Updates and background for this project (Digest)
The Commission’s principal recommendation
4.1 A number of options for reforming the current law have presented themselves. One is that where money is lent and no date or other condition is specified for its repayment, the limitation period should run from the date on which demand is first made for repayment. However, some concerns were expressed about having a limitation period which, in effect, commences at the election of the lender.28 One option to deal with these concerns would be to have the limitation period commence as it now does but allow for an extension of time for good reason. Under this proposal, if an application for extension of time is made, the onus could be placed on the borrower to show why the period should not be extended. This would have the effect of discouraging some litigation.29 However, this leaves open the possibility that borrowers could litigate the point, however baseless the grounds (this is more likely given the tensions that sometimes arise in disputes between family members and friends). The Commission prefers to remove such opportunities for litigation entirely from the range of options available to borrowers and so does not favour this option.
4.2 The Commission’s conclusion is that where money is lent and no date or other condition is specified for its repayment, the limitation period should run from the date on which demand is first made for payment. This recommendation is not intended to change the nature of the cause of action on a loan payable on demand.30
RECOMMENDATION 1
The Limitation Act 1969 (NSW) should be amended to provide that the limitation period for a loan payable on demand should run from the date on which demand is first made for repayment. This provision should not affect the accrual of the cause of action.
4.3 In making this principal recommendation the Commission has considered the following matters that affect the detail of any reform of the law of New South Wales:
- when the limitation period should commence;
- the length of the limitation period;
- whether the demand should be in writing;
- what should constitute a demand;
- whether the legislation should deal expressly with collateral obligations; and
- the effect of the reform on claims by or against deceased estates.
Commencement of the limitation period
4.4 Recommendations for reform of the law in Western Australia, Queensland and Alberta31 have raised a question whether, in the case of loans payable on demand, time should run from:
- when the demand for repayment has been made; or
- when a default in performance has occurred after a demand for payment has been made.
Whatever the advantage of the latter option in the case of a discovery-based limitations regime (rather than an accruals model), the Commission is of the view that its implementation in the current law of New South Wales would create uncertainty as it would then have to be determined when there had been a default in performance. This would depend, in part, on the nature and terms of the demand. In the Commission’s view, the preferable course is to follow the English model under which the limitation period runs from the time when the demand is made.
Length of the limitation period
4.5 The Commission has considered whether the limitation period should be six years once a demand for repayment has been made. A six year limitation period would be consistent with current provisions in relation to other contracts.32 The Commission is, however, concerned that a limitation period which extends six years after demand is simply too long, especially in light of the fact that the commencement date would be at the election of the lender. One submission suggested that a three year limitation period might be more appropriate in the context.33 The Commission agrees with this suggestion.
RECOMMENDATION 2
The limitation period for loans payable on demand should be three years after the demand has been made.
Ultimate bar
4.6 Under the current law the period of limitation is subject to an ultimate bar of 30 years from the date it first starts running.34 If recommendation1 is implemented this would mean that loans payable on demand would continue to be recoverable during a period that extends indefinitely into the future until a demand is made.
4.7 An ultimate bar is considered necessary so that there will not be an indefinite time for bringing actions no matter what other circumstances pertain.35 Under the current Limitation Act 1969 (NSW) the ultimate bar has the effect of barring action even when other provisions have allowed for an extension of the limitation period, for example, by acknowledgment or confirmation of the obligation from the borrower.36 Some submissions have accordingly suggested that there should be an effectual ultimate bar at 30 years after the making of the loan.37
4.8 The Commission agrees with this suggestion and considers that 30 years is a sufficient time for a lender to make a claim, even for an informal arrangement of the sort envisaged by these reforms. The ultimate bar provisions of the Limitation Act 1969 (NSW) will, therefore, need to be amended to make it clear that the ultimate bar applies 30 years from the date the loan was entered into.
Requirement that the demand be in writing
4.9 On balance the English Law Reform Committee recommended that the demand for repayment should be in writing. Arguments in favour of writing include the greater reliability of written evidence particularly in cases where the borrower is dead.38 Arguments against writing include the trend in some cases to move away from a requirement of writing (for example in sale of goods) and “where a debt has been incurred between friends, an oral acknowledgment may be freely given and accepted in circumstances in which the creditor would never think of asking for anything in writing”.39 It might also be considered odd that a loan which may not be evidenced by writing could require writing in order to be recalled.
