I Have Received a Letter of Demand: What Should I Do?

What a Letter of Demand Is

A letter of demand is a formal written notice asserting that one party owes money, has breached a contract, or has otherwise caused loss, and requiring rectification within a defined period. It typically sets out the facts, the legal basis for the claim, the amount sought (or the action required), a deadline for response, and a statement of intention to commence proceedings if the demand is not met.

Common Types of Claims

• Unpaid invoices — by far the most common letter of demand in commercial practice.
• Breach of contract — defective work, non-performance, late delivery or repudiation.
• Property damage — including workplace, motor vehicle and neighbouring-property claims.
• Misleading or deceptive conduct under the Australian Consumer Law.
• Recovery of overpayments or duplicated payments.
• Defamation — concerns notices and demands for retraction.
• Employment-related claims — unpaid wages, alleged adverse action, restraint of trade.

Time Limits

Causes of action have statutory limitation periods. Under the Limitation of Actions Act 1958 (Vic), contract and tort claims are generally limited to six years from the date the cause of action accrued. Other claims have shorter limitation periods — for example, defamation claims are generally limited to one year. A letter of demand near the end of a limitation period is a signal to respond carefully and quickly; proceedings could follow within days.

Preserving Evidence

On receipt of a letter of demand, gather and preserve evidence. This includes:

• all relevant contracts, purchase orders and quotes;
• email, text and messaging records;
• invoices, statements, payment records and bank statements;
• file notes, diary entries and call logs;
• photographs, drawings and other visual records; and
• names and contact details of witnesses.

Issue an internal hold on document destruction. Spoliation of relevant records — even routine deletion under a document-retention policy — can be used against you if proceedings follow.

Risks of Ignoring Correspondence

Ignoring a letter of demand has consistent consequences:

• the sender escalates to proceedings, usually within weeks;
• early opportunities to negotiate are lost;
• the unanswered letter sits on the Court file as evidence of an unreasonable attitude on your part, which influences costs orders; and
• you lose the opportunity to test the strength of the other side's evidence before they commit to proceedings.

Negotiation Options

A measured response opens negotiation. Options include:

• acknowledgement of receipt and a request for further information or supporting documents;
• a 'without prejudice' settlement offer designed to resolve the matter commercially;
• an offer of part payment or a payment plan where liability is conceded but quantum is disputed;
• referral to mediation or industry dispute resolution schemes (small business commission, fair trading, industry ombudsmen); or
• a formal denial with reasons.

Settlement Opportunities

Most commercial disputes settle. The question is when and on what terms. Early settlement — before either side has invested heavily in legal costs — is generally cheaper and more flexible. Settlement should be recorded in writing, and significant settlements should be documented in a deed of release that addresses confidentiality, non-disparagement and the full and final nature of the release.

When Legal Advice Is Needed

Legal advice should be obtained early — ideally before sending any response. A brief consultation with a litigation lawyer will identify:

• whether the claim has legal merit;
• whether limitation, jurisdiction or procedural defences are available;
• the realistic range of outcomes if the matter proceeds; and
• the best tactical posture for your response.

For what happens if a dispute escalates, see our companion guide on going to VCAT.

Frequently Asked Questions