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

What an Ordinary Letter of Demand Is — and Is Not

An ordinary letter of demand is a written pre-action communication asserting that a person owes money, has breached an obligation or has otherwise caused loss, and inviting or requiring some response. It usually sets out the facts as the sender sees them, the legal or contractual basis relied on, the amount or action demanded, a stated date for response and an indication of what the sender may do if the demand is not met.

It must be distinguished from several formal documents that have their own statutory form, service rules and consequences:

• a statutory demand under Part 5.4 of the Corporations Act 2001 (Cth), which is served on a company for a debt that is due and payable. Compliance may occur, within the statutory period, by paying the debt, or by securing or compounding for it to the creditor's reasonable satisfaction; a timely application under section 459G may seek to set the demand aside. Non-compliance can produce the statutory presumption of insolvency, subject to the Act;
• a bankruptcy notice under the Bankruptcy Act 1966 (Cth), which is issued in respect of a final judgment or order and, if not complied with or set aside in accordance with the Act, may found an act of bankruptcy;
• court or tribunal originating process (a complaint, writ, statement of claim, application or the equivalent), which commences proceedings and triggers strict rules-based timeframes to respond;
• security-enforcement notices (for example under the National Credit Code, the Property Law Act 1958 (Vic), mortgage or PPSA-related notices), which have their own preconditions and grace periods; and
• industry-specific notices, including director penalty notices from the Australian Taxation Office, retail or residential tenancy notices, and regulatory notices, each with their own timing and consequences.

Deadlines, evidentiary consequences and remedies that attach to one of these instruments do not transplant to an ordinary letter of demand.

Common Types of Claims

• Unpaid invoices and debt-recovery claims for goods supplied or services rendered.
• Breach of contract — defective work, non-performance, late delivery or alleged repudiation.
• Property damage — including workplace, motor vehicle and neighbouring-property claims.
• Misleading or deceptive conduct and other Australian Consumer Law claims.
• Recovery of overpayments or duplicated payments (restitution / money had and received).
• Defamation — concerns notices and demands for retraction under the Defamation Act 2005 (Vic) as amended.
• Employment-related claims — unpaid entitlements, alleged adverse action or restraint of trade.

Deadlines: The Sender's Date Is Not the Only One

The date stated in a letter of demand — most commonly 7, 14 or 28 days — is usually the sender's tactical or commercial deadline, not a legal one. It may be important where a contract or a statute supplies its own timeframe (for example, a contractual notice period, the statutory period applicable to a corporate statutory demand under Part 5.4 of the Corporations Act 2001 (Cth), timeframes on a bankruptcy notice or a regulatory notice), but a general pre-action letter does not create legal consequences merely because a date passes.

Separately identify:

• any contractual notice, cure or dispute period that applies to the underlying dispute;
• any statutory deadline attached to the type of document;
• any insurance notification requirement under a relevant policy — these are typically contractual conditions or requirements under the policy (subject to insurance law), not statutory deadlines merely because they are important, but they can be short and time-critical;
• any relevant limitation period (see below); and
• any procedural timeframe applicable once proceedings are on foot.

Limitation Periods

Limitation periods are claim-, jurisdiction- and accrual-specific. In Victoria, the Limitation of Actions Act 1958 (Vic) applies a general six-year period to many simple contract and tort claims, but a range of other causes of action are governed by different periods (deeds, land recovery, personal injury, defamation, trust and equitable claims, statutory claims and Commonwealth causes of action), with discoverability rules and provisions for postponement or extension in defined circumstances (for example, disability, fraud, concealment, mistake and part payment or acknowledgement of a debt in writing). Sending or receiving a letter of demand does not, of itself, stop time running for limitation purposes.

If a limitation period may be near, take advice immediately: expiry may provide a complete defence or bar the remedy, subject to the applicable limitation regime.

Silence Is Not an Admission

Not responding does not, by itself, admit the claim, and an unanswered letter of demand does not by itself found liability. Responding is often prudent, however: depending on the context, an early response can correct facts, seek documents, propose settlement or invoke a dispute-resolution process, and silence can carry practical and costs risks in some circumstances.

Preserving Evidence and Notifying Insurers

On receipt of a letter of demand, prompt evidence preservation is prudent risk management. Consider:

• relevant contracts, purchase orders, terms of trade 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.

A written internal hold on document destruction (paper and electronic) is often appropriate; routine deletion under a document-retention policy after a dispute has crystallised can be criticised later. Consider whether the claim triggers a duty to notify an insurer or an indemnifier — many liability, professional indemnity and management liability policies impose short notification timeframes.

