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Tarrant, John --- "Limitation Legislation and Loans Repayable on Demand" [2004] UNELawJl 13; (2004) 1(2) University of New England Law Journal 249


John Tarrant[*]

An old common law rule that a loan made without any fixed date of repayment is payable immediately has led to injustice in a number of cases. In the limitations context the cause of action is taken to have accrued when the loan was made and thus the limitation period can expire long before a lender decides to request repayment of the loan many years later. This paper explores the historical development of the rule and the reform of the rule in other jurisdictions. The author argues that the rule needs to be reformed in Australia.


The rule at common law is that a loan made without any fixed date for repayment is repayable on demand and the commencement of proceedings is sufficient demand. In the limitations context the practical implication of the rule is that as no prior demand is necessary before proceedings are commenced, the cause of action accrues, and time begins to run, when the loan is made.

The purpose of this paper is to review this common law rule and its practical implications and highlight the need for reform. It will be argued that the justification for the rule fails to take full account of balancing the interests of lenders and borrowers. The rule is strongly favourable to borrowers. It will be shown that the application of the rule in recent cases highlights the need for a specific provision in limitation legislation to cover these types of loans. Such a provision has been implemented in England and Scotland and successfully applied in a number of cases. The Queensland and New South Wales Law Reform Commissions have recently recommended the introduction of reforms similar in effect to those introduced in England. It will be argued that these reforms are to be welcomed and should be adopted in all Australian jurisdictions.


The historical development of the rule that the obligation to repay a loan repayable on demand accrues when the loan was made is connected to the historical concept of indebtedness. As the High Court noted in Young v Queensland Trustees Limited: [1]

The common law does not and never did conceive of indebtedness in a sum certain for an executed consideration as a mere breach of contract: it is rather the detention of a sum of money and that was so whether the creditor enforced his demand by an action of debt or by indebitatus assumpsit.[2]

The description of these loans as ‘repayable on demand’ may suggest that the cause of action accrues only after a demand. However, the opposite is the case. The loan is repayable on demand but it has been held that the lender can issue proceedings at any time to recover the loan – the commencement of proceedings is demand enough. The cause of action is complete, and thus accrues, from the date when the loan is made and not when the demand for repayment is made. The rule was outlined by Chitty J in Re Brown’s Estate [3] where he said:

The law is quite settled that, with regard to a promissory note payable on demand, no demand is necessary before bringing an action... [W]here there is a present debt and a promise to pay on demand, the demand is not considered to be a condition precedent to the bringing of the action.[4]


In Thompson v Eastwood[5] Lord Hatherley noted that one justification for the rule was to protect persons who had paid their debts but with the long passage of time had destroyed the proof of payment.[6] In A’Court v Cross[7] Best CJ noted the predominant intention of the rule which he described as follows:

Long dormant claims have often more of cruelty than of justice in them. Christianity forbids us to attempt enforcing the payment of a debt which time and misfortune have rendered the debtor unable to discharge. 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.[8]

This justification is difficult to accept in modern times. The rule fails to fairly balance the interests of lenders and borrowers and is extremely favourable to borrowers. Those who make loans to family and friends are the very people likely to be unaware of the existence of the rule. The rule simply does not balance the interests of the respective parties.

In Brisbane South Regional Health Authority v Taylor[9] McHugh J outlined the rationale for limitation periods. He noted that as time goes by relevant evidence is likely to be lost; it can be oppressive to a defendant to allow a claim to be brought long after the circumstances which gave rise to it have passed; people should be able to order their affairs in the knowledge that claims can no longer be brought; and public interest requires that disputes be settled as quickly as possible.[10] However, the rule in relation to loans repayable on demand can be amended while retaining the principles outlined in Brisbane South. The repayment of a loan is quite different from an action for compensatory damages for breach of contract or in tort. In the case of a loan the parties fully intend that the loan be repaid. The current provisions simply provide a windfall for a borrower who fails to repay the loan in circumstances where the plaintiff fails to commence proceedings until after the relevant limitation period has lapsed.


