A simple loan may be expressed to be repayable “on demand” or in some similar fashion such as “on request” or “at call”.
Expressions such as these, which may be used in casual or relatively informal loans between friends, business
associates or family, have a comforting feel about them.
One might have thought that the use of such expressions in a loan, or in a document acknowledging a loan, would have the
effect in law that the obligation to make repayment would not arise until the lender had made on the borrower a
demand, request or call for repayment.
One might also have thought that:-
These comforting thoughts would not be correct under the law of our State. The basic approach of the law to simple loans which are only worded in this manner is that:-
Remarkably, the approach is that time runs from the time of the loan. The limitation of actions clock ticks from that time!
That this is the true legal effect of such phrases where used without other words in a simple loan document can be seen from Ogilvie v Adams [1981] VR 1041. This was a rather fascinating decision of a single Justice of the Supreme Court of Victoria. (The decision was, it seems, decided in 1975 but was not reported in the Victorian Reports until 1981).
The facts of the case were simple. One Doris Melba Adams had, in 1957, signed a short acknowledgment addressed to her husband in which, after stating her full name, she acknowledged receipt from the husband of a specified sum “being a loan to me repayable on demand”. Many years later the husband's trustee in bankruptcy brought a claim for repayment of the loan against her estate.
It was held by His Honour Fullagar J. that the legal effect of these words, and of the very brief document itself, was that no demand was required for the borrower to be liable to make payment of the money lent. The money had become due instanter on the making of the loan. As the limitation period (calculated from that time) had expired prior to the filing of the writ the claim was statute-barred. The cause of action had not arisen on or after the making of the demand but at the (far earlier) time of the making of the loan.
The legal foundation for this approach, which was stated and explained by Fullagar J. in great detail, is that the law traditionally regarded the borrower as continuously detaining the creditor's money from the time of the loan. It did not regard the mere statement or agreement in the loan or acknowledgment that the money is repayable “on demand” or “on request” or “at call” as sufficient to “contract out ” of that situation.
Fullagar J. referred to many authorities supporting his approach. He also referred to a dictum of Dixon CJ, McTiernan and Taylor JJ in Young v Queensland Trustees Ltd (1956) 99 CLR 560, at p. 566 that-
A loan of money payable on request creates an immediate debt
Fullagar J. said that the demands required in banking loans are in a separate category. This is because the implied terms of the banker and customer relationship, which have traditionally required demands to be made, were evolved to meet the particular characteristics of the banker and customer relationship.
In Ogilvie v Adams Fullagar J. also said that his approach accorded with one legislative intention behind of the statute of limitations because it protected persons who have in fact paid their debts but, who, with the passage of time, have destroyed their proof of payment. That such a risk exists may be seen from the evidentiary rule that an alleged debtor carries the onus of persuading a court that payment of the debt was in fact made:- Young v Queensland Trustees Ltd (1956) 99 CLR 560.
Similar issues arose in VL Finance Pty Ltd v Legudi [2003] VSC 57 (13 March 2003) - a decision of His Honour Nettle J. (now Nettle JA) of the Victorian Supreme Court.
This case involved directors loans created by book entries. The loans were recorded as current assets. There was accounting evidence to the effect that such loans were treated as loans at call. No cash had in fact been received by the defendants. There was not even a loan document as such.
The defendants, the directors, argued that in the absence of any stipulation as to the date of payment it must be taken that the debts were repayable on demand. They argued that time had commenced to run when the debts were created. Nettle J. accepted these contentions. He applied the law as expounded by Fullagar J. in the earlier case.
Nettle J. rejected a contention for the plaintiff that the surrounding circumstances were sufficient to displace this position. The plaintiff had contended that there was an implied term of the loan that the money would not be repayable until reasonable notice had been given. However Nettle J. found that there was nothing in the contractual relations between the parties to displace the position that the cause of action for recovery of the money had arisen instanter on the making of the loans. He said that an intention to change this position, if not specified in the contract, had to be “necessarily implicit” in the contract.
(As a slight digression it is worth noting that Nettle J. also rejected a contention that an Annual Return was an Acknowledgment which satisfied s. 24 (3) of the Limitation of Actions Act 1958 so as to cause the limitation period to start running again).
A contract to pay on a stipulated date or on an event occurring might well displace the rule that the obligation to make repayment arises instanter on the making of the loan . However, it is clear from the decision of Nettle J. that Courts will not lightly treat the rule as having been displaced merely by implication from the surrounding circumstances. As Nettle J. said there is no ability to imply a term into a contract merely on the basis that it would be reasonable.
Ogilvie v Adams was considered by Osborn J. of the Supreme Court in another 2003 decision which related to a finance contract. This decision was Equuscorp Pty Ltd v Rigert & Anor [2003] VSC 343. Osborn J. said of the contract under consideration in this case that the cause of action with respect to payment of instalments and interest accrued as and when the payments became due. He said further that the cause of action with respect to the right to accelerate payment of the whole of the loan did not accrue unless the proviso for acceleration which the contract contained was complied with.
The point of the case law is that there is a rule that the mere use of phrases such as “repayable on demand” or “on request” or “at call” will be legally ineffective to displace or negate the position that the payment obligation arose instanter on the making of the loan.
It is a rule of construction but it is a very strong rule with extremely important substantive consequences.
Obviously each contract or acknowledgment has to be individually considered for its meaning and effect but the lesson is clear. One should consider so wording the loan document or acknowledgment as to specifically exclude the rule. Exclusion is most unlikely to be implied from surrounding circumstances. The mere fact that a loan may have been made for a specific purpose is very unlikely to be sufficient to displace the rule.
From the borrower's perspective the failure to “contract out” of the rule will mean that the borrower will not be entitled to time, let alone to a reasonable time, in which to make repayment.
From the perspective of the lender the fact that the loan document or acknowledgment does not contain such an effective exclusion could create a “time bomb”. After all it is the casual lender who has some relationship with the borrower who is the very one who may well not press for repayment until after the limitation period has expired.