Updates and background for this project (Digest)
2.1 The Commission is persuaded that, in its application to loans between family members and close friends, the current law may give rise to the unfairness and injustice identified by Master McLaughlin in Woodward v McGregor.9 The essential reason is that, in such cases, the law will generally operate to defeat the intention and expectations of the parties to the loan.
2.2 Commonly a loan between friends or family members is entered into orally and without legal advice. Where these parties do not make any agreement about the time at which the loan is to be repaid, their intention will be that the loan is payable when the lender requests its repayment. Effectively, this means that the borrower agrees to repay the loan at any time that the lender makes a demand for payment. As Justice Young has explained:
The reason why that is so really comes from the ancient idea that a loan of money, which constituted a debt, was a deposit of specific coins that the borrower was obliged to restore at any time. The nearest present day example is where one borrows one’s neighbour’s lawn mower. The lawn mower is returnable on demand, but one should have it ready at any time for the owner who may reclaim it whenever he or she wishes. If one looks through the early cases ... one can see that this is the basis of the principle. So that, “I promise to pay on demand” means “I am ready to pay at any time”. This line of thinking extends from 1712 to the present day.10
2.3 The expectations of the parties do not change where the lender requests repayment of the loan more than six years after the date at which the borrower received the money under the loan. The Commission is of the view that, to the extent to which the parties can be taken to have thought of time limits when making their contract, and remembering that they are unlikely to have the benefit of legal advice in such informal circumstances, they would not expect that the mere lapse of six years (or any other time) from the date of receipt of the loan would defeat the claim. At most, they would expect a limitation period (of whatever duration) to run from the date of the demand for repayment. The effect of the present law is thus to allow a borrower who pleads the Statute of Limitations to defeat the intention of the parties at the time of entering into the contract that the loan would be payable on demand. In the case of loans between family members and friends, this seems unfair.
Reasons for retaining the current law
2.4 A number of reasons have, however, been identified for retaining the current law.
2.5 First, it has been suggested that the current arrangements protect persons who have already paid their debts (or been discharged from them) but, after the passage of many years, have destroyed the proof of payment.11 This is merely an evidential point that the Commission finds unpersuasive as a general reason for retaining the present law. In any event, records of the movement of sums of money will usually be retained in some form by financial institutions.
2.6 Secondly it has been suggested that there may be an element of vindictiveness in reviving long dormant claims.12 This could be especially so in the case of debts between family members and friends. In the words of Chief Justice Best:
Long dormant claims have often more of cruelty than of justice in them ... The legislature thought that if a demand was not attempted to be enforced for six years, some good excuse for the non-payment might be presumed, and took away the legal power of recovering it.13
The Commission considers that the motive for demanding repayment of a debt cannot qualify the intention with which the loan was entered into in the first place.
Dangers in changing the current law
2.7 While the Commission can find no compelling reasons for maintaining the present law, at the same time, the Commission does not favour any reform of the law that would:
- alter the ingredients of a cause of action for the repayment of a debt under a contract of loan;14 or
- transform other settled bodies of law; or
- defeat legitimate commercial expectations.
2.8 The first danger arises in so far as any reform of the limitation period for loans payable “on demand” unwittingly results in a formal demand becoming a prerequisite to the action.15 Careful drafting averts this danger. Thus, English reforms allowing a loan to be recoverable provide that the limitation period applies “as if the cause of action to recover the debt had accrued on the date on which the demand was made”.16 This is one way of leaving the cause of action intact.
2.9 The second danger arises where a loan is supported by a collateral obligation, in practice, a promissory note. For the reasons outlined in paragraphs 4.14-4.18 of this Report, this danger is illusory since the Commission’s proposed reform of the law will not affect the substantive law relating to promissory notes.
2.10 The third danger presents itself in the case of commercial loans payable on demand. In such cases, the effect of allowing the period of limitation to run from the date of demand could be to extend the life of loans beyond the limitation period. The Commission has found no evidence suggesting that such extension will, in practice, be of concern in commercial cases. This is hardly surprising. While parties to commercial transactions may intend that a debt payable “on demand” is payable at any time, they will not generally intend that the debt should become unenforceable within any particular period of time, except that set by limitation statutes. A change in that period will be a matter on which parties to commercial transactions will generally have legal advice. In any event, commercial loans will normally specify a date for repayment or be conditional on a demand for repayment or on some other matter, thus taking them outside the category of debts payable “on demand”.17
2.11 Commercial loans are also highly likely to involve the periodic payment of interest.18 Loans that involve the periodic payment of interest will generally not come within the proposed reform since payments will be required on specified dates. Moreover, periodic payments, if made, may amount to confirmation of the loan agreement.19
FOOTNOTES
9. Woodward v McGregor [2003] NSWSC 672.
10. Drinkwater v Caddyrack Pty Ltd (No 3) (NSW SC, No3970/1996, Young J, 28 November 1997, unreported) at 4.
11. Ogilvie v Adams [1981] VR 1041 at 1053; Thomson v Eastwood (1877) 2 AC 215 at 248-249.
12. Ogilvie v Adams [1981] VR 1041 at 1053.
13. A’Court v Cross (1825) 3 Bing 329 at 332-333; 130 ER 540 at 541-542.
14. See HG Beale (ed), Chitty on Contracts (29th ed, Sweet and Maxwell, 2004) Vol 2 at para 38-232.
15. See England and Wales, Law Reform Committee, Final Report on Limitation of Actions (21st Report, Cmnd 6923, 1977) at para 3.19, 3.23 (the relevant rule of law belongs to the substantive law of contract rather than to the law of limitations).
16. Limitation Act 1980 (Eng) s 6(3) (emphasis added).
17. Compare Boyden v Stern (England and Wales, High Court of Justice, Chancery Division, 27 March 2002, Ferris J, unreported), but it is questionable whether this case involved a “loan”.
18. Loans payable on demand with interest (see Norton v Ellam (1837) 2 M&W 461; 150 ER 839) are unlikely to occur frequently in a modern commercial environment.
19. Limitation Act 1969 (NSW) s54(2)(a)(ii).