The recent Victorian case of VL Finance Pty Ltd v Legudi[11] highlights the problem with the common law rule. In Legudi the two defendants had received loans in September 1990 from a family company, Legudi Freehold Properties Pty Ltd. These loans were assigned to the plaintiff in June 2000 at which time the plaintiff demanded repayment. At the time of the demand the two loans totalled over one million dollars. Nettle J found that no formal loan agreements were ever brought into existence. The defendants argued that the debts were statute-barred by virtue of section 5(1)(a) of the Limitation of Actions Act 1958 (Vic). Section 5(1)(a) provides that actions founded on simple contracts shall not be brought after six years from the date on which the cause of action accrued. The defendants argued that in the absence of any stipulation as to the date of repayment the loans must be repayable on demand and therefore time began to run on the date the loan was made in 1990. On this basis the defendants argued that the action was statute-barred when the writ was filed in June 2000. After a careful analysis of previous cases Nettle J accepted the defendants’ argument.

The same issue had previously been considered by the Victorian Supreme Court in Ogilvie v Adam.[12] In Ogilvie the plaintiff was the trustee of a bankrupt’s estate and the defendants were the executors and trustees of the estate of the bankrupt’s deceased wife. The bankrupt had lent money to his wife in April 1957. The loan was recorded in writing and the relevant term was that the loan was ‘repayable on demand’. Demand was made in July 1972 and the defendants argued that the action was statute-barred. Fullagar J held that the cause of action was complete when the loan was made and thus the action was statute-barred. The plaintiff argued that there should be an implied term in the loan contract that the loan was not repayable until a demand was made. This argument was supported by the existence of such a rule in a banker and customer relationship. However, Fullagar J rejected this argument and held that

the banker-customer relationship cases turn upon the finding of what are the precise contractual terms of the ancient but complicated mercantile relationship of banker and customer, and it has been found that it is a term of the implied contract under which the bank borrows the customer’s money held upon current account that the bank is not bound to repay the money, or any of it, until the customer demands the money by presenting a cheque, and it has been found that it is a term of the implied contract under which the customer borrows on overdrawn current account from the bank that the customer is not bound to repay the money, or any of it, until the bank demands the money from the customer.[13]

It is clear therefore that banking contracts are treated differently from other loan contracts. An implied term is used in the banking contract but not in other contracts. The effect of the implied term is that the common law demand rule will be altered so that a request for repayment will trigger the start of the limitation period and not the date of the loan itself. This can clearly lead to potential injustice in the case of loans between family members and loans between individuals and private companies as is evident from cases like Legudi and Ogilvie. This injustice has been recognised and has led to legislative reform in a number of jurisdictions. These reforms will now be considered.


This issue was identified in England and the Law Reform Committee examined the issue in their 1977 report.[14] They noted the rule that where a loan was repayable on demand the cause of action accrued at the date of the loan and observed that:

It has been represented to us that, although this rule probably causes little injustice in the case of commercial loans, it can cause real hardship where the loan is made between friends or members of the same family. It is by no means uncommon for money to be lent in these circumstances without any written contract and without any legal advice having been obtained, on the tacit understanding that the borrower will not be expected to repay the money until it is asked for.[15]

They went on to note that a ‘rule which does not, in many cases, give effect to the true intention of the parties and which enables an unscrupulous borrower to “get away with it” is open to criticism’.[16] The Orr Committee noted that the rule had been reformed in Scotland. The reform in Scotland originated in 1970 with the Scottish Law Commission Report, Reform of the Law Relating to Prescription and Limitation of Actions.[17] The Scottish Law Commission considered that in cases of loans with no fixed date of repayment the limitation period should start from the date of a demand for repayment not from the date when the loan was made.[18] This recommendation for reform was accepted and the new provision was included in the Prescription and Limitation (Scotland) Act 1973.[19] The Orr Committee recommended that

where money is lent and no date specified for its repayment, then, for the purpose of limitation, time should not begin to run in favour of the borrower until the date on which a written demand for repayment is first made.[20]

The reform recommendation was accepted and the law was reformed.[21] The effect of the reform is that if no date of repayment is specified then the cause of action is deemed to accrue on the date on which a demand is made. If there is a collateral document that specifies some date for payment then that will determine the appropriate date.