4.10 In light of the general nature of loans between family members and friends, the Commission is of the view that it should not be necessary for a demand for repayment to be in writing.
RECOMMENDATION 4
A demand for repayment of a loan payable on demand need not be in writing before the limitation period can begin to run.
The meaning of demand
4.11 Recommendation 1 envisages that, in the case of loans payable on demand, the limitation period should run from the date on which demand is made for payment. This leaves open the question of what constitutes a “demand” for this purpose. The question may arise in the following cases:
- Where the demand specifies a fixed future date for payment (for example, “pay me four years from today”);
- Where the demand specifies a determinable future date for payment (for example, “pay me when I retire”);
- Where the demand is conditional (for example, “pay me if I reach retirement age”); and
- Where the demand allows time for payment (for example, “pay me by close of business on Monday”).
4.12 In the case of loans payable on condition that demand is made, authority establishes that “[t]here must be a clear intimation that payment is required to make a demand; nothing more is necessary, and the word ‘demand’ need not be used; neither is the validity of a demand lessened by its being clothed in the language of politeness; it must be of a peremptory character and unconditional, but the nature of the language is immaterial provided that it has this effect”.40 In the Commission’s view, the law should mirror this position in the case of loans payable on demand. If the lender were able to demand payment subject to a condition or at a fixed future date, the lender would effectively have the power to change the nature of the obligation (under which the borrower is liable to pay at once and at any time).41 Subject to one qualification, “demand” should, therefore, mean an unconditional demand for immediate payment. The qualification is that if the lender’s demand allows the borrower a time within which to arrange payment which is reasonable, having regard to the consideration that the borrower under such a loan should maintain an ability to repay it promptly if required, the demand should not be regarded as falling foul of the requirement that it be an unconditional demand for immediate payment. Indeed, even if a demand does not expressly allow a reasonable time for payment, it may be construed as doing so,42 even if this means only such time as is reasonably necessary to effect the mechanics of payment.43
RECOMMENDATION 5
“Demand” should be defined to mean an unconditional demand for immediate payment, including a demand that allows the borrower a reasonable time to arrange payment.
4.13 A lender may demand payment of part of the loan from the borrower, leaving the balance of the loan outstanding. The Commission is of the view that a demand for part only of the loan should not, for the purpose of the statute of limitations, operate so as to bar future demands in respect of the outstanding balance of the loan.
RECOMMENDATION 6
A demand for part only of the loan should not have the effect of barring future demands in respect of the balance of the loan.
Collateral obligations
4.14 In reforming the law to take account of arrangements between family members and friends, an issue arises as to the effect that any reform will have on collateral obligations entered to support the loan. In this context we are usually talking about the use of promissory notes as collateral security and would expect them to be used most often in a commercial context. However, there will be cases involving contracts between family members and friends where the parties may use promissory notes.44
4.15 In framing its recommendations, the English Law Reform Committee did not consider that collateral obligations presented a problem in this context and was content with making no recommendation on the point.45 However, as drafted, s 6(2) of the Limitation Act 1980 (Eng) does make reference to collateral obligations. It requires that, in order for time to start running as if the cause of action had accrued on the date of demand under the contract of loan, not only must the loan be payable on demand (that is not required on or before a fixed or determinable date) and be otherwise unconditional, but the collateral obligation (usually a promissory note), must be read into the contract of loan and must also meet the same requirements.46
4.16 Putting to one side the drafting of s 6(2), which has received considerable criticism for its complexity,47 the Commission is of the view that there is a need to refer to collateral obligations in legislation reforming the law of limitations in its application to loans payable on demand. It is true that such reference is not needed where a promissory note is payable on demand and otherwise unconditional. In such a case the obligation will not qualify in any relevant respect the terms of the principal contract of loan. Whether the lender takes action under the contract of loan or the promissory note, the action will be limited, under the Commission’s proposals, three years after the date of demand. This is the same result that is achieved by the current English provisions where a promissory note is payable on demand and otherwise unconditional.48
4.17 The position is, however, more complex where the promissory note is payable on or before a fixed date or otherwise subject to a condition for performance. Here, there is an inconsistency between the loan and the promissory note. In such a case, if the obligations are truly “collateral”, they are “separate, concurrent, secure the same sum, rank equally and are enforceable in any order”.49 This would seem to allow the creditor the option of taking action under the loan or under the promissory note, which, under the proposals in this Report, would attract different limitation periods. The English legislation avoids this result by requiring that the terms of the collateral obligation be read notionally into the loan agreement itself.50 The Commission supports this outcome because it gives effect to what the parties intended by including such terms in the promissory note.