Open Correspondence vs "Without Prejudice"

An open letter is one on which either party may rely in court. A "without prejudice" communication is generally protected from being tendered to prove liability, but the label alone does not create privilege — the protection generally requires a genuine attempt to settle an existing dispute, and does not cover admissions of fact made outside that purpose or statements not truly directed at settlement.

Use each register for its own job. Where you need to state your position openly — for example to deny liability, correct alleged facts, dispute quantum, reserve rights or request documents — write an open letter. Do not mark a substantive denial "without prejudice": it may be needed as your open position. Settlement proposals should be sent as separate "without prejudice" correspondence. Marking an offer "without prejudice save as to costs" (often referred to as a Calderbank-style offer) is intended to allow the offer to be brought to the court or tribunal on questions of costs after judgment, subject to the relevant rules and the exercise of discretion.

Working Through the Claim

Whether responding openly or preparing a settlement proposal, work through the claim systematically:

1. identify the correct parties, their capacity (individual, trustee, director, agent) and any guarantor;
2. separate liability from quantum, and check any contractual precondition to a claim;
3. consider set-off, counterclaim, credits, back-charges, accord and satisfaction, waiver, estoppel and release;
4. check limitation, jurisdictional and procedural defences;
5. assess documentary and witness evidence, including gaps that may need to be addressed; and
6. evaluate interest and costs positions and any statutory or contractual entitlements.

Interest, Costs and Enforcement

Recovery of interest and costs is not automatic. A contractual interest rate may be recoverable if the contract properly provides for it, is not challengeable on other grounds and complies with any applicable statute; in the absence of a contractual rate, prejudgment and post-judgment interest may be available in some courts and tribunals at the applicable statutory rate and discretion. Legal costs generally depend on the forum's costs rules and any judgment in the sender's favour. Fixed "collection costs" or administration fees claimed in a demand are not enforceable unless properly grounded in contract or statute — and even where a contract refers to such fees, they may still be subject to unfair-contract-term regimes, the penalty doctrine, reasonableness and other statutory controls, so contractual wording alone does not make every fee recoverable. Enforcement of any judgment is a separate process governed by the relevant court's rules and enforcement legislation.

Forum and Jurisdiction

The appropriate forum depends on the cause of action, the amount, any enabling legislation, any federal issues and the relief sought:

• general civil money and contract claims in Victoria are usually heard in the Magistrates' Court, County Court or Supreme Court depending on quantum and complexity — check the current monetary jurisdictional limits for each court rather than relying on older figures;
• VCAT is a statutory tribunal with jurisdiction only over disputes that enabling legislation directs to it (for example residential tenancies, some retail lease disputes, owners corporations and certain consumer claims under the Australian Consumer Law and Fair Trading Act 2012 (Vic)); it is not a general debt-recovery court, and it cannot exercise federal jurisdiction; and
• federal courts only have the jurisdiction conferred by statute. The correct federal forum for any federal cause of action (for example some corporate, intellectual property, competition, migration and federal-employment matters) depends on the cause of action, the statute conferring jurisdiction and the relief sought, and could be the Federal Court of Australia or the Federal Circuit and Family Court of Australia (which does not have general civil jurisdiction over every corporate, intellectual property, competition, migration or employment matter).

Companies and Directors

A company is a separate legal person, and directors are not automatically liable for company debts. Personal claims against a director require a proper basis — typically a personal guarantee, personal tort or misleading conduct in a personal capacity, statutory liability (such as director penalty notices for unremitted PAYG, GST or superannuation guarantee amounts under the Taxation Administration Act 1953 (Cth), or insolvent trading liability under the Corporations Act 2001 (Cth) subject to the safe-harbour rules), or breach of a fiduciary or statutory duty. Assess any personal claim on its stated basis rather than assuming exposure.

Genuine Dispute, Insolvency Documents and Court Process

There is an important difference between disputing a claim on genuine grounds and being unable to pay an uncontested debt, and between three quite different instruments that are sometimes loosely lumped together:

• a corporate statutory demand under Part 5.4 of the Corporations Act 2001 (Cth) may be set aside on the statutory grounds — including a genuine dispute about the existence or amount of the debt, an offsetting claim, a defect in the demand that causes substantial injustice, or some other reason;
• a bankruptcy notice under the Bankruptcy Act 1966 (Cth) ordinarily rests on a final judgment or order. A debtor cannot simply rely on an asserted "genuine dispute" as though the underlying claim had never been adjudicated; the available grounds, any counterclaim, set-off or cross-demand and any application to set the notice aside depend on the Bankruptcy Act and the judgment context; and
• a winding-up application and an ordinary civil debt claim have distinct thresholds and procedures, and disputed liability is usually addressed through ordinary civil recovery rather than an insolvency application.

