If you run a business in Ontario or anywhere else in Canada, chances are you have dealt with a client who simply will not pay. Maybe the invoice is thirty days overdue. Maybe it is ninety. Maybe the client has stopped replying to emails altogether. This situation is one of the most common headaches for small and medium sized businesses, and it can quietly drain cash flow, strain supplier relationships, and eat up hours that should be spent running the business instead of chasing money that is already owed.
Before businesses jump straight into a lawsuit, there is a simpler, faster, and far less expensive first step: a demand letter. This article explains what a demand letter is, why it works, what it should contain, and how a lawyer can help you use it effectively to recover unpaid invoices.
What Is a Demand Letter for non-Payment?
A demand letter is a formal written notice sent by a creditor (the business or person owed money) to a debtor (the person or business that owes it), asking them to pay an outstanding amount within a specific period of time. It sets out the debt owed, the reason it is owed, and the consequence of continued non-payment, usually a lawsuit or referral to collections.
Whereas an ordinary payment request or follow-up email does not have any legal bearing at all, a demand letter is a legal letter. The way in which the demand letter is drafted clearly communicates to the debtor that the creditor is very serious in recovering his money and will use the legal system to do so in case of no payment. Where the demand letter has been drafted by a lawyer, it indicates that the creditor has sought legal advice.
In legal terms, a demand letter can also serve an important procedural function. Under Ontario’s Limitations Act, 2002, certain claims (for example, claims against a guarantor or in some debt-related disputes) only “crystallize” once a demand for payment has been made and refused. In other words, sending a demand letter is sometimes not just good practice, it may be a legal precondition to starting a claim at all.
Why Businesses send Demand Letters before filing a Lawsuit
Litigation in Canada is expensive, slow, and uncertain. Even a straightforward claim for an unpaid invoice filed in the Ontario Superior Court of Justice or the Small Claims Court can take months, sometimes years, to resolve, and legal costs can quickly outstrip the amount actually owed. A demand letter offers a faster, cheaper, and often equally effective alternative, at least as a starting point.
There are several practical reasons businesses choose to send a demand letter before considering a lawsuit:
- It is fast. A well-drafted demand letter can be sent within days, compared to the weeks or months required to prepare and file a Statement of Claim.
- It is inexpensive relative to litigation. Legal fees for a demand letter are a fraction of the cost of a contested court proceeding.
- It often works. Many debtors pay, or at least begin negotiating, as soon as they receive a letter from a lawyer, simply because it signals that the creditor is serious.
- It preserves the business relationship. A firm but professional letter can resolve payment issues without permanently damaging a commercial relationship the way a lawsuit often does.
- It creates a paper trail. If the matter does end up in court, the demand letter becomes evidence that the creditor gave the debtor fair notice and an opportunity to pay before litigation began.
- It may satisfy a legal requirement. As noted above, in some cases a demand is a necessary step before a limitation period begins to run, or before certain remedies become available.
Courts in Canada have also recognized the importance of good faith and honest dealing in the performance of contracts. In Bhasin v. Hrynew, 2014 SCC 71, the Supreme Court of Canada confirmed that there is a general organizing principle of good faith that underlies contract law, and that parties must not lie or knowingly mislead each other about matters directly linked to the performance of the contract. A demand letter, sent professionally and accurately, reflects this principle in practice: it gives the debtor honest and clear notice of the creditor’s position before more serious steps are taken.
Common Situations Where a Demand Letter Is Required
Demand letters are used across almost every industry, but some situations come up more often than others. Below are some of the most common scenarios where Canadian businesses turn to demand letters to recover money owed.
- Unpaid invoices for goods sold or services rendered, such as consulting fees, contractor work, or wholesale supply agreements.
- Breach of a commercial contract, where one party has failed to pay an agreed amount on the agreed date.
- Returned or dishonoured cheques and failed pre-authorized payments.
- Unpaid rent under a commercial lease.
- Loans or advances between businesses, or between a business and an individual, that have not been repaid according to the agreed schedule.
- Disputes over deposits, holdbacks, or final payments in construction and trades contracts.
- Claims against a guarantor, where a demand for payment is often a formal precondition to pursuing the guarantee.
In each of these situations, the demand letter serves the same basic purpose: to formally notify the debtor of the amount owed, the basis for the claim, and the timeline for payment before the creditor takes further legal steps.
What should a Demand Letter Include?
Not all demand letters are created equal. A vague or poorly worded letter may be ignored, or worse, it may weaken the creditor’s position if the matter later goes to court. A properly drafted demand letter should generally include the following elements:
- Names and addresses in their entirety for both the creditor and the debtor.
- A factual explanation of the debt including the contract involved, invoices numbers, date(s), and amount owing.
- Reference to the particular contract or purchase order giving rise to the duty to pay.
- The exact amount of money being requested for, along with any interest payable at the contract rate or in its absence the statutory rate.
- A realistic time period for the payment to be made, usually ten to fourteen business days.
- Consequences of not paying, which would include filing a claim against the debtor in Small Claims Court or the Superior Court of Justice.
- Details on where and how the payment should be made.
- An appropriate tone must be maintained. Threats or aggressive language will make the letter look suspicious, and sometimes even put you open to charges of harassment.
It is worth noting that Ontario’s Courts of Justice Act allows courts to award prejudgment interest (section 128) and post-judgment interest (section 129) on money owed, even where the underlying contract does not specify an interest rate. A demand letter that correctly references these entitlements, or the contractual interest rate where one applies, strengthens the creditor’s position and puts the debtor on clear notice of the full amount at stake, not just the principal.
What happens after sending a Demand Letter?
Once a demand letter has been sent, there are generally three possible outcomes.
