforts to be repaid.

The letter will also make clear that the debtor could be the subject of a lawsuit if the letter is not complied with. This serves as an incentive for them to repay, as it is common knowledge that lawsuits are expensive and time-consuming. This element of formality, paired with risks can sometimes compel the debtor to settle.

2. The letter can be used as extra evidence for the creditor if the creditor proceeds to file a lawsuit

If the creditor decides to file a lawsuit against the debtor due to non-compliance, a letter of demand can be very useful to substantiate the creditor’s claims.

As part of the legal proceeding, the creditor will have to prove the truthfulness of the claims that they make. Letters of demand can be helpful in this regard in helping prove the weight of their claims against the debtor.

3. Helps the creditor maintain a positive commercial relationship with the debtor

A positive consequence of a letter of demand encouraging settlement is that it can help the parties maintain a good working relationship. This would not be the case if litigation is pursued, as proceedings are highly adversarial.

Is there anything I should avoid when writing a letter of demand?

You should avoid using language which may intimidate or threaten the debtor. This is important for two reasons.

Firstly, the intention behind sending a letter of demand is usually to reach some form of settlement with the purported debtor. Using inappropriate language or profanity will risk damaging the relationship, which may make it harder to reach a settlement.

Secondly, by using rude language you risk compromising future business relationships with the debtor beyond the point of salvation. Even if your letter of demand is successful in helping you arrive at a settlement with the other party, you may nonetheless compromise future business relations with the debtor, simply because of the language used.

What are the common responses to a letter of demand?

The debtor can respond in a variety of ways.

The debtor may meet the request of the creditor by fulfilling the demands stated in the letter. In this case, the creditor will be satisfied, and no further action needs to be taken by the creditor.

The debtor may choose to respond to the letter of demand with a letter of their own. Through the letter, the debtor would detail how they plan to meet the demands stated in the letter or may contest the demands on the basis that they are baseless and unwarranted. Depending on the response and the circumstances of the dispute at hand, the creditor may feel compelled to institute formal legal proceedings upon receiving such responses from the debtor.

The debtor may even ignore the letter of demand completely. Again, depending on the circumstances of the dispute, the debtor may feel compelled to institute legal proceedings at this stage.

Consequences of ignoring a letter of demand

If a debtor ignores a letter of demand, litigation will likely ensue. This is a very unfavourable outcome for the debtor as litigation is costly both in terms of time and money.

A debtor may seek to settle the dispute once litigation commences. However, once litigation ensues, settlement is likely not going to be possible as the creditor is likely not going to be receptive to any attempt to settle. This is justified by the fact that ample opportunity was afforded to the debtor to settle before formal litigation.

If litigation ensues and the debtor ends up losing the case, the debtor is likely going to be liable to pay a larger sum than that stated in the letter of demand. This is because the recipient may be liable to pay for damages and interest above and beyond the sum originally stated in the letter.

It is important to remember that litigation is an adversarial affair; a public process in which information about parties is revealed. This can have damaging effects on the party’s relationship. The consequence of litigation is that it often damages party relations to the extent that there remains no viable commercial relationship between the parties from thereon.

Please note that this is a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may wish to consult your lawyer.