Vendor and Customer Disputes: When to Send a Demand Letter and When to File Suit

By Hank FasthoffJuly 6, 2026

Every operating business will eventually have a vendor who doesn't deliver what it promised, a customer who doesn't pay what it owes, or a counterparty who breaches a contract. How you handle that dispute affects whether you recover what you're owed, how much you spend doing it, and whether the business relationship survives the process. Not every dispute justifies litigation, and not every dispute resolves with a phone call. Knowing when to escalate and how to escalate is one of the most practical functions outside general counsel provides.

When to Send a Demand Letter

A demand letter is the first step in formalizing a commercial dispute. It puts the other side on notice that you have a claim, specifies what you're owed, and offers the other side an opportunity to resolve the issue before you file suit.

Before sending a demand letter, evaluate the claim. Pull the contract and confirm what each side was obligated to do. Review the invoices, correspondence, and performance records. Determine whether the other side breached its obligations or whether the dispute is based on a misunderstanding, a scope disagreement, or a performance issue that falls short of a legal claim. A demand letter sent over a misunderstanding produces unnecessary hostility and can damage a relationship that would have been resolved with a phone call.

If the claim is legitimate, include in the demand letter a specific statement of the claim (what the other side did or failed to do), a reference to the contract provision or legal basis that supports the claim, the amount of damages or the specific performance you're seeking, a deadline for response (typically 10 to 30 days, unless a statute requires a different timeline), and a statement that you'll pursue legal remedies if the demand isn't satisfied.

Send the letter by a method that produces a delivery record, whether that's certified mail with return receipt, FedEx, or UPS. If the contract specifies a particular notice address or method of delivery, use it. A demand letter sent to the wrong address or by a method not authorized by the contract may not satisfy contractual or statutory notice requirements.

A letter that's aggressive, threatening, or insulting may feel satisfying but rarely produces a better outcome than one that's firm, professional, and factual. You're writing for two audiences simultaneously, the recipient (who you want to pay or perform) and a potential judge or arbitrator (who may read the letter as an exhibit in a future proceeding). Write for both.

The Cost-Benefit Analysis of Litigation

Before filing suit, run the numbers. Litigation has direct costs (filing fees, attorney's fees, expert fees, discovery costs) and indirect costs (management time diverted from running the business, disruption to operations, reputational effects, and the emotional burden of a contested legal proceeding).

A breach of contract claim in Texas state court (county or district court) can cost $15,000 to $50,000 in attorney's fees through trial for a mid-range commercial dispute, and significantly more if the case involves complex facts, multiple parties, or extensive discovery. Add six to 18 months of elapsed time, and the question becomes whether the amount in dispute justifies the cost and delay of pursuing it through the court system.

For disputes under $20,000, justice court (formerly small claims court and JP court) provides a faster and less expensive forum. For disputes above $20,000 but below $250,000, county court at law handles the case. For disputes above $250,000, district court has jurisdiction. Filing fees, discovery rules, and procedural complexity increase as the dollar amount and court level increase.

If the amount you're owed is $25,000 and litigation will cost you $20,000 in attorney's fees and 12 months of your time, the economic case for suing is marginal even if you win. If the amount is $250,000 and litigation will cost $40,000, the economics are different. Run the cost-benefit analysis before you file, not after you've spent six months in discovery.

Consider collectability. Winning a judgment against a defendant who has no assets or has dissolved its entity is a paper victory. Before filing, evaluate whether the defendant has the ability to pay. If it doesn't, a judgment is worthless regardless of how strong your claim is.

What the Contract Requires

Before you decide how to pursue a dispute, read the dispute resolution provisions in the contract. Many commercial contracts require mediation, arbitration, or both as a condition precedent to filing suit. If the contract requires mediation before litigation and you skip it, the other side can move to dismiss or abate your lawsuit until you've complied.

Mandatory arbitration clauses are enforceable in Texas under CPRC Chapter 171 (the Texas General Arbitration Act) and the Federal Arbitration Act (9 U.S.C. §§ 1-16). If the contract states that disputes "shall be resolved by binding arbitration," you can't file a lawsuit. You must arbitrate.

Arbitration has advantages (faster resolution, streamlined discovery, privacy, finality) and disadvantages (limited appeal rights, arbitrator fees that can exceed court costs for smaller disputes, and the perception that arbitrators split the difference rather than rendering a winner). For disputes above $100,000 with sophisticated parties, arbitration often produces a faster and more predictable result than litigation. For disputes under $50,000, arbitration costs (institutional filing fees and arbitrator compensation) can consume a significant percentage of the amount in dispute.

