What should you do if you receive a demand letter?
As a business owner, you have likely received a demand letter. Whether about a past-due account to a vendor or notice of a potential employment or personal injury claim, a demand letter is an integral part of doing business today. Learn how they are used and what you should do if you receive one.
What is a commercial demand letter?A demand letter is simply another business 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, perhaps it is for payment for services or products provided to you, or perhaps a landlord is 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 simply puts you on notice that you owe money, and failure to pay that money will result in a lawsuit being commenced. The letter will typically contain an explanation of why you owe the money, the amount you owe, and a deadline to make payment before a lawsuit is commenced.
How is a “cease and desist” demand 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 statutory law. 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 competition.
Typically, these types of claims involve damages that cannot be easily identified or quantifiable. Thus, they are putting you on notice that what you are doing is exposing them to damages and that you should adjust 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 demand letter.
Often the use of a demand letter is merely an attempt to resolve the claims without incurring the expense of commencing litigation. However, sometimes the demand letter is to provide notice required by the parties’ agreement or under the statute at issue, before pursuing other remedies or engaging in formal litigation.
What should you do in response to a demand letter?Regardless of the type of demand letter you receive, keep in mind that it 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.
In any situation where you receive a demand letter, you should consult with an attorney. There may be hidden issues that may negate 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 also be counterclaims or affirmative defenses available that would reduce the amounts owed. 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.
Even if the amount claimed as owing is undisputed, consulting an experienced attorney can be quite beneficial. The attorney may assist in negotiating a settlement of the party’s demands, either by settling the debt for a reduced amount or by obtaining some other valuable concession. The attorney should also ensure that the agreement is properly documented and does not contain any hidden traps for the unwary debtor. Finally, the attorney should identify and analyze secondary issues that must be considered, such as personal guaranties by the business owners.
What are the risks of denial and avoidance?Too often owners or managers of companies who are facing financial hardship are tempted to ignore a demand letter. Whether out of denial or ignorance, doing so will unnecessarily complicate any defense to those claims later in the litigation process.
The most immediate risk when you ignore a demand letter is increasing the damages arising from the situation. If based upon an underlying contract, many business-to-business agreements will contain penalty provisions increasing the amounts owed. Furthermore, such agreements often contain attorneys’ fees 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, failure to respond to or cure the alleged default described in the 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 company debt.
Finally, as mentioned above, 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.
What are the next steps?A demand letter is simply the first step in a process that should not be ignored or imprudently handled. Don’t underestimate the need for professional legal advice in such circumstances. If you received a demand letter, consult an attorney to understand how best to respond to the demand.