What is a demand letter for a breach of contract?
If you are involved in a dispute regarding a contract because you believe that the other party is not living up to their end of the bargain, the first formal step in solving the issue is to provide a notice of breach. The notice, typically in the form of a letter (sometimes called a “demand letter”), expands on your belief that the other party has failed to perform their obligations under the contract and outlines the necessary steps to either remedy the situation or terminate the contract and compensate for the harm.
Not all notices are general; some provide specific instructions on how to fix the problem and when you can expect to see results. Some notifications are more general and mainly function as an invitation to discuss the matter further.
What to include in a demand letter
In the event of a contract dispute, the following is a checklist of items to include in a notice of breach.
- Clarify the date: The date of the official notification of the breach to the party in breach is an essential element of the demand letter. If the matter goes to court, that date could be crucial. The party that isn’t in breach should make sure they’re sending the notice to the correct person using the right format before sending it.
- Read the notice clause carefully: One common feature of contracts is a provision that specifies the parties’ contact details and the method of notice communication. Certain forms of notice communication may be required, such as email, fax, or overnight mail. If these protocols are not followed, the rights of each party could be affected. Such a notice may not “count” as notice of the breach if sent to the incorrect address or by the incorrect method, allowing the party responsible for the breach additional time to fix the issue.
- Explain the violation: It is essential that the notice specifies which provision of the contract was violated. There are typically three forms of a breach, which is defined as a failure to perform as outlined in the contract: 1) The other party has not fulfilled their end of the bargain (e.g., you haven’t gotten your money or the promised goods yet); 2) The other party has already stated that it won’t fulfill its obligations going forward; or 3) The other party has made it so that you can’t fulfill your end of the bargain (e.g., you were hired to change a software program, but the company won’t give you the code).
Whatever the cause of the breach, your letter must specify which contract provisions are at issue. Claim the most serious violations first and then list any others that may have occurred.
- Check that it is a “material” violation: Although you are free to give notice for any breach, it’s important to remember that courts pay special attention to “material” breaches, defined as the other party’s actions that significantly diminish the contract’s value. Notifying the other party of a “non-material” breach (sometimes called a “partial breach” or a “immaterial breach”) is okay, but in most cases, will not result in the termination of the agreement.
- Provide a solution: It might be too late to resolve the issue in certain instances. In such case, the demand letter is a cancellation of the agreement and a demand for damages. However, in most cases, the goal of serving a notice of breach of contract is to rectify the situation while preserving the validity of the deal. That is why it is common practice to include a grace period in the letter, giving the party in breach the opportunity to remedy the situation.
A standard contractual remedy is a “cure period,” which is typically thirty days. Offering a cure period might be beneficial to you, even though it appears pointless at the moment. Perhaps the other side is oblivious to the issue or is experiencing temporary difficulties that make it hard to comply with the contract terms.
- Do not use emotional language: The tone of the notice of breach of contract should be objective and professional. Keep in mind that this letter, along with any other correspondence leading up to a lawsuit, may end up as an exhibit in the court documents. A letter that is overly dramatic, aggressive, or bullying will not be well-received by the court or jury. Do not stray from the facts.
- Seek to resolve it: You should attempt to resolve the issues informally before sending the notice (or maybe even simultaneously). You might end up saving money, time, and maybe even your business relationship if you do this. For example, if a deal isn’t as profitable as you had hoped, you shouldn’t use the notice to threaten a lawsuit as a means of business intimidation. Particularly when bluffing (and subsequently embroiled in a protracted legal struggle), that strategy frequently backfires.
- Lastly, a separate agreement terminating the contract is the best way to formally end (or “discharge”) the agreement if both parties so desire. A mutual rescission agreement is a common tool for this purpose. An in-depth settlement and release is required, however, if either party has partially completed the contractual duties (such as building a house).
The Reaction to a Demand Letter
The other party to the contract may respond in one of the following ways after you send a demand letter:
- No reply: Send a follow-up letter referencing your first one if you haven’t heard anything after two weeks. Seek legal counsel if you do not hear back after sending a second letter. Using a lawyer’s stationery for your letter might be more effective. In such case, you should consult an attorney to decide on your next course of action.
- Go away: The response you get might be something along the lines of “get lost” or something similar. They may say: “We read your letter and decided that our company has not broken the agreement.” Because the other side could be right at times, you should talk to a lawyer before responding angrily.
- We should have a conversation: You might be getting closer to a solution if the reply letter asks for a meeting to go over the issue. If you want to know what to do next, especially if you want to settle with the other party in writing, you should probably talk to an attorney.
- We surrender: Well done. You came out on top. How you choose to conclude matters determines what follows. A formal settlement agreement may be necessary if the breach is significant or of a certain type. Once again, legal counsel can ensure a proper conclusion.
