One of the most frustrating things about owning a business is having to chase up unpaid debts. Unpaid debt can have a huge impact on your business, restricting your cash flow, compromising your relationships with clients and jeopardising the reputation of your business. In these situations, it can be tough to know how to proceed. There are a number of ways that you can approach debt collection, one of which are ‘actions for debt’. This article explains what actions for debt are, how they apply and why it may be the best way to recover compensation.
What is an action for debt?
If you have a client who owes you a fixed or ascertainable sum of money under a contract, you can recover that sum through an action for debt. For example, a landlord may sue for the agreed rent, a builder may sue for an instalment under a construction contract or a seller of goods may recover the price due under a contract. Importantly, this is different from attempting to claim damages resulting from a breach of contract. When pursuing an action for debt, you are suing to recover a debt due, not for compensation for breach of contract.
How does it work?
There are three steps which you must prove before you can successfully bring an action for debt.
- The contract must impose an obligation upon a party to pay a certain or ascertainable sum of money. This obligation may either be an entire obligation or a divisible obligation. Whether the obligation is entire or divisible depends on the nature of the contract and intentions of the parties.
- The obligation may take the form of an entire obligation, which requires whole or complete performance. This means that there is a condition which must be met prior to payment being due. For example, actions for debt for employment contracts for a specified period of time cannot be brought until the entire period of time as elapsed.
- The obligation may be divisible if the parties intended the contract price and obligations to be divided into separate parts. This means that parties will be able to recover debts for each part of the contract which has been performed.
- The right to payment of the sum should have been accrued, otherwise known as executed consideration.
- The doctrine of consideration allows for parties to recover debts even if the obligation isn’t fully performed.
- Sometimes a debt exists due to disputes over the quality of performance. In this instance the courts will weigh the performance of a contract against the defects in what was actually performed.
- With regard to sales of land, the right to retain a payment is conditional on completing the contract.
- The right to collect a debt is dependent on the performance of the obligation under contract as per the Sale of Goods Act 1923.
What about deposits?
In certain circumstances you may wish to recover or retain a deposit. Your right to claim or retain a deposit depends on which party is in breach. If a vendor is in breach, a purchaser has the right to recover a deposit if already paid or be indemnified from paying the deposit if they have not yet paid. If a purchaser is in breach, a vendor may retain the deposit or recover the deposit price if it has not yet been paid. In this context, a deposit is seen as consideration for entering into an agreement not for the completion of contractual obligations.
Get a free legal document when you sign up to Lawpath
Sign up for one of our legal plans or get started for free today.
What are the advantages of an action for debt?
As mentioned above, there are a number of ways in which you can try to claim compensation as a business. An action for debt may be a better option than pursuing damages for a number of reasons.
- You will not need to prove a breach of contract has occurred. You only need to prove that you have a right to payment for a specific sum.
- The debt you owe cannot decrease for being too remote or for your failure to mitigate any losses.
- The onus will shift onto the other party to prove payment of a sum as a defence. This occurs if you prove a contract imposes an obligation for payment after performance and that you have performed it.
There are only two limitations on pursuing actions for debt. First, you must be able to completely fulfil your obligations under the contract without further cooperation of the other party. Second, there must be a legitimate interest in pursuing this course of action. For example, damages are too difficult to calculate or it is unclear if a breach has occurred.
Conclusion
When your business runs into trouble and needs to recover money, there are a number of paths you can take. Picking the right one can be the difference between a quick and easy process and a long and drawn out one. To make sure you are making the right decisions, we recommend you seek advice from a debt collection lawyer today.
Get a fixed-fee quote from Australia's largest lawyer marketplace.