The English reforms were first considered in Boot v Boot.[22] In 1983 the plaintiff agreed to sell a house to his son and daughter-in-law (the defendant). In 1984 the couple signed a promissory note in which they jointly and severally promised to pay the appellant the borrowed sum on demand. The couple later divorced and the house was transferred into the sole name of the defendant. In 1990 the plaintiff demanded repayment of the loan from both his son and his former daughter-in-law. In 1993 he issued proceedings only against his former daughter-in-law, the defendant. The trial judge considered the effect of the new provisions and concluded that the action was statute-barred. The plaintiff appealed. In the Court of Appeal Waite LJ, commenting on the trial judge’s decision concluded that the ‘inference becomes inevitable that he must have misread the subsection by treating what is expressed as an exception to the application of s.6 as an exception to its non-application’.[23] Accordingly, the Court of Appeal held that the loan was not statute-barred.

The reforms were more recently considered in Re Westminster Property Management Ltd.[24] Loans were made by a company to two of its directors. The directors argued that the new provisions were only intended to cover informal transactions between family members or friends rather than commercial loans made by a company to its directors. They based this on reference in the Orr Committee Report to loans between family members or friends. However, Ferris J rejected this argument and found nothing in the Orr Committee Report or in the legislation that the section was to be limited in this way.[25]

These cases demonstrate that the legislative reform in England has been successful. Claims which would otherwise have been statute-barred have now been successful as a direct result of the new provisions.


In Australia, in the absence of legislative reform, a plaintiff faced with a defence based on the demand rule may be able to pursue an alternative cause of action in restitution. A plaintiff could argue that as a result of a mistaken understanding of the law the defendant has been unjustly enriched because the defendant now has a valid defence to any claim under the loan contract. A plaintiff would need to show that a separate obligation arises from the unjust enrichment of the defendant. A plaintiff could do this by making a demand for payment and then claim that it would be unjust for the borrower to retain the money. However, the existing cases on unjust enrichment in Australia do not provide direct authority for a plaintiff to succeed on this basis. In Pavey & Matthews Pty Ltd v Paul[26] the plaintiff was able to succeed in an action based on unjust enrichment because the High Court recognised an obligation arising separately from a contract which was unenforceable because of lack of formality. The independent obligation arose from the plaintiff’s performance of the work and the defendant’s acceptance of it.[27] However, in the case of a loan contract there is no benefit conferred on the defendant that the defendant has accepted outside the loan contract.

In David Securities Pty Ltd v Commonwealth Bank of Australia[28] the appellant was able to recover a payment made in ignorance of the fact that the relevant contractual obligation was void. Importantly for current purposes the decision supports the contention that sheer ignorance can amount to a mistake of law.[29] A plaintiff who makes a payment in sheer ignorance of their legal obligations can prima facie recover. However, where a plaintiff is faced with a valid defence, because of their ignorance of the law, the situation is different because no payment was made under a mistake of law. The plaintiff may, however, be able to succeed by analogy. Although the plaintiff is not making a claim for a mistaken payment based on ignorance, nevertheless the borrower is enriched because of the sheer ignorance of the lender. A plaintiff could argue that the limitation defence available to the contract claim is not available to the unjust enrichment claim because the cause of action in unjust enrichment only accrues when the plaintiff makes a demand. However, it is uncertain whether such a claim would succeed based on the current authorities because it falls outside the principles established in those cases. Reform of the legislation, as has occurred in the jurisdictions discussed earlier, may be the more certain avenue to redress the anomaly created by the demand rule. However, in the absence of any legislative reform a plaintiff might succeed in an unjust enrichment claim.


A limitation scheme is designed to provide a balance between the interests of the parties. However, the current rule is too favourable to borrowers because it allows them to simply avoid repaying a loan in circumstances where the lender has shown forbearance. The rule generally operates to statute bar loans between family members and friends and between individuals and private companies as highlighted in the Legudi case. The cases show that these loans are often made without legal advice and are often undocumented. By contrast, commercial loans are often documented by solicitors and provide some date of repayment thus avoiding the injustice of the demand rule altogether.

