Disclaimer: This article is for general informational and educational purposes only and is not intended as legal advice. Laws and procedures may change over time and can vary based on the specific facts and circumstances of each case. For any particular legal concern, it is best to consult an attorney licensed in the Philippines.

I. Introduction

In the Philippines, disputes arising from sales transactions (whether for goods, services, or real property) often revolve around non-payment or delayed payment of the purchase price. One of the most common legal tools a seller (or other creditors) uses to compel payment is the demand letter. This article provides a comprehensive discussion of:

What a demand letter is and why it is used in sales disputes.
Legal grounds and formal requirements for demand letters under Philippine law.
Common consequences and liabilities for non-payment after receipt of a demand letter.
Potential remedies and defenses for both parties.

Understanding these aspects helps both creditors and debtors alike navigate their rights, duties, and legal options in situations where buyers fail to pay.

II. Overview of Demand Letters

A. Definition and Purpose

A demand letter is a formal written notice typically sent by the seller (creditor) or their lawyer to a buyer (debtor) reminding them of an unpaid obligation and formally requesting payment (or performance of another obligation) within a specified period. The primary purposes of a demand letter are:

Establishing Default or “Mora”: Under Philippine law, particularly the New Civil Code, a debtor can be considered in “mora” or default once a valid demand has been made and the debtor fails to fulfill the obligation within the time specified.
Preserving Legal Rights: It shows that the creditor took proactive steps to collect what is due before resorting to filing a lawsuit.
Facilitating Settlement: Demand letters can serve as a prelude to negotiation, giving both parties the opportunity to resolve the issue amicably and avoid litigation.

B. Legal Basis

While there is no single statute that exclusively governs demand letters, their use and effects are spread out in various laws and jurisprudence:

Civil Code of the Philippines: Provisions on obligations and contracts (Articles 1159, 1169, 1256, 1306, and related articles) address the effects of non-payment, default, and breaches of contract.
Rules of Court: Although the Rules of Court do not mandate a demand letter as a strict requirement before filing a civil suit, sending one is often considered necessary to establish the date of default and to show good faith in trying to settle.
Case Law: The Supreme Court of the Philippines has consistently ruled that a formal demand can be used to fix the period of default and to possibly accrue interests and damages from that date.

III. Common Reasons for Sending a Demand Letter in Sales Disputes

Unpaid Invoices or Installments: If a buyer has failed to pay after the due date of an invoice or an installment plan, the seller typically demands immediate payment.
Dishonored Checks: If checks issued by the buyer are dishonored for insufficient funds or other reasons, demand letters are often sent prior to any civil or criminal action (e.g., cases under Batas Pambansa Blg. 22).
Final Notice Before Legal Action: Sellers or creditors use demand letters to formally notify the debtor that they intend to enforce legal remedies if payment or settlement is not made within the given timeframe.

IV. Legal Consequences of Non-Payment After Receipt of Demand Letter

A. Establishment of Default (Mora)

Under Article 1169 of the New Civil Code, a debtor is considered in default when:

The obligation is due and demandable;
There is a valid demand from the creditor (unless the law or the obligation itself expressly states that demand is not necessary); and
The debtor fails to comply despite the demand.

Effects of Default include:

The debtor may become liable for interest on the unpaid amount from the time of default.
The debtor may also be held liable for damages, subject to proof (e.g., if the delay caused specific, quantifiable losses to the seller).

B. Accrual of Interest and Penalties

When a debtor ignores or fails to pay after receiving the demand letter, the following may apply:

Legal Interest: Under BSP (Bangko Sentral ng Pilipinas) Circulars and relevant Supreme Court rulings, the legal interest rate can be 6% per annum for loans or forbearance of money in many instances (although the rate may vary depending on the period and the nature of the obligation).
Conventional Interest: If the contract (e.g., a sales agreement) stipulates a certain interest rate or penalty for late payment, that clause may be enforced, provided it is not unconscionable or contrary to law, morals, or public policy.
Penalty Clause: If there is a penalty clause in the contract, the debtor may be required to pay additional charges or penalty fees for late payment.

C. Potential Civil Actions

If the debtor continues to neglect payment, the seller can resort to filing a lawsuit for:

Collection of Sum of Money: The creditor files a civil action to recover the unpaid amount, plus interest, penalty charges, and attorney’s fees (if justified under the contract or law).
Rescission: In certain contracts, especially if there is a breach so fundamental that it defeats the object of the agreement, the seller could seek rescission or cancellation of the contract. However, rescission typically requires a judicial process unless the contract explicitly provides for extrajudicial rescission.
Replevin (Recovery of Personal Property): If the item sold is movable property subject to a conditional sale (e.g., sold on installment, with ownership retained by the seller until full payment), the seller may file an action for replevin to recover the item if the buyer fails to pay.

