A recent High Court decision (Anchorage Management Limited v D A Oldham & P J Cordner as trustees of the Royds Family Trust) provides a useful reminder of the potential impact of the Limitation Act 1950. The case involved a debt due from a family trust which was 'payable on demand'. The court reaffirmed a centuries' old rule that, on their own, the words 'payable on demand' are not sufficient to qualify the implied promise of immediate repayment.
Despite the inclusion of the words 'on demand', under the rule, where the loan contract is otherwise reticent about repayment, the cause of action will accrue from the date the money is first advanced. The limitation period therefore begins at this time, and after six years any action to recover the debt may be barred.
According to UK section 6(3) of the Limitation Act 1980, a cause of action under a loan contract accrues from the date demand is made if no repayment date is specified or if there is no effective provision about repayment on demand. There is no equivalent subsection in New Zealand's Limitation Act.
To avoid the consequences of this rule, the parties to the loan contract must 'have either expressly or by necessary implication demonstrated an intention that a demand is required to create a liability to repay'. The recent decision reiterates that the words 'payable on demand' by themselves do not achieve this purpose.
The effect of this decision is nonetheless narrow, because the rule has been strictly confined. For example, where a loan was payable on demand 'in writing' or where a loan contract involved collateral obligations becoming effective on demand, the rule was not held to apply.
Arms-length loans are also unlikely to be caught by the rule, because the limitation period runs from the date of the last payment of interest or principal. This only leaves exposed those on demand loans which do not call for ongoing payment of interest or principal. These will largely comprise loans between related parties. Care must, therefore, be taken when drafting these loans to ensure that the rule will not apply.
Notwithstanding (or, perhaps, because of) the fact many exceptions are available, the High Court's decision effectively endorses the view the word 'on demand' adds nothing.
Given the courts' frequently stated desire to ensure parties' intentions are followed and words given their plain meaning, it seems odd that the court did not question the efficacy of the continued application of the rule.
James Aitken and Vaughan Spurdle
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