4.18 In making its recommendation on this matter, the Commission wishes to stress that the recommendation is intended to affect only obligations that can truly be described as “collateral” in the sense mentioned in paragraph 4.17. In particular, our recommendation is not intended to alter or influence the common law relating to the determination whether obligations are collateral or not. This determination can only be made in each case by reference to the intention of the parties.51 Nor is our recommendation intended to affect the law relating to collateral contracts properly so called, that is, contracts “the consideration for which is the making of another contract”.52
RECOMMENDATION 7
For the purposes of determining whether or not the loan is payable on demand, the terms of a collateral obligation to pay the amount of the debt or any part of it should be read into the terms of the loan agreement itself and, to the extent of any inconsistency between the terms, prevail over them.
Claims by or against deceased estates
4.19 In New South Wales, the legislation relating to the survival of causes of action provides that when a person dies “all causes of action subsisting against or vested in the person shall survive against, or, as the case may be, for the benefit of, the person’s estate”.53 At common law the cause of action accrues when the borrower receives the money under the loan.54 It follows that the cause of action subsists at the date of the death of either party where the borrower had received the money under the loan at any time before the relevant death provided, of course, that no limitation period prevents the claim. Recommendation 1 does not change the nature of the cause of action.55 Under the Commission’s recommendations, the period of limitation applicable to the claim by a lender against the borrower’s estate or by a lender’s estate against the borrower or the borrower’s estate would be three years from the date of demand of the money by the lender (if the lender made the demand during his or her life) or by the lender’s estate. No change in the law is necessary in this regard.
4.20 In Woodward v McGregor,56 which is discussed in paragraph 1.4, Master McLaughlin left open the possibility that if the limitation period had not expired before the death of the borrower, the borrower’s executor would have been obliged, at common law,57 to fulfil the contractual duty of the deceased to repay the loan even though the limitation period on the contract of debt had expired before the lender made the claim. If the Commission’s recommendations are implemented it becomes unnecessary to investigate this line of argument.
4.21 Further concerns were raised in submissions concerning the protection of executors or administrators of a deceased borrower and beneficiaries if the lender were to demand payment after the debts of the estate had been paid and the assets already distributed.58
4.22 So long as an executor or administrator of a deceased borrower’s estate follows the prescribed procedures and waits the prescribed time, the executor or administrator may distribute the assets having regard to any claims of which they are notified and they will not be liable in respect of any claims of which they did not have notice.59 This means that under the Commission’s proposed reforms an executor or administrator will be protected against claims that are made in respect of a loan payable on demand even when those claims are not yet statute barred, so long as they have followed the correct procedure and not received notice of the claims before they distribute the estate.
4.23 However, once an estate has been distributed, a lender may have the right to follow assets of the estate to which they are entitled into the hands of the beneficiaries of the estate.60 This situation is one that appertains to all cases in which an estate has been properly administered but there are later found to be legitimate claims against the estate. The reform of this provision, if thought desirable, should properly be dealt with in the context of administration of estates and not in the context of a review of a small part of the law of limitations.61 In any case, this circumstance is unlikely to arise in the situations covered by the current reforms since a lender who has entered into a loan payable on demand will usually be well known to the borrower and will, in the normal course of events, become aware of the death of the borrower and, consequently, of the need to make claims in relation to any loans that may have been entered into.
