What to Do When You Receive a Demand Letter

What Is a Demand Letter?

Just like it sounds, a demand letter is a letter that makes a demand of the recipient. People send them to seek compensation for loss or injury, or to compel or restrict an activity the sender believes violates a law or agreement.

Some of the ways demand letters are used include:

• to collect unpaid fees due under a service agreement or unpaid wages
• to demand a company stop using a name or selling product that is copyrighted or trademarked by someone else, and
• to obtain compensation for a loss or injury resulting from an accident, such as a car accident or a slip and fall.

Although you can sue someone without first sending a demand letter, most of the time people send a demand letter in hopes that the recipient will comply and a lawsuit won't be necessary. While these letters are often written in blustery language that threatens a lawsuit, demand letters routinely accomplish their purpose, motivating the parties to resolve the matter without going to court.

Demand letters usually include a description of the dispute, the names of the parties involved and their relationship to the dispute, a statement about the laws or agreements the sender claims have been violated, and the action the sender wants the recipient to take, along with a timeframe for doing so.

What's the Next Step When You Get a Demand Letter?

Don't assume that just because a demand letter looks and sounds official, its assertions have merit, or that the sender will prevail in court or mediation. The claims made in the letter are just that: claims. You and the other party have the power to arrive at a mutually agreeable resolution that doesn't parrot the letter, or failing that, a mediator can suggest a resolution. As a last resort, a judge can resolve the dispute.

You should carefully weigh the claim and decide whether to comply with the demand, contest it, or negotiate a different resolution. Your analysis should consider the facts, the applicable law, the risks to you if the case does go to court, and your chances of winning a lawsuit.

Assess the Facts and the Law

Carefully review the facts that the other party has provided. Suppose you receive a demand letter from a handyman you hired to install four shelves in your store. You agreed to pay $200 upon completion of the work and paid a $50 deposit before the work began. But the handyman left you high and dry after installing only two of the four shelves.

You decide that the $50 deposit is sufficient payment because the work wasn't completed and the job looks half-finished, but the handyman is demanding you pay the balance of $150. Before you decide to contest the demand, you should:

• Check to make certain your service agreement specifies that the handyman was to install four shelves. (If it doesn't specify the number of shelves—or if you have no service agreement--you might be hard-pressed to convince a judge that the handyman isn't due the full payment.)
• Consider how much of the work the handyman actually completed, and the value of that work. In this example, the handyman completed one-half of the work, which would amount to one-half the agreed-upon price, or $100. Less the deposit already paid, a strong argument could be made that you still owe the handyman $50. Although you think that the unfinished appearance of the job makes the two shelves less valuable than half the agreed-upon price, you might want to reconsider in order to avoid court. It might be wise to contact the handyman and offer an additional $50 payment to settle the matter.
• Think about what the law has to say in this situation. A judge would not allow you to become "unjustly enriched" by enjoying the value of the two shelves without paying for their reasonable value. That's not to say that you could not persuasively argue that the unfinished appearance of the shelving unit makes the two shelves worth less than half of the cost of the agreed-upon four-shelf unit. You'll need to be prepared to argue this aesthetic point if you end up in court.

Weigh the Financial and Other Risks of a Court Case

While going to court will ideally result in winning (paying only $50), even a win is not without risks. The possibility of negative, collateral consequences is what attorneys call "assessing your exposure." For example, even if you win, you'll spend time and money preparing for court at the expense of tending to your business, and your reputation might suffer. If you lose, in addition to possibly paying the winner's court fees and attorney's fees, a court judgment might include additional penalties (along with damage to your reputation) that would total considerably more than the amount the claimant is demanding.

The store owner in the example above might want to fight the demand, feeling that the handyman is taking unfair advantage by insisting on the full payment, but paying an additional $50 (or even the full balance of $150 if there was no service agreement) might be a lot cheaper than the hundreds, or even thousands, of dollars a court judgment would cost.

Assess Your Odds of Winning in Court

Just because you believe the action you took (or didn't take) is justified, do not allow your emotions to dictate your response to a demand letter. Instead, carefully assess the evidence to determine your chances of winning your case in court. If the evidence doesn't back up your position, consider giving in to the demand or negotiating a settlement. Seasoned businesspeople call such decisions "the cost of doing business," and they feel no shame in cutting their losses.

How to Respond to a Demand Letter

No matter the position you take (or how legitimate you believe the claim to be), respond in writing, preferably by postal mail, and obtain delivery confirmation. If the matter ends up in court, you'll want a paper trail that shows your good faith efforts to address the problem. Using email is risky; recipients can claim that they never received your reply, and unless you have used a receipt-generating tool (which the recipient might refuse), you'll have a hard time proving that you replied.

It's never wise to ignore a demand letter, no matter how questionable you believe the claim to be. A judge can interpret your failure to respond as an admission of fault, which would usually favor the other party in the dispute.

Be aware that once you've received a demand letter, you won't be able to claim ignorance of the problem. You are also obligated to preserve any records or other evidence that pertains to the dispute.

Must You Hire an Attorney to Respond to a Demand Letter?

A response that comes from an attorney will generally be taken more seriously than one you write yourself. Even if you are hoping to settle the matter without going to court, you should consider hiring an attorney and paying a one-time fee for the sole purpose of responding to the letter (a less expensive option than retaining an attorney for the duration of the proceedings).

A response drafted by an attorney adds not only an air of legitimacy to your position, it can also bolster your position by ensuring that all the relevant legal arguments are included.

If you do handle the response yourself, keep it civil and factual, even when you believe the demand is completely without merit, and send it by the deadline requested.

Some states allow litigants to use the response to a demand letter as evidence in trials or depositions, so a threatening or smart-alecky response can work against you at trial. A clear and complete recitation of your position might also convince the sender of the demand letter to drop the matter or negotiate a settlement.