Limitation on duty to collect: Overview, definition, and example
What is limitation on duty to collect?
Limitation on duty to collect refers to a provision or clause in a contract that restricts or defines the obligations of one party (often a creditor or service provider) to collect payments, debts, or amounts owed from another party. This limitation outlines the extent to which the party responsible for collecting payments is required to actively pursue or enforce the collection, and under what circumstances they can limit their efforts or obligations.
This limitation might specify that the party responsible for collection does not have to take extensive or costly actions, such as pursuing legal action or engaging in collection agencies, unless certain conditions are met. It can also set boundaries for how long the party must make efforts to collect a debt before the duty to continue collection is waived or reduced.
Why is limitation on duty to collect important?
The limitation on duty to collect is important because it clarifies the responsibilities of the parties involved when it comes to the collection process. By specifying the extent to which one party must actively pursue the collection of outstanding debts or amounts, it helps manage expectations and reduces the risk of disputes regarding the collection process.
For creditors or service providers, the limitation helps avoid undue financial or operational strain by not requiring them to pursue exhaustive or costly collection methods for small or unrecoverable debts. For debtors, it provides clarity on the process, including when they can expect collection efforts to stop or become less aggressive.
Understanding limitation on duty to collect through an example
Imagine a company that provides consulting services and issues invoices for payment. The contract specifies that the company is only required to send up to three reminder notices for unpaid invoices before it is no longer obligated to continue collection efforts. This provision limits the company’s duty to collect by preventing them from taking aggressive actions, such as hiring a collection agency, unless they choose to do so or unless the debt exceeds a certain amount.
In another example, a loan agreement might state that the lender is not required to pursue collection if the borrower’s outstanding balance is under a certain threshold, such as $500. Once the debt exceeds this threshold, the lender may be required to make more significant collection efforts, including pursuing legal action or engaging a collection agency.
An example of a limitation on duty to collect clause
Here’s how a limitation on duty to collect clause might appear in a contract or agreement:
“The Creditor’s duty to collect payment under this Agreement is limited to sending no more than three reminders for unpaid amounts. The Creditor is not obligated to take further collection actions, including engaging a third-party collection agency or pursuing legal action, unless the outstanding debt exceeds $[X] or the Debtor has failed to make payment within [Y] days of the final reminder.”
Conclusion
Limitation on duty to collect is a contractual clause that outlines the extent to which one party is responsible for pursuing the collection of debts or payments. By specifying the limits on collection efforts, such as the number of reminders or the threshold for more aggressive actions, it helps protect both parties from undue burden and clarifies the responsibilities of each. This limitation ensures that collection efforts are reasonable and proportionate, and it helps prevent disputes over whether the duty to collect has been fulfilled.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.