If you receive a statutory demand or a bankruptcy notice, obtain specialist advice immediately: each has short statutory timeframes and consequences that are outside the scope of a general guide.

Debt Collection Conduct: What Is Not Permitted

A demand must not threaten action without a proper basis, misstate legal rights, remedies or consequences, use collateral or improper pressure, or threaten criminal, regulatory or publicity action merely to force payment of a genuinely disputed civil claim. Not every reference to a civil claim, insolvency step, regulatory report or costs is improper — a measured and accurate notice that the creditor genuinely intends to take an available civil or insolvency step in relation to an undisputed debt that is due is not automatically improper. Misleading or unconscionable conduct in trade or commerce can breach the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 (Cth)) and equivalent state laws. The ACCC/ASIC joint Debt collection guideline: for collectors and creditors is regulatory guidance rather than legislation, but it reflects the regulators' view of conduct that may breach Commonwealth consumer-protection, credit, privacy and other laws; harassment, coercion and misleading statements should be assessed against the actual statutory source that applies to the conduct in question. Handling of personal information may engage the Privacy Act 1988 (Cth) and the Australian Privacy Principles, and legal practitioners are bound by professional-conduct rules on truthful communication and not threatening improper action.

Settlement, Deeds of Release and Payment Plans

Many commercial disputes resolve without a hearing. Settlement should be recorded in writing; significant or ongoing arrangements are usually documented in a deed of release or settlement deed. Draft carefully: a release binds only the parties to it and generally covers only the claims and matters described. Unknown, statutory or future claims are not automatically released, and releases cannot contract out of statutes that prohibit such contracting out. If a payment plan or instalment arrangement is agreed, address default consequences, interest, any security, confidentiality (if desired) and authority to bind each party. Payment or acknowledgement of a debt in writing can, in some circumstances, affect limitation, but only where the statute so provides.

Sending a Letter of Demand: Measured Drafting

If you are the sender, treat the letter as pre-action correspondence rather than a rhetorical exercise. A well-drafted demand generally addresses:

• the correct parties and the capacity in which each acts;
• a concise factual chronology;
• the legal or contractual basis relied on, with references to the relevant clauses or provisions;
• the amount claimed and how it is calculated, including interest (if any) and its basis;
• the key supporting documents (attached or clearly identified);
• a precise demand — for payment, performance, rectification, cessation or delivery up;
• a reasonable response date where no rule fixes one;
• payment or performance details;
• a reservation of rights (including as to costs, interest and further steps); and
• a proposed dispute-resolution or settlement pathway, such as direct discussion, mediation, a small business commission process (where eligible) or an industry ombudsman scheme.

Comply with any contractual notice requirement and any statutory pre-action step that applies to the type of claim. In Victoria, once proceedings are commenced, the overarching obligations under the Civil Procedure Act 2010 (Vic) (including a paramount duty to the court and obligations to act honestly, to only make claims with a proper basis, and to minimise cost and delay) apply, and pre-action conduct is best conducted so that it sits comfortably with those obligations rather than at odds with them. The Civil Procedure Act does not itself require a particular pre-action letter or mediation step in every dispute; specific pre-action requirements depend on the underlying substantive law and any contractual dispute-resolution clause.

Service and Proof of Delivery

How a demand should be sent, and how delivery is proved, depends on the contract, any statute and the applicable court or tribunal rules. Email, ordinary post, registered post and personal delivery are not universally effective merely because they are used: contractual notice provisions, statutory service rules and, for corporate statutory demands, the specific service requirements in the Corporations Act must be followed. Where the type of document has strict service rules (for example a statutory demand or a bankruptcy notice), defective service may invalidate, delay or prevent reliance on a step, and some defects may be curable or otherwise dealt with — the effect depends on the instrument, the defect, the statute and the procedural response, so the exact statutory or contractual service rules should be followed without assuming a universal outcome.

When Legal Advice Is Needed

Take advice early — ideally before sending any response. A short consultation with a litigation lawyer can:

• identify the document type and the deadlines it does (and does not) create;
• assess merits, defences, set-off and counterclaim;
• identify limitation, jurisdictional and procedural issues;
• triage insurance and notification obligations; and
• recommend the best combination of open and "without prejudice" correspondence for your position.

Parke Lawyers acts for Victorian individuals and businesses on both sides of pre-action correspondence: drafting demands, responding to demands received, negotiating and documenting settlements, and running proceedings where matters do not resolve. For an overview of what happens if a matter escalates to tribunal proceedings, see our companion guide on going to VCAT.

Frequently Asked Questions