Legal Guide to Debt Acknowledgement Agreements
What is a Debt Acknowledgement Agreement?
A debt acknowledgement agreement or deed (AOD) is a written contract in which the debtor states that they owe the creditor a stated sum of money and they will pay the said sum fully by a certain date or in instalments spread out over a stipulated period (acknowledgement of indebtedness). It is also called a debt acknowledgement and debt settlement (or repayment) deed.
The purpose of a debt acknowledgement deed is to provide to the creditor, a liquid document setting out an amount of outstanding debt, that the creditor can rely on as evidence of a debt should the matter come up in a suit in court for debt recovery.
How to Draft a Debt Acknowledgement
It is advisable to draft the acknowledgement of debt template/sample for use in your business in the form of a deed as opposed to an agreement for the following reasons
- A deed need not be supported by contractual consideration as other forms of agreements. One of the ingredients of a valid contract in Kenya is that there must be some form of consideration exchanged between the parties unless the contract is in the form of a deed. In a debt acknowledgement deed, there is no need to prove exchange of consideration for it to be legally binding.
- Under a debt acknowledgement deed, the consideration that the creditor receives is: the preclusion of the debtor claiming that he does not owe the money to the creditor. On the other hand, the creditor in this deed does not need to give any consideration in exchange for the promise of the debtor that indeed he owes the creditor the sum of money stated to be owed in the deed of acknowledgement and will pay it on a certain date.
Is it Detrimental to use a Debt Acknowledgement “Agreement” instead of a Deed?
Case law on debt acknowledgements has established that a debt acknowledgement document drafted as an agreement instead of a deed is not necessarily defective if one drafts the agreement in such a way to clearly show the type of consideration that the creditor gave to the debtor in exchange for the debtor’s promise that indeed he owes the debt and the attendant undertaking to pay the said debt by a certain date.
Such consideration would for instance be, a forbearance not to sue the debtor on the debt until a set time in the future. But in practical terms while such a promise would be consideration under the doctrine of freedom of contract, it would not be very helpful to a creditor to make such a counter-promise to the debtor simply for the satisfaction of drafting an agreement as opposed to a deed.
When to Issue a Deed of Debt Acknowledgement of Debt and Settlement of Debt
After default of any underlying commercial contract where the debtor ends up owing the creditor (for instance a loan agreement, sale agreement, supply agreement, licensing agreement or distributorship agreement), the creditor shall endeavour to issue a standard debt acknowledgement deed to the debtor for signature, in which deed, the debtor shall unequivocally agree that he owes a stated amount of debt to the creditor and the agreed payment terms and the dates on which this payment shall be made. The creditor is advised to pay stamp duty on this deed to ensure it is enforceable in court.
Is a Verbal Acknowledgment of Debt Permissible?
As stated above, one of the requirements for a valid acknowledgement of debt is that a debt acknowledgement needs to be in the form of a deed; therefore, this precludes the validity of a verbal acknowledgement of debt. In any case a written acknowledgement of debt is more persuasive.
Enforcement of a Deed of Debt Acknowledgement
Under Order 36 of the Rules made under the Civil Procedure Act of Kenya, the law allows for summary action and judgement on a liquidated claim such as that evidenced by a debt acknowledgement deed. Tying the deed to this procedure under law, the deed will facilitate a summary court action against the debtor should the debtor fail to adhere to any payment terms. Additionally, the deed could support an application for judgement on admission in the alternative.
The benefit of the deed of debt acknowledgement to the creditor is that in a debt recovery action, an application can be made by the creditor to the court for summary judgement; and once presented to court as evidence, a valid debt acknowledgement deed is prima facie proof of the debt.
In the summary action, the plaintiff creditor seeks only to recover a debt or liquidated demand in money payable by the defendant debtor. The application for summary judgement will be accompanied by the necessary affidavit and proof of the debt and the onus is on the defendant debtor to prove that that debt (or the deed of acknowledgment) is not valid and mere denials will not do in the face of an acknowledgment of debt validly signed by the debtor promising to repay said debt on specified date(s) as held in Telkom Kenya Limited v Kenya Railways Corporation  eKLR.
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