Are you owed money? Then you need to read this

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Civil litigation basics: debt versus damages

When there’s money owing, we often see these two scenarios. Either someone has done something wrong, such as a business making a misleading statement, or a customer breaching a contract, and the ‘wronged person’ thinks they should be entitled to hefty compensation without the need for any court procedure at all; or creditors who are genuinely owed money put off taking debt recovery action due to a misconception that to recover debt through a court procedure will be lengthy, complex and costly.

These mistakes arise when people misunderstand the differences between two legal claims: a claim in debt, and a claim in damages. Understanding the difference between the two, and seeking appropriate legal advice, will help you know how best to proceed to get your money back.

Debt or damages?

A claim for debt and a claim for damages are two different types of legal claims that arise in different contexts and have distinct legal implications.

Claim for Debt

A claim for debt is a legal claim made by a creditor against a debtor to recover a sum of money that is owed. It typically arises from a contractual relationship where the debtor has borrowed money or received goods or services on credit and has failed to repay the debt as agreed. A claim for debt seeks to enforce the contractual obligation to repay the borrowed money or the outstanding balance of a credit account.

In a claim for debt, the creditor is seeking to collect the specific amount of money owed, often with interest and/or penalties as provided for in the contract or by applicable law.  The debt can be recovered from either the principal debtor (the person or company who was loaned the money or supplied with the goods or services) or the person who guaranteed the debt (if any). 

Claim for Damages

A claim for damages, on the other hand, is a legal claim made by a party who has suffered harm or loss due to the wrongful act or omission of another party. Damages are a form of legal compensation awarded to the injured party to compensate for the loss or harm suffered. Damages can arise from a wide range of circumstances, including personal injury, property damage, breach of contract, tortious acts, and more. A claim for damages seeks to compensate the injured party for the actual losses suffered, such as lost wages, medical expenses, property repair costs, and pain and suffering, among others.

The two types of claims are different in their nature, purpose and the procedure that must be followed. The key differences are as follows.

  • The nature of the obligation

A claim for debt arises from a contractual obligation to repay a sum of money owed.

A claim for damages arises from a legal obligation to compensate for harm or loss suffered due to wrongful actions.

  • Legal basis and context

A claim for debt typically arises in the context of a creditor-debtor relationship.  Often this will be due to the terms of a loan agreement or a credit agreement which underpins the relationship between a supplier and a customer. 

A claim for damages can arise in various legal contexts, such as tort law, contract law, and other areas of civil law.  A claim for damages is based on a legal duty to compensate for harm or loss caused by wrongful conduct. 

  • Type of relief

A claim for debt seeks to recover a specific amount of money owed.

A claim for damages seeks to compensate for the actual losses suffered by the injured party. 

  • Limitations, exclusions and indemnities

A claim for debt is usually limited only by a statute of limitations, if the debtor is declared bankrupt (or enters into an alternative to bankruptcy) or the creditor enters into a settlement agreement with the debtor.

A claim for damages can be limited in numerous ways. Often a party to a contract will seek to limit their liability to pay damages even if it has acted wrongfully by including exclusion clauses or indemnities in their terms of trade or the terms of a contract.  Such terms may or may not be effective depending on the wording and context of the agreement. Further, a court will typically limit the type of losses which will be compensated for to those which were reasonably foreseeable at the time of the contract or the wrongful conduct.

  • Procedure

It is often more straightforward to bring a claim in debt.  In a claim for debt, the creditor may only need to provide evidence of the debt, such as a written loan agreement or a credit agreement and invoices which establish the debtor’s obligation to repay the debt.  This can often give rise to black and white issues: a debtor either received the loan or did not, they either repaid the loan or they did not.

In a claim for damages, the claimant typically needs to establish the existence of a duty or obligation, a breach of that duty by a defendant and a loss flowing from that breach of duty.  This can often lead to disputes about whether a certain promise or representation was made, whether a defendant actually breached its promise or made a false representation and/or whether a loss complained was actually caused by a defendant’s conduct. 

What happens if you are successful in your claim?

Regardless of whether pursuing a claim in debt or damages, if the claim is successful, then the court or relevant authority will generally assess the evidence presented by both parties and determine the extent of the debt owed or to, or damages suffered by, the plaintiff (the person bringing the claim). If the claim is upheld, the court may issue a judgment in favour of the plaintiff, which may require the defendant to pay a debt or compensate the plaintiff for the damages suffered, either through a monetary award or other forms of relief. 

After a judgment is issued, the plaintiff (now known as a judgment creditor), may then need to take further steps to enforce their judgment if the defendant (now known as the judgment debtor) still refuses to pay any amount that has been ordered.  There are a number of options available to a judgment creditor to enforce a court judgment.  Check out our article about enforcing judgments found here.

How can we help?

WRMK’s experienced litigation and dispute resolution team understand that navigating the legal landscape can be complex and overwhelming, especially when it comes to financial matters. Our firm prides itself on providing personalised and results-driven legal solutions. We take the time to listen to your concerns, explain the legal differences between a claim in debt and a claim in damages, and tailor our strategies to meet your unique needs.

Don’t let the confusion of legal jargon or procedural complexities hold you back from pursuing the money you’re owed. Let our experienced lawyers guide you through the process with professionalism and expertise. Contact us today to schedule a consultation and take the first step towards resolving your claim and securing the debt you are owed or the compensation you deserve. You can view our team here.

WRMK Lawyers takes all reasonable care to make sure that the information in this article is up-to-date and accurate at today’s date. It is necessarily general information and not intended as legal advice to be relied upon.

Our thanks to Nick Coyle for writing this article.