Contractual relationships govern most of our daily interactions and over the course of our lives most of us will enter into a contract either as an individual or business. In many cases, these contracts concern one party owing money to another. What often comes as a surprise is that in NSW, there comes a time where you are unable to pursue legal action to recover a debt and, aside from a personal obligation to pay, the debt is effectively wiped clean.

What are the limitations?

Like most areas of law, debts arising from a contract are subject to a statute of limitations, that is, a time frame, imposed by the Limitation Act 1969 (NSW) that regulates how long a creditor has to pursue a debt. In relation to contract law, the Limitation Act 1969 (NSW) provides for a 6-year time frame to recover a debt owed under a contract. This means a creditor has 6 years to take legal action under the contract to recover the outstanding amount.

In its most simple form, the 6-year time frame will start to run from the date that you as a creditor become able to commence legal action to recover a debt. This is ordinarily the date that the debtor breached the contract i.e. failed to pay the amount owing.

What happens if the debtor hasn’t paid the full amount though?

What can you do when the debt is larger and the debtor hasn’t paid the full amount, but has on occasion made part payments of the debt, or the debtor has in writing promised to pay and admitted to owing the amount? In these instances the cause of action is revived each time there is a written acknowledgment or part-payment made by the debtor. As such, the limitation period commences to run at the time the acknowledgment or part-payment is made. So, each acknowledgment or part-payment constitutes a confirmation of the debt and ‘resets the clock’ giving the creditor 6 months from the date of the confirmation to recover the debt.

Limitation periods make debt collection an important concern particularly for businesses, as a failure to commence legal action within the limitation period can lead to serious financial hardship and affect the solvency of a company.

Here at Adams & Partners Lawyers we can conduct a business health check, help your business assess the status of your debtors and put in place strategies of debt recovery that ensure you are paid before time runs out.

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