What to Do When You Receive a Demand Letter

A demand letter is a preliminary tactic that individuals and entities use in an attempt to induce another party to take some particular action, usually in the form of a payment. Nolo has various resources advising on how you can send a demand letter to another party in an effort to resolve a dispute before taking formal legal action (see Demand Letters: The Basics and How To Write a Formal Demand Letter). This article provides guidance on the actions that you should take in the event that you're on the receiving end of a demand letter from an adversarial party.

Don't Blow It Off

You or your business can suffer consequences from failing to answer a demand letter in a timely fashion. Most demand letters will instruct you to provide a written reply (your response letter) within a certain amount of time (the response deadline), or else the sending party (the obligee) will consider taking legal action against you. Although you're generally not legally bound to send a reply before the response deadline (or at all), the referenced time frame can give you some insight as to the obligee's eagerness to move forward with the adversarial process. Ignoring a demand letter — particularly if you don't read it at all — usually gives the obligee no other choice but to initiate a formal legal action against you or your business, perhaps even sooner than they otherwise would have. Once the obligee has expended funds to hire a lawyer and file an official complaint, there is often little that you can do to stop the process. Furthermore, in the subsequent legal proceeding, the obligee will be able to argue to the trier of fact that they offered you a reasonable time to amicably resolve the issue, but you ignored their good faith efforts.

Demand letters can either be expected or unexpected. Your motivation and willingness to confront the matters described in the letter will not only depend on your assessment of the merits of the underlying claim, but also on your visceral reaction. No matter what your attitude is towards the dispute, you must sufficiently restrain your emotions so that you can readily address the issue. By simply reading the letter (rather than throwing it away or tossing it aside), you might even realize that the other party's demands are more reasonable than you had previously anticipated. This would give you the opportunity to save yourself unnecessary strife by readily redressing the outstanding matters. Note that, in the event you're able to reach a mutually satisfactory conclusion, the obligee should provide you with a signed and notarized written release.

Assess the Validity of the Arguments

Once you've read the demand letter in full, make an honest assessment of the validity of the obligee's arguments, including any monetary amounts that you might legitimately owe them. Also, make note of any discrepancies you see in the obligee's recitation of the underlying factual background. Furthermore, you should make a tabulation of any deductions or counterclaims that you feel you could rightfully assert against the obligee.

Understand the Obligee's Motives

Every demand letter is issued with varying motives and levels of expectations. Although most demand letters use hyperbolic language intended to elicit your compliance (by threatening a lawsuit), this is often a bluff meant to intimidate you into some sort of settlement — even if it's for much less than what the demand letter is requesting. In particular, this might be the case if the obligee believes that you're either lacking adequate counsel, naïve with respect to legal matters, or unlikely to effectively rebut the merits of their claims. In short, the obligee might simply feel that sending a terse demand letter could be a quick and cost efficient way for them to walk away with something rather than nothing.

Even in cases where the obligee's claims are entirely warrantless or frivolous, the obligee could still try to bully you into a settlement if they believe you'll seek to avoid litigation at all costs.

Determine Whether or Not You Need a Lawyer

If you already have an attorney, then you will likely want to have them respond to opposing counsel on your behalf. If you don't have an attorney, you still might consider hiring one for the sole purpose of responding to the demand letter, if you can negotiate a nominal, one time legal fee. Using an attorney adds legitimacy to your response letter and ensures that it is written with relevant legal arguments and vernacular.

Respond Formally, Factually, and Professionally

If you elect to prepare the response letter yourself (in other words, without an attorney), then be sure to deliver it within the requested time frame. Your response letter should be both factual and professional and written on your company's letterhead. Based on the merits of the claim, your available resources, and your personal situation, you'll have to determine how vigorously you want to respond; but you should only include as much forceful language as is minimally necessary to convey your arguments effectively. Always remember that part of the obligee's motivation in eliciting your written response is so that they can possibly use it against you in court. If the obligee can demonstrate that your response letter was merely a vitriolic rant devoid of any cogent argument, then it will likely tarnish the launch of your defense. And with the judge (as with anyone else), you only get one chance to make a first impression.

Furthermore, keep in mind that attorneys often write these types of letters for their clients solely to earn a fee, without fully understanding the particulars of the underlying history. If you respond to the demand letter in a factual, deliberate, and conscientious way, then it's possible that the obligee's legal counsel could convince their client to either abandon the dispute altogether or take a more conciliatory approach, based on their recent revelations.

Get Verification of Receipt

When you deliver your response letter, make sure that you send it to the obligee's attorney via both email and a postal service that allows you to track and confirm delivery. You should have some form of tangible evidence that your response letter was both delivered and accepted. Save this documentation in a safe place, just in case you need to produce it in connection with a future proceeding.