Whenever disputes arise between parties, especially if it involves non-payment of debts, it is common practice in the legal world to firstly issue a letter of demand.
What is a letter of demand?
A letter of demand (usually known as “LOD”) is essentially a letter issued to give formal notice of your demands to the recipient and the possible legal consequences the recipient might face should the recipient fail to comply with your said demands. A letter of demand usually comprises of these following components:
a) The identity of both parties involved;
b) A brief summary of the nature of dispute;
c) The demands sought (payment of debts / to either carry out an action or
refrain from such action);
d) A deadline for when the recipient should comply with the demands; and
e) A statement of the possible legal consequences against the recipient for
failing to meet those demands.
Depending on the nature of your claim, there are various types of demands including but not limited to:
a) Demand for payment for unpaid debts (debt recovery matters);
b) Demand for particular actions to be done (i.e., an apology for defamation
matters); and / or
c) Demand to prohibit particular actions (i.e., demand to cease constant
nuisance).
For example, client A owes you X amount of money for the services you have provided. Therefore, you can issue a letter of demand to client A to set out the amount of money due and owing to you and demand for that payment.
In this article, we will be using the example of client A, wherein client A owes you money for services rendered and has failed to make payments to you within the relevant timeframe (“Client A example”).
Why is a letter of demand important?
There is this common perception that letters of demand do not carry much weight and can be merely time consuming as it is not a necessity by law to issue them. However, this is not entirely true. Whilst it is true that letters of demand are not required by law, the issuance of letters of demand are important and we list the reasons below on why we say as such:
A. Setting out your claim
A letter of demand helps set out in black and white, your claim against the other party. For instance, using the Client A example above, your letter of demand to Client A will set out your claim in a coherent manner (in this situation, you are trying to recover your money due and owing to you by Client A for your services).
If Client A still fails to pay the debt despite you issuing the letter of demand, the said letter of demand can be used in Court as evidence that you (as the creditor) had exercised reasonable steps to recover the debt owed before turning to the Courts for assistance. Additionally, should Client A fail to even respond to your letter of demand, there is a higher possibility that the non-response of Client A may strengthen your case against Client A, as seen in the case of Small Medium Enterprise Development Bank Malaysia (formerly known as Bank Perusahaan Kecil dan Sederhana Malaysia Bhd) v Lim Woon Katt [2016] 5 MLJ 220 (this shall be discussed further below).
B. Understanding the recipient’s response / defence
Issuing a letter of demand can assist you to gauge how the recipient would respond to the said letter of demand (i.e., Whether Client A agrees that he owes you that money but is having financial difficulties to pay the said amount or whether Client A is disputing the amount of debt).
This can be a strategical move as it can help you anticipate Client A’s defence should this matter proceed to Court. In other words, you will be able to assess the strengths and weaknesses of your claim if the claim is filed in Court as you are now able to anticipate the recipient’s defence to your claim. This will give you time to prepare your claim against their defence.
C. Possibility of out-of-Court settlement
Filing a suit in Court can not only be time consuming but also costly. If someone owes you money, you would want to recover the money in the fastest and least costly way. Sometimes, issuing a letter of demand can help you achieve that goal.
The legal fees involved in the issuance of the letter of demand is significantly lower than the legal fees you would have to pay fighting the dispute in Court. For instance, if you issue a letter of demand to Client A and Client A responds by stating that he has financial difficulties and would not be able to pay the debt lump sum, you can negotiate with Client A on a few possible options. These options are either reducing the total amount of debt or proposing a payment plan that is best fitted for both parties. In simpler words, the issuance of a letter of demand saves time and costs as it allows you to assess your chances of recovering your debt and gives you an option to negotiate with Client A before filing your claim in Court.
By doing so, you get to rightfully claim what is due to you whilst at the same time, maintaining a good business relationship with Client A. Further, disputing this matter in Court will take up much time as trial can take several months to years to complete (depending on the severity of the case). Therefore, out-of-court settlement negotiations are more beneficial to parties.
However, should the negotiations with you and Client A become unsuccessful and the dispute eventually goes to Court, the attempt to settle out-of-Court can be seen as a genuine attempt to settle this matter amicably.
D. Response to the letter of demand can be vital
If you had issued a letter of demand, their response may be vital in the event the dispute goes to Court.
In the case of Small Medium Enterprise Development Bank Malaysia (formerly known as Bank Perusahaan Kecil dan Sederhana Malaysia Bhd) v Lim Woon Katt [2016] 5 MLJ 220, the Plaintiff alleged that the Defendant was liable under a Guarantee and Indemnity Agreement signed by the Defendant. The Plaintiff had issued a letter of demand to the Defendant regarding the same and the Defendant chose not to respond to the Plaintiff’s letter of demand. The Plaintiff eventually filed a suit in Court. The Defendant’s defence was that the Defendant chose not to respond to the Plaintiff’s letter of demand as the Defendant alleged that he did not sign the Guarantee and Indemnity Agreement and asserted that his signature was forged.
The Court of Appeal held that the Defendant’s failure to respond to the Plaintiff’s letter of demand when the Defendant’s case was related to forgery, weakened the probative force of the Defendant’s case.
The Court of Appeal, whilst acknowledging that failure to respond to demand notices cannot be equated to an admission, held that the failure to respond relates to conduct which is a relevant fact for the Court to take into account in order to determine the credible version of events.
“[8](b)…Conduct is a relevant fact for the court to take into account to give the relevant probative force to the version of the plaintiff and/or defendant’s case. It is well settled that not all demand notices must be responded…”
When wrongful allegations are made against one, it would only be reasonable to expect a strong denial on the same, especially in commercial cases:
“[8](c) it must also be noted that in commercial cases (not civil), courts have taken notice that, in the ordinary course of business, if one man of business states in a letter to another that he has agreed to do certain things, the person who receives that letter must answer it if he means to dispute the fact that he did so agree (see PECD Construction Sdn Bhd v Freehold Point Sdn Bhd [2008] MLJU 127; [2008] 3 CLJ 215)”
Following this case law, in the event that you show the Court that you have issued a letter of demand to Client A and Client A has failed to respond, this can likely assist your claim in Court as it may weaken Client A’s case, especially if Client A is disputing the amount of debt owed to you.
Conclusion
From the above, it is prudent that before you plan to initiate a claim in Court, it is best practice to issue a letter of demand to the opposing party as not only it may save time and costs, but it can also assist you in Court when needed.
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