Overdue debt is a complication in business that comes with a number of factual and legal consequences. If the creditor does not start enforcing its claim in time, it runs the risk of running up against the statute of limitations and of losing in potential litigation.
This article aims to introduce the reader to the statute of limitations in private law. It answers the following questions:
- What does it mean that a claim is time-barred?
- How long is the statute of limitations?
- What is an acknowledgement of debt and what is its effect on the statute of limitations?
The issue of statute of limitations is not only relevant in relation to possible success or failure in litigation, but also has significant accounting and tax implications.
The concept of limitation
The passage of time is a significant legal fact, with which the law in many cases links the creation, change or termination of rights and obligations. One of the consequences of the passage of time may be that a creditor's claim becomes time-barred.
Under the Civil Code all property rights are statute-barred unless otherwise provided by law. For example, a right to payment of a certain amount under a contract, a right of easement and a lien may be time-barred. On the other hand, property rights or personality rights (right to life, right to privacy, etc.) are typically not subject to limitation.
The essence of limitation is that the right of the creditor to demand that the debtor fulfil the debt is weakened due to the expiry of the limitation period. Creditors are thus incentivised to resolve their affairs with debtors in a timely manner.
The consequence of limitation is not that the creditor's claim is extinguished, but that it is transformed into a bond in kind. As a matter of principle, natural bonds are not subject to protection by the public authorities. In other words, the claim as such still exists, but it is no longer possible to call upon a public authority to assist the creditor in its application and enforcement.
In practice, this means that if the debtor raises a valid limitation objection in court proceedings, the court will dismiss the action as unfounded. However, if the debtor voluntarily decides to pay their debt to the creditor, there is no unjust enrichment on the part of the creditor. In practice, this means that a debtor who has discharged a debt to a creditor which is time-barred cannot claim repayment of that voluntary discharge from the creditor.
Conditions of limitation
To establish that the statute of limitations has expired, the limitation period must have expired in vain. The expiry of the limitation period in vain consists in the creditor's failure to assert their right before the competent public authority (most often a court) within the limitation period, thereby stopping the limitation period from running. Creditors must therefore bear in mind that it is not enough to notify the debtor of the overdue debt, nor is it enough to have the debt collected by a debt collection company, but it is necessary to seek payment of the debt in court.
At this point it is important to note that the court does not have the power to assess limitation per se, but it must always be the debtor who argues that the creditor's right is already time-barred. If the debtor fails to do so, the court is not entitled to dismiss the action on its own initiative. The plea of limitation itself has no prescribed form but may be raised at the hearing before the court or contained in a pleading addressed to the court.
Limitation is the result of the passage of time in the form of the expiry of the limitation period. This period can be generally characterised as a certain period of time within which the creditor must lodge their claim with a public authority in order to cause it to run.
The limitation period is of a combined nature and is divided into two groups:
- subjective limitation period; and
- objective limitation period.
The differences between them lie in their length and in the decisive facts for their commencement.
The length of the subjective limitation period is generally three years. For the subjective limitation period to start running, it is essential that the creditor knew or could have known that a certain right could be exercised before a public authority (e.g. that the creditor has a certain claim due). The time limit thus starts to run when the right could have been asserted before the court for the first time (assuming the creditor knew or could have known about it).
In practice, the first day of the subjective limitation period will most often be the date on which the debt is due, as this is the when the right is first enforceable before the public authority (the term "actio nata" is used in the literature, i.e. the day on which the action is "born").
The objective limitation period then lasts, as a rule, 10 years, but it varies depending on the legal basis of the creditor's claim. This period is not dependent on the knowledge of the entitled person (the creditor) and generally starts to run from the date of maturity of the debt. However, the statutory provisions lay down special rules in a number of places for its commencement (e.g. in the case of damage and injury or the right to the payment of unjust enrichment) and its duration (e.g. in the case of intentionally caused damage or injury).
In this connection, it should also be noted that the running of one time limit does not preclude the running of the other. The subjective and objective limitation periods are independent of each other. However, it is always the case that the debtor is entitled to raise the defence of limitation whichever period has expired first. The relationship between the subjective limitation period and the objective limitation period is illustrated below.
- Both time limits start to run at the same moment - the right is time-barred by the expiry of the shorter of the two (subjective).
- First the objective period starts to run, and within it the subjective period, which ends before the objective period - the right is time-barred by the expiry of the subjective limitation period.
- The objective period starts first and then the subjective period within it, but the objective period ends before the subjective period - the right is time-barred by the expiry of the objective limitation period.
- The objective limitation period starts and runs to its end, the subjective limitation period does not - the right is barred by the expiry of the objective limitation period.
Acknowledgement of debt
It has already been mentioned above that it is possible to discharge a time-barred debt. However, are there any ways to modify the length of the limitation period or extend or renew it? The answer is simple: yes, there are. It is possible to agree on a different length of limitation period, for example in a contract, or to extend the expiring or expired limitation period in a relatively simple way - by acknowledging the debt.
Acknowledgement of debt is traditionally characterised as an expression of the debtor's will directed towards the creditor, by which the debtor acknowledges the amount of the debt and the reason for its creation.
If the debtor acknowledges their debt to the creditor, this has the effect of renewing the limitation period and starting a new limitation period, which lasts 10 years from the date of acknowledgement. Had the debtor also specified the period within which they would fulfil their debt at the time of acknowledgement, the 10-year limitation period would only start to run from the last day of the period so specified.
Another consequence of the acknowledgement of a debt is that a rebuttable legal presumption arises as to the existence of that debt at the time of the acknowledgement. Thus, the creditor does not have to prove the creation of the debt or its amount at the time of the acknowledgement in court. The burden of proof in this case shifts to the debtor.
The acknowledgement of debt has relatively strict requirements, where, apart from the amount of the debt, it must specify the debtor's debt in such a way that it is not interchangeable with other debts. This requirement becomes particularly important when the debt is to be acknowledged between long-term business partners who have a number of mutual claims and debts.
The statutory provisions further provide that acknowledgement of debt may also be made by implication, for example by payment of interest, which is deemed to be acknowledgement of debt in the amount in which interest is paid.
The issue of limitation has a significant practical impact on almost all standard contractual commercial relationships. It is the creditor's responsibility to pursue their claim properly and in a timely manner if they wish to avoid its limitation. To this end, it is necessary to carefully assess the point at which the time limit starts to run, determine its length and then bring the claim to court in a timely manner.
The statute of limitations contains a number of general rules, but there are numerous exceptions. It is therefore advisable to familiarise yourself with the rules at least in a rudimentary way and to deal with any debt recovery without delay.