Many business clients have questions regarding the first step in the litigation process – the demand letter. Here are some of the issues, strategies, and considerations business owners face when considering whether to send a demand letter.

What’s the purpose of a demand letter?

The typical demand letter involves a party’s failure to make payment for goods or services provided by your business. Although it typically involves a customer or client, it may relate to a refund owed by a vendor, lease payments owed by a tenant, or any other party that owes your company money under an agreement.

The first step is to fully understand the terms of the underlying agreement, as well as any laws that govern the relationship. Although it is advisable to consult an attorney for this initial phase, a few situations may be simple enough to handle on your own. Some of the issues you should consider include:

  • the initial due date for the payment
  • what rights you have according to your contract when payment is not received
  • what penalty provisions may be included to discourage late payment

What is the process for demand letters?

The most powerful tool you may have to compel payment quickly is an attorneys’ fees provision. This provision allows you to recover your attorneys’ fees, costs, and any disbursements you incur while recovering payment. There may also be personal guaranties provided by the owner(s) of the business securing payment to your business. If you don’t regularly use such personal guaranties, consider including them when customer accounts are initially established.

In any contract where some type of “notice” is required as a precondition to exercising additional rights and remedies under the agreement, you should comply with the notice requirements exactly and retain evidence that those requirements were followed. This type of provision is often included in commercial leases and is designed to ensure that the alleged breach is not due to mistake or inadvertence. To be safe, multiple “notices” may be sent not only to ensure compliance with the underlying agreement but also to confirm the other party receives the notice.

What if the parties are in different states?

Another issue to consider is whether there are forum-selection, jurisdiction, or choice-of-law clauses that dictate where and how any dispute must be resolved. One issue confronting businesses when dealing with an out-of-state party is whether there will be a “race to the courthouse.” This situation develops where there is no forum pre-selected in the agreement about where the claims must be brought.

Once a party puts the out-of-state party on notice of a claim, that party may bring a claim in their own state/jurisdiction, either for their own damages or simply as a declaratory judgment action asking the court to decide whether the amounts are owed. If there is a chance the other party may engage in this strategy, you should consider retaining an attorney and commencing the lawsuit in your own jurisdiction before making the demand.

What if the claim isn’t financial?

Sometimes demand letters involve non-monetary claims, especially where there is a continuing violation of an agreement or other legal rights. In this case, a demand letter may be considered a “cease and desist” letter, where you are putting the other party on notice of their continuing breach and the accrual of damages while that breach continues. Example situations involve:

  • misappropriation and use of trade secrets
  • patent infringement
  • other intellectual property violations
  • tortious interference
  • business disparagement

How do you write a demand letter?

Demand letters must be drafted very carefully, and the process of making a payment demand must be documented thoroughly. This is critical to protecting your rights. In its simplest form, the monetary demand letter will include:

  1. the exact amount owed to cure the default
  2. a specific deadline for payment receipt
  3. how the payment is to be made
  4. a warning about any attorneys’ fees provision if there is one

Should I manage a “cease and desist” demand letter on my own?

You should consult an attorney for a “cease and desist” demand letter because it requires more careful consideration of the claims and the other party’s conduct. Typically, these claims depend upon statutory or common law principles governing how businesses should conduct their operations. Such rights protecting contractual relationships, trade secrets, or business reputations from false reporting, are dependent upon a detailed legal analysis beyond the ability of even the most sophisticated business owners.

In fact, incorporated businesses must be represented by attorneys in legal proceedings in state and federal courts in many states, including Minnesota. An experienced attorney should conduct the analysis upon which such demand letters are based, especially if it may result in future litigation.

What should I consider before I send a demand letter?

Before a demand letter is sent, there are many issues and complexities to consider. Without a clear understanding of the terms of the underlying contract as well as any statutory and common law principles that apply to the claims, a demand letter is not likely to be successful. To increase your chances of success, consult an attorney first.