Mediation is a non-binding process in which a neutral third party facilitates negotiation between the parties. It doesn't produce a decision. The parties reach an agreement voluntarily or they don't. Mediation resolves disputes approximately 70 to 80 percent of the time in commercial cases, and even when it doesn't produce a full settlement, it often narrows the issues and reduces the cost of the subsequent litigation or arbitration.

Sending the Right Demand for the Right Claim

Some claims in Texas carry statutory demand requirements that affect the claimant's available damages.

Under the DTPA (§ 17.505), a consumer must provide 60 days' written notice before filing suit. The defendant can make a settlement offer during that period. If the offer is reasonable and the consumer rejects it, the consumer loses the right to recover attorney's fees.

Under the RCLA (Texas Property Code Chapter 27), a homeowner must give 60 days' written notice of construction defect claims. The contractor has 35 days to inspect and 45 days to make a written offer.

Even for ordinary breach of contract claims that don't carry a statutory notice requirement, sending a demand letter before filing suit demonstrates good faith, creates a record that you attempted to resolve the dispute without litigation, and may support a fee-shifting argument in contracts that award attorney's fees to the prevailing party.

Collecting on a Judgment

Winning a judgment is the beginning of the collection process, not the end. A judgment is a piece of paper stating that the defendant owes you money. Converting that paper into cash requires additional legal steps.

An abstract of judgment can be recorded in any Texas county where the defendant owns real property. Under CPRC § 52.001, a recorded abstract creates a lien on the defendant's real property in that county. If the defendant sells or refinances the property, your lien must be satisfied before the transaction can close. An abstract of judgment lien lasts 10 years and can be renewed.

A writ of execution directs the constable or sheriff to seize and sell the defendant's non-exempt personal property (inventory, equipment, vehicles, bank accounts) to satisfy the judgment. Texas exemptions protect the defendant's homestead, personal property up to certain dollar limits, and current wages from garnishment (Texas is one of the most debtor-friendly states in the country for wage garnishment, which is prohibited except for child support, taxes, and student loans).

A turnover order under CPRC § 31.002 requires the defendant to turn over non-exempt property that can't be reached through ordinary execution. Turnover proceedings are a procedural tool for reaching assets that are otherwise difficult to attach, including accounts receivable, interests in partnerships or LLCs, and out-of-state assets. Courts can appoint a receiver to take control of the defendant's non-exempt assets and liquidate them to satisfy the judgment.

Post-judgment discovery allows you to examine the defendant under oath about its assets, income, and financial condition. If the defendant doesn't voluntarily pay the judgment, post-judgment discovery is the mechanism for identifying assets to seize or attach.

How OGC Handles Disputes Efficiently

An attorney who's been reviewing your contracts, managing your vendor relationships, and advising on your customer agreements already has the context needed to evaluate a dispute quickly.

When a customer doesn't pay, your OGC already knows the contract terms, the payment history, the relationship dynamics, and the business context. When a vendor fails to perform, your OGC already reviewed the vendor agreement before you signed it and knows what the vendor was obligated to deliver, what remedies the contract provides, and whether the dispute is worth pursuing. This institutional knowledge eliminates the orientation phase that a new attorney would need and produces a faster, more informed response.

OGC also provides calibration. A business owner in the heat of a dispute may want to sue on principle ("it's not about the money, it's about the principle"). An OGC who knows the business, the relationship, and the economics can provide a candid assessment of whether the claim justifies the cost, whether the business relationship is worth preserving, and whether a negotiated resolution would serve the owner's interests better than a courtroom victory.

Practical Recommendations

Send a demand letter before you file suit. Even if the contract doesn't require one, sending a demand letter demonstrates good faith, invites the other side to resolve the dispute, and puts on record that you attempted a non-litigious resolution.

Run the cost-benefit analysis before you file. Compare the amount in dispute to the estimated cost of litigation (attorney's fees, filing fees, discovery costs, expert fees), the estimated time to resolution, and the defendant's ability to pay a judgment. If the economics don't support litigation, a negotiated settlement or a write-off may be the better business decision.

Read the contract's dispute resolution clause before you decide how to proceed. If the contract requires mediation or arbitration, comply with it. Filing a lawsuit when the contract requires arbitration wastes time and money and results in the case being sent to arbitration anyway.

Use mediation before trial. Mediation resolves 70 to 80 percent of commercial disputes and costs a fraction of what trial costs. Even if mediation doesn't produce a full settlement, it narrows the issues and provides both sides a realistic preview of how a judge or arbitrator would view the case.

If you win a judgment, pursue collection promptly. Record an abstract of judgment in every county where the defendant owns property. Conduct post-judgment discovery to identify assets. Use writs of execution and turnover orders to convert the judgment into recovery. A judgment that stays in a file drawer collecting interest is a reminder of the work you haven't finished.