We often come across situations where family members or friends have loaned large sums of money to each other and haven’t agreed on any repayment terms. This is usually because people naturally don’t envision that a relationship will go south or they cannot fathom that the other person might never repay them. But, sadly, this does happen and if it does, you don’t want to end up being unable to sue to get that money back. There are time limits for filing a Court claim and sometimes if you are too late, you may lose your right to recover the loan.
What sort of loans to watch out for
If a loan agreement (whether oral or written) doesn’t stipulate a date for the debt to be repaid or you both agree that the loan can be repayable “on demand” then the ‘cause of action’ will usually arise on the date that the money is initially loaned to other person, not the date that you demand repayment. The date that the ‘cause of action’ arises is important because this is the date from which your right to sue to recover the debt begins.
The rule that the cause of action arises on the date the money is loaned rather than demanded is a very old rule. Justice Young, in an unreported 1997 Supreme Court of New South Wales decision, explained that when you say “I promise to pay on demand” in relation to a loan you are really saying “I am ready to pay at any time”. Justice Young used the analogy of borrowing your neighbour’s lawn mower in explaining this concept – you might borrow the lawn-mower and might not give it back until your neighbour asks for it, but you would always make sure that it is in a condition to return to your neighbour at any time.
Although the above rule might seem harmless, especially in the context of lending or borrowing money from family or friends, there can be serious implications for if you do ever need to take recovery proceedings to get your money repaid. Section 14 of the Limitation Act 1969 (NSW) means that you, as a creditor, only have 6 years from the date the cause of action arises to sue for an unpaid debt.
Therefore, if you and the person you have loaned money to have not agreed on a date for repayment at the time the loan is given or have agreed that the loan is repayable on demand, you could be statute barred from enforcing repayment after 6 years from the date the loan is given. This is even more likely to be the case if the person who borrowed your money hasn’t made any payment on the loan or acknowledged the loan in writing since you provided it to them. The consequences of this is that after 6 years, you may no longer have rights to recover your money.
What to do
Preventing these situations from arising is easier than remedying them when they do:
Obviously, the best way to avoid situations like the ones above from arising is to have a loan agreement in writing which provides for basic details such as how much the loan is for and when it should be repaid. The problems which can arise if these details aren’t explicit are part of the reason why getting legal advice before you agree to loan money to anyone is always advisable.
Although an oral agreement can technically be enforced (although this can be difficult), even if you have tried to do the right thing and have a loan agreement in writing, this might not always guarentee the loan is enforceable. The benefit of a written loan agreement drafted by a lawyer is that the lawyer will take into account what you are trying to achieve and ensure that the actual loan agreement meets your needs.
Remedy the situation as fast as possible: If you have already loaned the money and you think that you are nearing the end of the 6 year period, and the debtor still has not paid back the loan and is not likely to in the near future, then you need to take steps to secure your rights over the loan and make sure you are not left empty handed after 6 years.
The limitation period may be restarted if the person who owes you money makes a payment towards the loan, or acknowledges the loan. The acknowledgment must be in writing, clearly acknowledge that the debt exists and remains unpaid and also be signed by the debtor. As there are strict requirements for what constitutes an enforceable acknowledgment of debt, it is advisable to discuss the matter with a lawyer first before you approach the debtor on your own.