What About Demand Letters?

Originally published by Josie Morgan.

Demand letters are, ideally, a tool that can be used to recover funds and settle a dispute without the need to file a lawsuit. Of course, demand letters do not always lead to settlement and, thus, they are frequently a predecessor to litigation. This dual impact—a shot at settlement and the “teeing up” of potential claims—makes demand letters critical.

Unfortunately, attorneys often send out form demand letters with little thought. “You owe me $20,000 under a contract and/or you defrauded me. Pay up or I will sue you.”

Demand letters should not take long to write, and we do them frequently. But there are some crucial factors to consider in crafting a demand letter. These items take little time to consider, but many lawyers still frequently overlook them.

Here are some common mistakes I see attorneys making with respect to demand letters:

1. Failing to think through insurance issues. If you are owed money and are considering litigation to collect it, your chances of you collecting the full sum without the need for a protracted dispute increase drastically if your claim is covered by the other side’s insurance policy. Most insurance policies do not cover breach of contract claims where they are accompanied by allegations of intentional, wrongful conduct, such as fraud. So, before your attorneys start hurtling accusations of fraudulent or other intentional misconduct around, think those accusations through. If the party you are trying to collect from has an insurance policy, they will send your demand letter to the provider. Don’t draft the demand in a way that will enable that insurance provider to abruptly deny the other side coverage. If your adversary is insured, the sooner their insurance provider elects to cover a claim, the more quickly you can collect.

2. Sending demands from the wrong channels. A few years ago, I coined the term “litigation avoidance” to describe a portion of my practice. Although I spend a lot of time in the courtroom, my advice is always to make yourself whole without the need for litigation if possible, and where it meets the client’s business goals. To this end, I refrain from escalating situations unnecessarily. So, I think carefully about who the demand should be sent to and, perhaps more importantly, who the demand should come from. Keep in mind that a hostile demand letter from outside counsel, as opposed to a person in the business, may cause the other side to get defensive, dig in, or be reluctant to consider negotiating informally. Sometimes the communication should come from the business, and not the lawyers. On the flip side, if negotiations have continued, fruitlessly, without attorney involvement, it may be time to “call in the muscle” and send the communication through an attorney. Do not overlook these simple, but highly strategic, considerations.

3. Not having documentation in place. Do not, and I repeat do not, reference evidence (such as damning communications or evidence of costs incurred) that does not exist. The side will ask to see that evidence, typically immediately, and you will find yourself “two steps back.”

4. Sending demands to begin with. There are inevitably times where you just need to short-circuit the “letter writing campaign” and file suit. You may need to seek emergency injunctive relief to prevent ongoing violations of, say, a non-compete agreement. You may need to be the first party to file suit because of strategic concerns relating to the selection of the forum for a lawsuit. In these (rarer) scenarios, you may want to refrain from sending an initial demand at all.

In short, demand letters, like any other aspect of our legal practice, require thoughtfulness and mindfulness to be effective. Don’t fall victim to “form” letters. Be sure your attorneys think through these and other critical issues.

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