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

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

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

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards