Reading time: 5 minutes

We all know how frustrating it is when a debtor is either unable or unwilling to pay you money that is due and owing. When the amount of that debt is significant, you will inevitably have to expend time and further money on legal fees to recover that debt. In most circumstances, you can recover at least a portion of the legal fees from your debtor. There are, however, a couple of things that you can do to assist with legal debt recovery. This article will cover steps you can take to avoid having any issues with debt recovery in your personal or business dealings, including:

  • being proactive with your contract drafting;
  • sending your debtor a letter of demand; and
  • being aware of certain factors once initiating court proceedings. 

Be Proactive With Your Contract Drafting

Being proactive in your contract can have two main benefits concerning debt recovery. Firstly, a good contract will clearly set out the rights and obligations of the parties. Secondly, if a party defaults in their obligations under the contract, a well-drafted contract may outline the process you can follow to recover damages. Your contract should include a clause (or clauses) setting out your rights and entitlements in circumstances where that party defaults on payment.

A well-drafted contract will state that you are entitled to claim all of your costs of recovery, including legal fees, from your debtor once they have defaulted on payment. You can rely on this clause during negotiations with your debtor, as well as later if you are required to commence formal court proceedings.  

Letter of Demand

Before you can begin formal court proceedings, you must send your debtor a letter of demand. As the name suggests, the purpose of a letter of demand is to demand payment of the outstanding debt from the debtor. It provides the debtor with a final opportunity to pay the debt before you commence court proceedings. A letter of demand will set out the: 

  • amount owing;
  • legal basis for the demand, including any supporting documents; and
  • the specific date by which the debt is due for payment.  

If the debtor does not pay the debt by the specified date, the next step is to consider the commencement of proceedings. 

It is also important that your letter of demand

  • identifies principal debt which is owing; and
  • makes it clear, if the debt is not paid, the debtor will be liable to pay any additional legal costs incurred as a result of the need to commence proceedings.

Sometimes, this alone is sufficient motivation for your debtor to pay any outstanding amount, and you will not need to proceed with legal debt recovery. This is because the debtor may be motivated to avoid the costs associated with court proceedings. 

What Else Do I Need to Know?

There are some other important factors you should know once you have initiated court proceedings which include:

  • if you commence proceedings in the Small Claims Division of the NSW Local Court, the court will cap your legal costs. For example, if your claim is worth between $5,000 and $10,000, you can only claim a maximum of $802.56 in legal costs (current as at 23 June 2016);
  • a party that is self-represented is not usually entitled to recover professional legal costs;
  • if you are unsuccessful in your proceedings, the court can make an order requiring you to pay the defendant’s legal costs. There are different types of costs, and the court can order costs on either an ordinary basis or an indemnity basis; and
  • the court can award costs against any party who causes an unnecessary delay during proceedings.

Key Takeaways 

When entering into new business arrangements, it is important to take some simple steps to ensure you are protected in the event that your invoices go unpaid. Firstly, you should ensure that your business dealings are governed by a well-drafted contract. This contract should make the obligations and rights of both parties clear. Before considering the commencement of proceedings, you should first issue a letter of demand. A well-drafted letter of demand may recover your debt without the need to proceed to court proceedings. This is beneficial as court proceedings can be time-consuming and costly, and you may not receive full legal debt recovery. If you require your contracts reviewed, need to start debt recovery proceedings, or if you have any questions about the Small Claims Court, get in touch with LegalVision’s dispute resolution lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

What is a letter of demand?

A letter of demand’s purpose is to demand payment of the outstanding debt from the debtor. It provides the debtor with a final opportunity to pay the debt before you commence court proceedings.

Should i include a clause in my contract relating to debt recovery?

Yes, it should include a clause (or clauses) that set out your rights and entitlements in circumstances where that party defaults on payment.

Webinars

Construction Contract Essentials

Thursday 12 August | 11:00 - 11:45am

Online
Understand how construction contracts are drafted and how to protect your construction business.
Register Now

Startup 101: Understanding Cap Tables and ESOPs

Thursday 19 August | 11:00 - 11:45am

Online
Cap tables and employee share option plans are essential for fast-growing startups. Learn more with this free webinar.
Register Now

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. From just $119 per week, get all your contracts sorted, trade marks registered and questions answered by experienced business lawyers.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

  • 2020 Excellence in Technology & Innovation – Finalist – Australasian Law Awards 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice – Winner – Australasian Lawyer 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards 2021 Law Firm of the Year - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer