Our partners at LawBite receive dozens of requests for help from clients on this topic every week and typically things are settled quickly and amicably. After so many requests from Small to Medium Enterprises (SME’s), here they share some best practice for self-help before picking up the phone and dialling legal emergency 999.
As a general rule, court proceedings should be seen as a measure of last resort as they are invariably costly, time-consuming and may not achieve the commercial solution needed by your business. A breach of contract letter before action or a letter of claim as it is often termed provides formal notification of an impending lawsuit.
It may indeed be enough to prompt payment and satisfaction of the outstanding debt where a client has refused to pay an invoice and is in breach of contract. As most businesses want to avoid time-consuming and costly litigation, such a letter provides an opportunity to settle the matter out of court.
A well-written letter before action provides a clear and strong signal regarding the seriousness of the matter at hand and emphasises that if necessary court action will be commenced. Under the Civil Procedure Rules (CPR), a claimant is obliged to send such a letter before commencing legal proceedings. The Pre-action Protocol sets out how parties should act when attempting to resolve matters prior to commencing court proceedings.
What to include in the letter
Whilst there is no official legal format that the letter must take, it should include all essential information, including details of the outstanding debt and a final deadline for payment and:
- The circumstances relating to the debt
- The basis of the claim and details of the breach of contract
- The amount owed and how this has been calculated and any interest due
- The timeframe within which the breach should be remedied, this period should be reasonable, with 14 days regularly used in such letters
- Any documents relevant to the matter can also be included
- Finally, the letter should state that if payment is not received within the stipulated period, proceedings will be commenced
Possible errors or difficulties with a letter before action
It is important to avoid inconsistencies between what is written in the letter and any court claim form or witness statements. As any such inconsistencies will almost undoubtedly undermine your case should the matter proceed to court. Similarly, the particulars included in the letter should be correct. Putting a precise figure on what is claimed to be owed, unless very certain of this figure and how it is calculated, may be risky. If in doubt it is better to err on the side of caution when it comes to putting a figure in with the claim.
Also, a claim should not be inflated, deliberately or due to ignorance of the rules about mitigation of loss. Therefore, in more complex cases, it is advisable that the letter be written by a lawyer.
An alternative option may be to issue a statutory demand as laid out in the Insolvency Act 1986. It is a formal written demand for a debt in excess of £750 and is effectively a precursor to insolvency proceedings. If the debtor does not pay within 21 days of receiving the demand, a creditor may then apply to the court to request bankruptcy (if an individual) or a winding up (if a company) if the debt is not paid.
Such a demand can only be issued in relation to matters which are undisputed and should only be used where a debtor does not have a bona fide defence and where the debtor has assets. It may be a useful debt recovery tool, as the mere threat of a winding up or bankruptcy petition may be enough to force action and settle the amounts owing. It is a relatively quick and inexpensive way to determine if a debtor will pay the debt owed.
Also, it’s worth noting that the Insolvency Act 1986 was amended. From October 2015 the minimum value of debt for the issuing of statutory demands will increase from £750 to £5000 in the case of individual bankruptcies. This change does not apply to company insolvencies. As such, this will limit the options available for recovery of small debts below the new threshold of £5000 where a company is owed such as debt by an individual such as a sole trader.
The sending of a letter before action or a statutory demand may in many cases be a cost effective way to resolve the dispute in a timely fashion and avoid the need for court proceedings. If, however, this does not bring about recovery of the sum owed, court action to recover the monies owed may need to be considered. In that event, it will be necessary to consider if this would be a prudent course of action to take and specialist advice may be needed to assess the risks and likelihood of success associated with the taking of any such action.
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