FOOTNOTES
28. JW Carter, Submission.
29. JW Carter, Submission.
30. See para 2.8.
31. See para 3.4.
32. Limitation Act 1969 (NSW) s 14(1)(a).
33. JW Carter, Submission.
34. Limitation Act 1969 (NSW) s 51.
35. NSW Law Reform Commission, First Report on Limitation of Actions (Report 3, 1967) at 127.
36. Under Limitation Act 1969 (NSW) s 54.
37. J Bryson, Submission; P Blackburn-Hart, Submission at 2.
38. England and Wales, Law Reform Committee, Final Report on Limitation of Actions (21st Report, Cmnd 6923, 1977) at para 2.67.
39. England and Wales, Law Reform Committee, Final Report on Limitation of Actions (21st Report, Cmnd 6923, 1977) at para 2.66.
40. Re Colonial Finance, Mortgage, Investment and Guarantee Corp Ltd (1905) 6 SR (NSW) 6 at 9 (Walker J).
41. See para 2.2. And see especially Bond v Hongkong Bank of Australia Ltd (1991) 25 NSWLR 286 at 328 (Mahoney JA).
42. Bunbury Foods Pty Ltd v Bank of Australasia (1984) 153 CLR 491 at 502-503.
43. Bond v Hongkong Bank of Australia Ltd (1991) 25 NSWLR 286 at 295 (Gleeson CJ), 318 (Kirby P), approving Bank of Baroda v Panessar [1987] 1 Ch 335 at 348 (Walton J). But compare Bunbury Foods Pty Ltd v Bank of Australasia (1984) 153 CLR 491 at 503-504.
44. For example, Boot v Boot (1996) 73 P & CR 137 (CA); Von Goetz v Rogers (England and Wales, Court of Appeal (Civil Division), 19 July 1998, unreported).
45. England and Wales, Law Reform Committee, Final Report on Limitation of Actions (Twenty-first Report, Cmnd 6923, 1977) at para 3.26.
46. Limitation Act 1980 (Eng) s 6(2), as interpreted by the English Court of Appeal in Boot v Boot (1996) 73 P & CR 137.
47. See, eg, Boot v Boot (1996) 73 P & CR 137 at 139-141. See also D Petkovic, “Limitation periods for on demand loans” (1996) 15(1) International Banking and Finance Law 2 at 2; N Levy, “Loans: Time to pay up” (1999) 149 New Law Journal 18 at 18.
48. See Boot v Boot (1996) 73 P & CR 137.
49. Stock Motor Ploughs Ltd v Forsyth (1932) 48 CLR 128 at 135 (Dixon J). Consider also Gardiner v Grigg (1938) 38 SR (NSW) 524 at 534-535 (Jordan CJ).
50. See Boot v Boot (1996) 73 P & CR 137 at 140 (Waite LJ). See also Von Goetz v Rogers (England and Wales, Court of Appeal, 29 July 1998, unreported).
51. See especially Hoyt’s Proprietary Ltd v Spencer (1919) 27 CLR 133 at 148 (Isaccs J), citing Gartside v Silkestone and Dodworth Coal and Iron Co (1882) 21 ChD 762 at 767-768.
52. See Heilbut Symons & Co v Buckleton [1913] AC 30 at 47.
53. Law Reform (Miscellaneous Provisions) Act 1944 (NSW) s 2(1).
54. See para 1.1.
55. See para 2.8, 4.2.
56. Woodward v McGregor [2003] NSWSC 672 at para 87-88.
57. See Angullia v Estate and Trust Agencies (1927) Ltd [1938] 3 All ER 106 explaining the judgment of Romilly MR in Cooper v Jarman (1860) LR 3 Eq 98.
58. JW Carter, Submission; P Blackburn-Hart, Submission.
59. Wills Probate and Administration Act 1898 (NSW) s 92.
60. Wills Probate and Administration Act 1898 (NSW) s 95.
61. The administration of deceased estates is being reviewed by the National Committee for Uniform Succession Laws: see New South Wales Law Reform Commission, Uniform Succession Laws: Administration of Estates of Deceased Persons (DP 42, 1999).
