If you’re a business owner, you have likely received a demand letter at some point. Whether it’s related to a past-due vendor account or notice of a potential employment claim or personal injury claim, a letter of demand is an integral part of doing business today. Too often, however, company owners or managers who are facing financial hardship are tempted to ignore a demand letter. Whether out of denial or ignorance, disregarding a demand letter will complicate the situation and hurt your defense to those claims later if it ends up in litigation. Learn what they are, how they’re used, and why ignoring a civil demand letter is never a good idea.

What is a civil demand letter?

A demand letter is simply someone notifying your business of a claim based upon the relationship between the parties. It may claim that your business owes money under an agreement, or it may claim damages arising from your actions or inactions, which caused them injury. If based upon an agreement, it may be related to payment for services or products provided to your business, or perhaps it’s a landlord demanding amounts owed under a commercial lease. If based upon damages arising from a personal injury, perhaps a customer was injured on your premises, or a company employee caused injury to the claimant during the course of employment.

In its simplest form, a demand letter puts you on notice that you allegedly owe money, and failure to pay that money may result in a lawsuit. The letter will typically contain:

• an explanation of why you owe the money
• the amount you owe
• a deadline to make payment before a lawsuit is commenced or other action taken to collect the debt

How is a “cease and desist” demand letter different?

Beyond a demand for monetary damages arising from a breach of contract or otherwise, a demand letter may instead contain what is referred to as a “cease and desist” demand. In other words, the sender is demanding that you stop doing something which is contrary to an agreement or statute. This may involve claims for the illegal possession or use of trade secrets, infringement of a patent or other intellectual property right, or some type of unfair or illegal competition.

Typically, these types of claims involve damages that cannot be easily identified or quantified. Thus, they are putting you on notice that what you are doing is exposing them to damages and that you should change your behavior accordingly. With these types of claims, the complaining party may seek an injunction or temporary restraining order to prevent you from continuing to engage in the behavior at issue. They may even rush to court to obtain such an order before you even receive a letter of demand.

Often demand letters are used merely as an attempt to resolve the claims without incurring litigation expense. However, sometimes the demand letter is used to provide notice required by the parties’ agreement or the statute at issue prior to pursuing other remedies or engaging in formal litigation.

Regardless of the type you receive, you should never disregard a demand letter. Here are the top six reasons ignoring demand letters is not good business.

Six Reasons You Should Never Ignore a Demand Letter

1. The fact that you ignored the demand letter will be used against you in court.

The demand letter will likely end up as an exhibit to the court and jury in any subsequent litigation, and your response to the demand will be judged accordingly. If the claims in the letter are deemed justified or meritorious, your refusal to recognize that and adjust your behavior may be considered evidence of your intentional wrongdoing or willfulness in violating the other party’s rights. Thus, you should consider a demand letter you received carefully and, if appropriate, take the opportunity to reevaluate your previous decisions.

Failure to respond to a demand letter that raises an issue of a continuing breach of contract or violation of a party’s rights may be used later as evidence of intentional conduct or willfulness. Therefore, you should consult an attorney to carefully analyze whether the demand has merit and provide a carefully considered and reasoned response to the demand letter if appropriate under the circumstances.

2. You could end up owing more than the original claimed amount.

The most immediate risk when you ignore a civil demand letter is increasing the damages beyond what the original letter alleges. The demand letter may relate to an underlying contract, and many business-to-business agreements will contain penalty provisions increasing the amounts owed. In addition, such agreements often provisions allowing the prevailing party to recover its attorneys’ fees from the breaching party. In those situations, if you don’t respond to the demand letter, and the party is forced to commence litigation, the attorneys’ fees, costs and disbursements incurred in the lawsuit may be added to the amount you owe.

If the demand is intended to provide the notice required pursuant to an agreement, failing to respond to a demand letter may allow additional remedies, such as foreclosure or eviction in situations involving a mortgage or lease. Additionally, failure to cure an alleged default may result in individual liability for any potential guarantors of the business’ debt.

3. The claims made in the demand letter may not be entirely valid.

Anytime you receive a demand letter, you should consult with an attorney. There may be hidden issues that may invalidate the claims, such as lack of acceptance of goods upon which the claims are based or some other breach of the underlying contract. There may be a statute of limitations that would entirely negate the claim or other laws that could limit or preclude any recovery by the claimant. This is why it’s important to have an attorney evaluate the underlying bases for the claims in the demand letter.

4. An attorney may be able to negotiate a settlement lower than the claimed amount.

Even if you don’t dispute the amount claimed, consulting with an experienced attorney can be to your advantage. The attorney may be able to help negotiate a settlement, either for a reduced amount, setting up a payment plan, or by obtaining some other valuable concession. The attorney will also ensure that the agreement is properly documented and does not contain any hidden traps that could take you by surprise later. Finally, the attorney should identify and analyze secondary issues that must be considered, such as personal guaranties by the business owners.

Conversely, if you ignore the demand letter and force the creditor to pursue expensive litigation, the creditor will be less likely to negotiate a settlement on your terms or to offer any concessions to resolve the issue.

5. There may even be counterclaims that your attorney can bring against the other party.

An attorney may examine the claims and find counterclaims or affirmative defenses available that would reduce the amounts you owe. At the very least, there may be contractual terms that do not authorize the claims or which may be modified by state or federal laws. Thus, competent legal analysis is a necessity in evaluating the merits of any claims against you or the availability of any defenses or counterclaims against the claimant.

6. Certain litigation strategies may be forfeited by ignoring the initial demand letter.

An experienced civil litigation attorney can evaluate your options if you’ve received a demand letter. Some options may include pursuing contractually required mediation, arbitration, or other options in the underlying contract. There may also be options such as which jurisdiction to bring the claim or which state’s laws will apply. In some situations, merely determining which “form” agreement prevails may determine which state’s laws will apply, which may determine who prevails in any dispute. Often there are options to bring the claim in federal or state court.

Finally, where the parties are from two different states, or the agreement provides options for the forum or the laws to be applied to the dispute, the creditor will likely try to bring the claim in the state where it is located to obtain an advantage. This essentially sets up a “race to the courthouse” where the first party to file may determine where the case will be litigated. To protect yourself from defending claims in a distant forum, you should have a counsel evaluate the claims and your options once you receive a demand letter.

What are the next steps?

While it’s simply the first step in a process, demand letters should not be disregarded or carelessly handled. Don’t underestimate the need for professional legal advice. If you received a demand letter, consult an attorney to understand how best to respond to the demand and ensure your interests are protected.