You suddenly receive numerous customer complaints about your company’s top selling product. You learn your supplier secretly changed the materials in a key component of your product, and the product now performs below expectations which is costing your company substantial revenue.
Because you read our previous litigation blog post, you knew that immediate investigation and document preservation are essential. You interviewed your own employees to learn all interactions with the supplier and customers, and you have documents reflecting cancelled orders and lost revenue.
You ask your lawyer to immediately file a lawsuit, but he recommends first sending a demand letter to the supplier. Your initial reaction is to question your lawyer- Why would he want to delay a lawsuit by sending a letter?
A demand letter from a lawyer is often a critical step in the litigation process for many reasons. A well drafted letter to the opposing party setting forth the facts supporting a claim and your damages serves multiple purposes.
Generally, this letter can help avoid a lawsuit which should be the goal in any situation. Among other things, avoiding a lawsuit keeps your dispute out of the public records so that the world does not know about your dispute with a supplier. At this stage, parties may be more willing to pay more money or accept less money to resolve a dispute since significant legal fees have not been incurred and settlement will avoid a public record of a lawsuit. Once each side incurs legal fees, it is normal for parties to dig in their heels and take those fees into account when evaluating settlement.
A well drafted demand letter with backup documentation also shows the opposing party you are serious and prepared to file a meritorious lawsuit. The demand letter should be factual and avoid personal attacks. At this stage, the goal is to investigate if a settlement is possible, and not to cause a further rift between the parties.
The process of working with your attorney to prepare this letter is also beneficial. You may learn from your attorney that certain damages are not recoverable, or your attorney may ask for additional documentation that you did not realize was relevant.
However, if you are asserting a claim for damages, your attorney should not just send off a quickly drafted demand letter asking for money. A demand letter will not be beneficial unless it is supported by facts or documentation. Opposing parties do not simply open their wallet and pay money when they receive a demand letter without seeing backup to support the damages. If you have solid evidence to support for your claim, there is often no reason to avoid providing those documents or the information to the opposing party at this early stage so that the opposing party can fully evaluate your claim for damages.
A demand letter can elicit a variety of responses, many of which are beneficial. We are always hopeful that the other side responds by indicating a desire to negotiate and avoid a lawsuit. However, a response from the other side setting forth their version of the facts and their defenses also provides value, as you may learn your claim is not as strong as you initially believed. This gives you the opportunity to further discuss the case with your attorney and decide if a lawsuit is appropriate. You may learn other information which may dissuade you from filing a lawsuit, such as the possibility that the opposing party is going out of business and there is no money or assets to satisfy your claim. This information is also helpful, as a lawsuit against a party with no assets may be a waste of money and resources.
In addition, responding appropriately to a demand letter is equally as important. If you are served with a demand letter it is imperative that you meet with an attorney to determine how to respond. If the letter raises issues that may be covered by an insurance policy, it is often appropriate to send the letter to your insurer. Ignoring demand letters will put you at a disadvantage if a lawsuit is later filed against you.
In our next blog post, we will discuss the litigation process that often commences when pre-lawsuit settlement cannot be achieved.