Reform is required in all jurisdictions in Australia to avoid loans like the loan in Legudi from being statute-barred before a demand for repayment is made. The need for reform in Australia is highlighted by the High Court’s acceptance in Young of the rule that no demand is necessary which precludes lower courts in Australia rejecting the rule as outdated.

Queensland and New South Wales have specifically considered reforming the law in this area. In its 1998 report[30] the Queensland Law Reform Commission devoted a short chapter to the issue of debts repayable on demand. The Queensland Commission noted the existing law as outlined by Fullagar J in Ogilvie and noted that:

The effect of the existing law is that, particularly in a domestic setting where money is lent to a friend or relative on the assumption that it will be repaid but no conditions are specified as to repayment, a lender may be unaware that the limitation period is running.[31]

The Queensland Commission took the view that the discovery period should not start until the plaintiff knows that there has been a default in performance of the obligation to repay after a demand for performance has been made.[32] Accordingly the Queensland Commission concluded that

a claim for a debt repayable on demand should be an exception to the general rule, and that there should be only one limitation period commencing when there has been a demand for repayment which has not been complied with.[33]

In its 2004 report[34] the New South Wales Law Reform Commission recommended that ‘the limitation period should run from the date on which demand is first made for payment’.[35]


The historical rule that loans made without any fixed date for repayment can clearly lead to injustice in many cases has been demonstrated by the recent decision in Legudi. The injustice of this approach was recognised in Scotland over 30 years ago, however, reform has been limited to England and Scotland. It is submitted that all Australian jurisdictions should adopt the reforms proposed by the Queensland and New South Wales Law Reform Commissions and amend their limitation legislation to specifically provide, that if a loan is made without any date for repayment, then the limitation period begins to run from the date that a demand is made for repayment and not from the date when the loan was made.

[*] Doctor of Juridical Science Candidate, University of Western Australia.

[1] [1956] HCA 51; (1956) 99 CLR 560.

[2] Ibid 567 (Dixon CJ, McTiernan and Taylor JJ).

[3] [1893] 2 Ch 300.

[4] Ibid 304–305.

[5] [1877] 2 AC 215.

[6] Ibid 248–249.

[7] [1825] EngR 816; (1825) 130 ER 540.

[8] Ibid 541-542 (Best CJ).

[9] [1996] HCA 25; (1996) 186 CLR 541.

[10] Ibid 552-553 (McHugh J).

[11] [2003] VSC 57; (2003) 54 ATR 221.

[12] [1981] VicRp 92; [1981] VR 1041.

[13] Ibid 1051.

[14] United Kingdom Law Reform Committee, Final Report on Limitations of Actions, Twenty-first Report, Cmnd 6923 (1977).

[15] Ibid 37.

[16] Ibid.

[17] Scottish Law Commission, Reform of the Law Relating to Prescription and Limitation of Actions, Report No 15 (1970).

[18] Ibid 30.

[19] See s 6 of Schedule 2. This Act has since been replaced by the Prescription and Limitation (Scotland) Act 1984. For a discussion of the relevant Acts see David Walker, The Law of Prescription and Limitation of Actions in Scotland (4th ed, 1990).

[20] Ibid 38–39.

[21] See ss 5 & 6 of the Limitation Act 1980 (UK) c 58.

[22] [1996] 2 FCR 713.

[23] Ibid 717 (Waite LJ).

[24] [2002] EWHC 52 (Ch).

[25] Ibid.

[26] [1987] HCA 5; (1986) 162 CLR 221.

[27] Ibid 228 (Mason and Wilson JJ).

[28] [1992] HCA 48; (1992) 175 CLR 353.

[29] Ibid 369 (Mason CJ, Deane, Toohey, Gaudron and McHugh JJ).

[30] Queensland Law Reform Commission, Review of the Limitation of Actions Act 1974 (Qld), Report No 53 (1998).

[31] Ibid 219.

[32] Ibid.

[33] Ibid.

[34] New South Wales Law Reform Commission, Time Limits on Loans Payable on Demand, Report No 105 (October 2004).

[35] Ibid 10.

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