- Full payment. In many cases, particularly where the letter is sent by a lawyer, the debtor pays the amount owed within the stated deadline, or shortly after. This is the outcome businesses hope for, and it is more common than many people expect.
- Negotiation or partial payment. The debtor may respond disputing part of the claim, proposing a payment plan, or offering a lump-sum settlement for less than the full amount. A lawyer can help evaluate whether a proposed settlement is reasonable given the cost, time, and risk of pursuing litigation instead.
- No response or refusal to pay. If there is no reply from the debtor or no payment made by him, some of the possible steps that the creditor may take include filing an action in Small Claims Court (if the amount involved is within the specified dollar ceiling), taking action in Superior Court of Justice (if the amount exceeds the ceiling), turning over the account to a collection agency, or taking any other suitable step.
No matter what the final result, however, the letter itself is included as evidence. In the event that a lawsuit should occur, the courts will usually ask whether there was an attempt at a fair resolution prior to the lawsuit and the demand letter can show such an attempt.
How a Lawyer can improve your chances of Recovery
Business owners are sometimes tempted to draft and send a demand letter themselves, and in very simple, low-value cases this can be a reasonable first step. However, engaging a lawyer to prepare and send the letter offers several distinct advantages.
- Credibility and seriousness. A demand letter written on the letterhead of the law firm will be taken much more seriously by the debtor because it means that there really is the possibility of legal action, rather than just a bluff.
- Legal precision. The lawyer will know which exact grounds the claim will be based on – be it a contractual one, a promissory note or a personal guarantee – and will be able to determine interest and damages according to the agreement and Ontario statutes.
- Appropriate tone and timing. The lawyer will know how to find the right balance between toughness and professionalism, and will give advice on realistic deadlines and further actions depending on the debtor’s reaction.
- Protection from risks. In some cases, demand letters might lead to the sender being accused of defamation or harassment if it contains false information and/or inappropriate threats.
- Seamless escalation. If the debtor does not respond, a lawyer who has already reviewed the file is positioned to move quickly to the next stage, whether that is a Small Claims Court action, a Superior Court claim, or another available remedy, without losing time re-explaining the background of the dispute.
This is crucial: no matter how well written your letter of demand is, it does not necessarily ensure that you receive your payment. There will be instances where debtors truly have no means to pay; unfortunately, no letter can alter this situation. However, a well-written letter will greatly increase the chances of an effective resolution.
Why choose Pacific Legal for Demand Letter?
At Pacific Legal Professional Corporation, we work with business owners across Canada who are dealing with overdue invoices, unpaid contracts, and difficult debtors. Our approach is practical and business-minded: we understand that most clients want their money back quickly, at a reasonable cost, without unnecessary conflict.
When we help you prepare a demand letter, we make sure to fully understand the relevant agreement, confirm the amount owed, and find the best possible reason to pursue your claim – be it breach of contract, a promissory note that needs to be repaid, or even personal guaranty of some kind. We will make sure that the letters you receive are well written and researched, and we will provide an honest evaluation of what you should expect from the procedure.
However, if there is absolutely no response from the debtor, we will be able to offer you an appropriate course of action, which may include going to the Small Claims Court or suing for the debt in the Superior Court, or whatever else fits your situation. Schedule your consultation now!
FAQs
What is a letter of demand for an overdue invoice?
A letter of demand for an overdue invoice is a formal written notice sent to a client or customer who has not paid an invoice by its due date. It sets out the amount owed, the invoice details, and a deadline for payment, along with a warning that legal action may follow if payment is not made.
What are common reasons for a demand notice?
Demand notices are commonly sent for unpaid invoices, breach of a commercial contract, unpaid rent under a lease, dishonoured cheques, unpaid loans between businesses or individuals, and claims against a guarantor under a personal or corporate guarantee.
What document is used as a demand for payment?
The document typically used is called a demand letter or letter of demand. It is a formal written notice, usually prepared by the creditor or their lawyer, that sets out the debt owed and requests payment within a specified period before further legal steps are taken.
How much does a lawyer charge to prepare a demand letter?
Costs vary depending on the complexity of the debt and the law firm involved. Many lawyers offer demand letters at a flat or modest fee, since the letter itself is usually a straightforward document once the underlying facts and contract are reviewed. It is best to ask for a fee estimate upfront before engaging a lawyer.
Can I send a demand letter myself?
Yes, a business owner can send a demand letter without a lawyer, particularly for smaller or straightforward amounts. However, a letter sent by a lawyer often carries more weight with the recipient and is more likely to prompt a prompt response or payment.
Does a lawyer’s demand letter carry more weight?
In practice, yes. A letter on law firm letterhead signals to the debtor that the creditor has taken formal legal advice and is genuinely prepared to pursue legal action if payment is not received, which often results in a faster and more serious response than a letter from the business itself.
How long should I wait after sending a demand letter?
Most demand letters set a deadline of ten to fourteen business days for payment or a response. The appropriate timeline depends on the size of the debt, the relationship with the debtor, and any applicable contractual terms, so it is worth discussing the right deadline with your lawyer.
What if the recipient ignores the demand letter?
If the debtor does not respond or refuses to pay, the creditor’s options generally include filing a claim in Small Claims Court or the Superior Court of Justice depending on the amount owed, referring the matter to a collection agency, or pursuing other available legal remedies such as a claim against a guarantor.
Can interest be claimed on unpaid invoices?
Yes. If the contract specifies an interest rate for late payment, that rate generally applies. Where the contract is silent, Ontario’s Courts of Justice Act allows courts to award prejudgment interest under section 128 and post-judgment interest under section 129 on the amount owed.