D. Potential Criminal Liability

While the mere failure to pay a debt is generally not a criminal offense in the Philippines, criminal liability may arise if there are other factors, such as:

Batas Pambansa Blg. 22 (B.P. 22): The issuance of a bouncing check may lead to criminal prosecution if the check bounces due to insufficient funds or account closure and the issuer fails to make the check good within five banking days from notice of dishonor.
Estafa or Fraud: Under the Revised Penal Code, if the non-payment stems from deceitful acts or fraudulent conduct (e.g., knowingly issuing invalid post-dated checks with no intention of paying), it might give rise to an estafa case.

E. Additional Costs and Attorney’s Fees

If the case goes to court and the creditor is compelled to file a civil suit, the debtor could be liable for:

Attorney’s fees (if stipulated in the contract, or if warranted by law and jurisprudence).
Litigation expenses (court filing fees, process server fees, and other incidental costs).
Damages if proven in court (actual, moral, exemplary, depending on the circumstances).

V. Practical Consequences for the Debtor Who Ignores a Demand Letter

Credit Standing: Failing to settle after a formal demand can tarnish one’s business reputation or credit history, affecting future transactions.
Settlement Leverage: Once a creditor decides to file a lawsuit, the possibility of a negotiated settlement might still exist, but the costs and demands could be higher.
Property Seizure or Garnishment: If a judgment is rendered against the debtor, the creditor can enforce it via writs of execution, such as garnishing bank accounts or attaching property to satisfy the judgment.

VI. Remedies and Defenses Available to the Debtor

Receiving a demand letter does not automatically mean the debtor has no defense. Common defenses and remedies include:

Questioning the Validity of the Obligation: Arguing there was no valid contract, or that it was void or voidable due to lack of consent, fraudulent representation, or incapacity.
Disputing the Amount: Showing evidence that the amount demanded is incorrect or already partially paid.
Set-Off or Compensation: If the creditor also owes the debtor a liquidated amount, the debtor may seek to set off these amounts.
Negotiating a Payment Plan: The debtor may propose a restructuring of the debt or a settlement to avoid litigation.
Nullity of Interest or Penalty Clause: If the stipulated interest or penalty is unconscionable or violates Philippine law, the debtor can challenge it in court.

VII. Best Practices Before and After Sending/Receiving a Demand Letter

A. For the Creditor (Seller)

Keep Accurate Records: Maintain receipts, invoices, official communications, and a clear statement of account.
Draft a Clear, Professional Demand Letter: Include the nature of the obligation, the outstanding amount, the due date, the basis for the claim, and a clear deadline for payment.
Indicate Possible Legal Action: Politely but firmly clarify that failure to settle may result in civil or (if applicable) criminal proceedings.
Consider Alternative Dispute Resolution: Before going to court, explore mediation or arbitration (under the Alternative Dispute Resolution Act of 2004) to save time and costs.

B. For the Debtor (Buyer)

Do Not Ignore the Demand Letter: Respond promptly to avoid escalation, as silence or inaction can be taken as an admission of liability.
Evaluate the Claim: Check your records and see if the amount is accurate or if there is a valid dispute.
Seek Legal Advice: If you believe you have a strong defense, engage a lawyer to reply formally or negotiate on your behalf.
Consider Settlement: Propose a payment plan or compromise agreement if the claim is legitimate but finances are tight.

VIII. Conclusion

In Philippine sales disputes, the demand letter serves as a critical juncture: it provides formal notice of the obligation owed and often signals a final opportunity to avoid court action. Once a demand is made and a debtor neglects to pay, legal consequences quickly follow—ranging from default and the accrual of interest, to potential civil lawsuits, and, in some cases, even criminal liability (e.g., for bouncing checks).

Both sellers (creditors) and buyers (debtors) must understand their rights and remedies as well as the legal repercussions of ignoring or failing to respond to a demand letter. Adequate documentation, prompt and well-founded responses, and openness to negotiation or settlement are vital practices to achieve a fair and cost-effective resolution.

Disclaimer: This discussion is a general guide and does not replace personalized legal advice. For a detailed evaluation of specific legal issues or disputes, it is recommended to consult with a qualified attorney in the Philippines.