A Letter of Demand (LOD) is a formal written notice that sets out the background facts of a dispute and clearly demands payment or action from the recipient and warn the recipient that legal actions may be taken should they fail to comply.
It helps establish a legal record that the claimant has made an attempt to resolve the matter before pursuing legal action. By providing a final warning, the letter offers the recipient an opportunity to settle the dispute without resorting to court, potentially saving both time and legal costs. Additionally, the LOD clearly outlines the details of the claim, such as the amount owed or the issue to be addressed, along with a deadline for compliance. It encourages a peaceful resolution, preventing the need for further legal proceedings.
In debt-related cases, it’s often the first step before filing a legal claim in court. Despite some clients thinking it’s unnecessary, there are compelling reasons to issue a letter of demand:
1. Establishing Your Claim: While not legally mandatory in most cases, a letter of demand is helpful for establishing the creditor’s intent to recover the debt. It serves as proof of the debt and any interest or costs owed. If the debt isn’t paid, the letter can act as evidence in court of the steps taken to recover the debt.
2. Gauging the Debtor’s Response: Issuing an LOD can help assess the debtor’s stance on the debt. It may reveal whether the debtor disputes the debt and the reasons for doing so. Understanding the debtor’s potential defence can aid in strategizing the case if it escalates to litigation.
3. Saving Costs: Contrary to the belief that it’s a waste of money, issuing an LOD can be a cost-effective alternative to direct litigation. If the debtor is convinced to pay to avoid legal action, the legal fees for an LOD are typically much lower than full legal proceedings.
4. Corporate Governance: A letter of demand provides a written record of the dispute, which is good for internal documentation and corporate governance. In the future, if key personnel leave, the letter helps others easily understand the debt’s history and details.
While it’s possible to issue a letter of demand on your own company letterhead, it’s recommended to have a professional review it before sending, especially if court action is likely.