Possible grounds to dispute liability

Contributed by Mary Hawkins, DCLS, for the NT Law Handbook, as amended by Elizabeth Samra of Consumer Law Centre of the ACT and current to March 2022

Before paying any debt, a debtor should be sure they are legally liable for it. Some possible grounds of disputing liability are set out below.

Statute barred debts

Under the Limitation Act 1985 (ACT), a creditor only gets a limited amount of time to sue a debtor in contract. For debts arising from simple contracts, which include most consumer debts other than mortgages, the limitation period is 6 years. If a creditor does not bring a court action against the debtor within the relevant time limit the debt becomes statute barred and the debtor has a complete defence to any court action.

Time under the Limitation Act starts to run from:

• The date the debtor should have made payment;
• The date the debtor last made payment; or
• The date that the debtor or his/her representative acknowledged in writing that the debt is owed.

The debtor should go to the most recent of these events and count 6 years. If 6 years has expired, the debt is statute barred. While this does not mean the creditor cannot ask you to pay the debt, it does mean that if the creditor seeks to sue you in court for payment, you will have a complete defence.

If the debt is statute barred, the debtor should write to the creditor and request that they desist from further contact because the debt is statute barred. In any letter to the creditor on this basis, it is vital to include a sentence such as, "I deny that I am liable for the amount demanded". If judgment has been entered against the debtor in court, the relevant time limit is 12 years from the date of judgment.

If the debtor has given a mortgage for payment of the debt, the relevant time limit (a) to recover principal money secured by mortgage; or (b) to recover possession of mortgaged property from a mortgagor; or (c) to foreclose the equity of redemption of mortgaged property is 12 years running from the date when the cause of action first accrues. However, the Limitation Act states that this time period only relates to the recovery of the principal lent by the creditor, not the interest. Action for interest on a mortgage must generally be brought within 6 years (see s 24 Limitation Act).

Breaches of the NCC or other laws

The debtor could challenge the debt on grounds that the credit provider breached key provisions of the National Consumer Credit Protection Act or National Credit Code, such as the responsible lending conduct obligations or disclosure requirements. For example, if a debtor was not able to afford the loan (or not without substantial hardship) at the time the loan was taken out, there is a chance that the loan may have been unsuitable. For more information, see Responsible Lending.

Not a party to the contract

Debts are generally not transferable from one person to another. If a debtor did not enter into a contract with the creditor, he/she could challenge liability.

Australian Consumer Law

If a debtor agreed to buy goods on the basis of information that was supplied by the creditor or trader, and that information turned out to be incorrect or inaccurate, the debtor may be able to challenge liability. A debtor may also be able to challenge liability for certain contracts, such as unsolicited goods. For more information, see Unsolicited Consumer Agreements.

Contractual capacity

If the debtor was under 18 a contract cannot be enforced unless it is for “necessary” goods (i.e. food, clothing or transport).

Unjust credit contracts

A definition of the term “unjust” is provided in s 204(1) of the National Credit Code, which states that “unjust includes unconscionable, harsh or oppressive”. Section 76 of the National Credit Code deals with unjust contracts and these provisions apply to credit cards, guarantees and mortgages. Contracts found to be unjust can be reopened and varied.

Debtor that did not benefit from the contract

A co-borrower has fewer rights than a guarantor even though they are jointly and severally liable for the credit from the outset and can be sued with or without the other co-borrower(s) if there is a default on repayments. Unlike a guarantor, a co-borrower shares the benefit of the loan. A person who signs as a co-borrower but is really a guarantor, that is, they share no direct benefit from the loan, may be able to avoid liability.

Unfair contract

Certain contracts may be unfair, for example, where the debtor did not understand the contract or signed the contract under undue influence.