The Limitations Act 1969 (NSW) (Limitations Act) establishes time limits within which plaintiffs must commence civil proceedings, including for the recovery of a debt. A failure to bring a claim within the relevant time period results in the claim lapsing, and the creditor losing its rights to enforce its debt. Accordingly, it is critical that creditors understand how the law restricts their ability to collect debts and any exceptions that they may rely upon as the limitation date approaches.
The limitation period for recovering debts
In NSW, there is a general limitation period of six years to recover debts arising from contract. This means that a creditor has six years from the time that the cause of action accrues to commence civil proceedings before its rights are extinguished. If, however, the agreement has been made by way of a deed, the limitation period is 12 years.
When does the cause of action accrue?
Generally, the terms of the contract governing the debt dictate when the debt becomes due. The debtor’s failure to pay the debt by the due date constitutes a breach of the contract and gives rise to a cause of action to recover the debt. If the debtor fails to pay off multiple debts, each failure will constitute a separate breach with its own limitation period.
For example, if a lease provides for monthly payments of rent, the tenant’s failure to pay rent over a six-month period would give rise to six distinct breaches, each of which is capable of constituting its own cause of action with its own countdown timer (in this case, six years). Similarly, each failure to pay interest under a loan will constitute a separate breach of the loan agreement with its own limitation period.
The principle that the terms of the contract determine the date upon which a cause of action accrues also applies to debts for services performed. For example, a contract may stipulate that the occurrence of specified milestones creates an entitlement to progress payments before all work or services under the contract have been completed. Alternatively, the contract may provide that payment for a service only becomes payable one month from the completion of all work. The parties to the contract have absolute discretion to determine when debts become due and payable before entering into the contract. It is when the debtor fails to make the required payment by the agreed payment date, thereby breaching the contract, the cause of action accrues.
In the absence of a term in the contract prescribing when payment becomes due, the limitation period begins to run from the earliest time at which the debt could have been recovered. Typically, this means that the cause of action will accrue once a service has been provided or work performed. For example, consider the scenario of a lawyer who has issued their client with an invoice one month after the completion of the lawyer’s work and is now seeking to recover the unpaid fees. In this case, the cause of action is taken to have accrued not when the bill was issued, but when the work was actually completed. Similarly, if a builder demands payment for work performed, the cause of action begins to accrue from the time the work was completed, not when the demands were made. This distinction becomes particularly relevant in circumstances where a bill is not issued until several months after a service has been performed or work completed.
The situation becomes more complicated when the contract governs multiple discrete promises which result in accumulating debts, incurred on a continuous basis over a long period of time. The accounts arising from such contracts can be characterised as running accounts.
A running account is effectively an active account between creditors and debtors who have an ongoing relationship. The account runs from day to day and anticipates that further debts will be incurred. Rather than a series of independent debts (where an account is closed once the debt has been repaid), payments to a running account are credited against the total balance owing in the account as the debtor works to bring the account into credit. In other words, payments made by the debtor are not usually apportioned among the various debts constituting the balance but are instead made generally on account of the entire balance.
Even though the outstanding amount is viewed as one fluctuating balance, the Limitations Act treats each debt incurred as separate and distinct for limitation period purposes. Accordingly, running account debts incurred more than six years before the commencement of proceedings cannot be recovered.
Extending the limitation period
The six-year time limit can be extended in a number of circumstances.
The most common example is when the debtor confirms the debt before the expiration of the limitation period. To constitute a confirmation for the purposes of the Limitations Act, a person must either:
- acknowledge that the creditor has a right to the debt; or
- make a payment to the creditor in respect of the debt owed.
An acknowledgement demonstrates that the debtor recognises they have a debt outstanding. It must be received by the creditor themselves, or a person through whom the creditor claims, in writing and signed by the debtor. However, so long as these formal requirements are met, the acknowledgement can take a number of forms including as a letter or an email and does not have to be contained within one document.
Alternatively, a partial payment towards the balance owed by a debtor is also sufficient to show that the debtor has confirmed there is a debt outstanding. The partial payment acts as an admission from the debtor that the debt remains alive and payable despite the passage of time.
A confirmation of a debt restarts the six-year countdown, giving the creditor a longer time period to recover the debt.
In the context of running accounts, as explored above, payments by a debtor are generally made ‘on account’ in regard to the entire balance owing as opposed to any particular debt arising from a specific transaction undertaken over the duration of the account’s operation. Therefore, any valid partial payment or acknowledgement by the debtor has the effect of confirming the entire balance and restarting the limitation period for the total debt owing.
Failure to bring a claim within the limitations period can have serious consequences for a debtor. The law in NSW treats that claim as being extinguished and no further action can be brought to recover that debt. Accordingly, it is important for creditors to be mindful of when their cause of action has accrued and to monitor the period for which the debts remain unpaid in the absence of an adequate confirmation restarting time.
Where multiple debts accumulate under one contract, creditors should be aware that each breach gives rise to its own cause of action, meaning that the Limitations Act will treat each breach independently, thus giving rise to multiple limitation period dates under the one contract. This is unless the debtor has ‘confirmed’ the debt, which, in the context of a running account, restarts the limitation period for the entire outstanding debt.