Key reasons why businesses should issue a letter of claim before taking legal action to recover a debt

If customers pay you late this can have a significant knock-on effect – especially if you are a small business or rely on a concentrated pool of customers. If your cash flow is affected by late payments, it could impact your own ability to pay suppliers, which could in turn damage your credit rating and have knock-on effects for the future of your business.

It is therefore vitally important to have robust procedures in place for pursuing late payments. These procedures must include issuing a formal letter of claim (required by the Practice Direction on Pre-Action Conduct (the PDPAC) contained in the Civil Procedure Rules (CPR), which govern civil court procedure in England & Wales and how parties to disputes must behave) before initiating any legal action in order to protect your legal position.

What is a letter of claim?

A letter of claim is, quite simply, a formal letter that should be sent to a debtor as a final step before issuing court claims for non-payment of a debt. It sets out the legal basis for why the debt is due and may offer a final opportunity to settle the matter before you take the debtor to court in pursuit of payment. There are a number of items the letter must include (which are slightly different depending on if your debtor is an individual or a business). However, it should always include:

  • Details of the debt owed, interest (and how it has been calculated) and how the debt has arisen
  • Details of how the debt can be paid
  • Documents or information that evidence the outstanding balance and the legal relationship between the parties
  • A set time period for the debtor to reply to the letter before legal action is commenced (the PDPAC prescribes a period of 30 days for individual debtors)
  • The consequences of ignoring the letter and failing to repay the debt

Often a letter of claim will include an offer to resolve matters through alternative methods of dispute resolution (such as negotiation or settlement discussions, or mediation ) without court proceedings being necessary.

Even if you have lost patience with the debtor, it’s important to issue a letter of claim before commencing court proceedings for two key reasons:

Saving time and expense

Issuing a formal letter of claim before embarking on legal action could provide an opportunity to save time and money.

Taking a dispute to court can be costly and time consuming for a business. If the debt owed is less than £10,000 it will be dealt with by the small claims court where the usual rule is that, even if successful, a party will not recover the legal fees it incurred in chasing the debt. Further, even in the swiftest of court proceedings, it can take a number of months to get to a final court judgment. Commercially, therefore, if an early resolution can be achieved without the court’s involvement, there are likely to be substantial benefits.

A letter of claim can instigate a more formal platform through which to resolve an outstanding debt, particularly if the debtor hasn't taken your previous requests for payment seriously. If payment has simply fallen off the bottom of the debtor's "to-do list", a formal legal letter will often focus the debtor's mind much more sharply than an accounts' team chaser. Alternatively, if there are genuine reasons why the debt has not been paid, it may be possible to open up discussions and resolve matters without the need for the court's involvement.

Complying with the court’s requirements

A critical benefit of issuing a letter of claim is that it ensures you have complied with the requirements of the court as set out in the PDPAC. The PDPAC dictates how parties to disputes should behave before court proceedings are issued. It places a strong impetus on resolving disputes without the need to involve the court. Parties are therefore encouraged to resolve issues swiftly and sensibly and to avoid unnecessary cases that clog up the court system. Failure to send a letter of claim or comply with the other requirements of the PDPAC could lead to the court making costs orders against you even if your underlying claim against the debtor is successful.

To make sure the letter of claim is as effective and compliant as possible, you may want to source legal support.

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