IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM TAUNTON COUNTY COURT
(HIS HONOUR JUDGE COTTERILL)
Strand London WC2 |
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B e f o r e :
LORD JUSTICE WAITE
SIR IAIN GLIDEWELL
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BOOT | ||
PLAINTIFF/APPELLANT | ||
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BOOT & ANR | ||
DEFENDANTS/RESPONDENT |
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Smith Bernal Reporting Limited, 180 Fleet Street,
London EC4A 2HD
Tel: 0171 831 3183
Official Shorthand Writers to the Court)
MR J ISHERWOOD (Instructed by Messrs Annear, Devon, EX34 8AJ) appeared on behalf of the Respondent
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Crown Copyright ©
LORD JUSTICE WAITE: The appellant, Mr Colin Boot, was formerly the owner of a property, 24 Church Street, Ilfracombe, which was occupied by his son Christopher and daughter-in-law Pauline. In 1983 he agreed to sell them the property at a price of £33,000. They were unable to raise the full purchase price and at completion he agreed to accept a down payment of £25,000 and to leave the unpaid balance of £8,000 outstanding by way of loan. That balance was to be secured by a promissory note which was signed by Christopher and Pauline on 27 January 1984 and reads as follows:
"We ... hereby jointly and severally promise to pay to [the plaintiff] or to his order on demand the sum of £8,000."
The son's marriage unfortunately failed, and the couple separated and were later divorced. On 7 September 1990 the plaintiff gave notice to the son and daughter demanding payment of the £8,000. Nothing was paid, and on 8 January 1993 the plaintiff issued a writ against Pauline alone for payment of the monies due under the promissory note. The property had in the meantime been transferred into her sole name by order of the court in financial proceedings in which the plaintiff had been refused leave to intervene.
The defendant (who joined her former husband as a third party to the proceedings) raised various defences, including an assertion that the cause of action on the promissory note was barred by section 5 of the Limitation Act 1980. She later took out a summons in the County Court (to which the proceedings had in the meantime been transferred) to have the action summarily dismissed as statute-barred.
The summons was heard in the first instance by District Judge Turner before whom it was resisted by the plaintiff on the ground that, by virtue of section 6 of the Act, no cause of action for repayment of the loan accrued until the date of demand, which had been made well within the six year period before the writ. The defendant's claim was that the effect of the collateral security afforded by the promissory note was to disapply section 6 under the exclusion provisions contained within the section itself. The district judge, who commented that he took a poor view of the law and regarded the case as one to be decided in the light of common sense, found in favour of the plaintiff and ordered the action to continue. The defendant appealed successfully to His Honour Judge Cotterill sitting at the Taunton County Court on 12 April 1995. The judge held, albeit with considerable reluctance, that the promissory note was caught by the words of exception in section 6 and that the loan was accordingly statute-barred. From that conclusion the plaintiff now appeals to this Court.
Nothing more need be said about the facts. The legal background to the appeal requires to be stated in rather more detail. There is a principle of common law, well established by authority although its logic may not be immediately apparent to a layman, that a contract of loan under which the money lent is expressed to become repayable to the lender on demand imposes an immediate obligation of repayment upon the borrower from the outset of the loan, regardless of whether any demand for payment is made or not. Chitty J expressed the principle thus in J Brown's Estate [1893] 2 Ch 300 at page 304:
"It is plain that a distinction has been taken and maintained in law the result of which is that where 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 an action."
When the law of limitation was examined by the Law Reform Committee in 1977, note was taken of the fact that this principle (to which -- although it goes back to much earlier authority -- it may be convenient to refer as "the rule in Re Brown") was liable to lead to unfairness when applied in a non-commercial context. The Committee commented that when loans were made within a family or between friends, there was a risk of lenders suffering an inadvertent barring of their claims to repayment through an erroneous, though understandable, assumption that there were no penalties for forbearance, and that the claim could be left outstanding without risk of extinguishment until repayment was formally demanded. In their final report, therefore, the Committee recommended a change in the law to provide 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 payment is made..."
(see the Law of Contract: Report on Contribution (Report) [1977] EWLC 79 (01 January 1977) Command Paper 6923, paragraphs 3.19 to 3.26).
If that recommendation had been fully adopted, the rule in Re Brown would have had to be rescinded altogether. The draftsman of the Limitation Act 1989 clearly thought that would be too extreme a step, and decided instead to give effect to the spirit of the recommendation by preserving the rule but modifying its effect. Sections 5 and 6 of the Act read as follows:
"5. An action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued.6.-(1) Subject to subsection (3) below, section 5 of this Act shall not bar the right to action on a contract of loan to which this section applies.
(2) This section applies to any contact of loan which -
(a) does not provide for repayment of the debt on or before a fixed or determinable date; and(b) does not effectively (whether or not it purports to do so) make the obligation to repay the debt conditional on a demand for repayment made by or on behalf of the creditor or on any other matter;except where in connection with taking the loan the debtor enters into any collateral obligation to pay the amount of the debt or any part of it (as, for example, by delivering a promissory note as security for the debt) on terms which would exclude the application of this section to the contract of loan if they applied directly to repayment of the debt.
(3) Where a demand in writing for repayment of the debt under a contract of loan to which this section applies is made by or on behalf of the creditor (or, where there are joint creditors, by or on behalf of any one of them) section 5 of this act shall thereupon apply as if the cause of action to recover the debt had accrued on the date on which the demand was made."
The formula introduced by section 6(2) is undoubtedly elaborate, and it was criticised as bewildering by both the judges in the courts below. Nevertheless, the general scheme involved in sections 5 and 6 (when read together) is in my view reasonably clear. It can be summarised as follows:
(1) Although no express reference is made to the rule in Brown's case, its existence is tacitly recognised by the distinction drawn in section 6(2)(b) between the purport on the one hand, and the effectiveness on the other, of a provision making the obligation to repay conditional on a demand for repayment. The potential hardship of the rule to which the Law Reform Committee have drawn attention is, however, mitigated by causing the six year time bar imposed by section 5 to run, in the case of loan contracts which contain no provision for a fixed payment date and which omit any effective provision making the loan repayable on demand, from the date of any written demand for repayment rather than from the date of the loan. It will be convenient to refer to such loan contracts hereafter as "qualifying loans".
(2) Special provision is made, however, for cases where qualifying loans are supported by a collateral security taken from the borrower. In such cases (of which a promissory note is specifically instanced as an example) the terms of the collateral security have to be read notionally into the loan agreement itself, and the agreement thus notionally established has in turn to be scrutinised for the purpose of determining whether it satisfies the conditions of a qualifying loan. If it does not, the benefit of section 6 is lost, and time will run from the date of the loan. If it does satisfy those conditions, the benefit of section 6 is retained and time will not run until a demand is made.
The judge in this case, therefore, had a two-fold duty. The first was to decide whether the loan was a qualifying loan. He held that it was - and was clearly correct in doing so, because it satisfied both the conditions in section 6(2)(a) and (b), in that it did not provide for repayment of the debt on or before a fixed date and did not, when construed according to the rule in Brown's case, render the obligation to repay conditional upon demand or any other condition.
The judge's second duty was to consider the effect of the collateral security afforded by the promissory note. In discharging it he first directed himself correctly to apply the wording of the exception to section 6(2). He then summarised the inquiry which those words of exception required of him as follows:
"It seems to me that the problem may be expressed in these terms: did the debtor deliver the promissory note in connection with taking the loan on terms which would, if they applied directly to the repayment of the debt, fall outside the provisions of s.6? The terms which are relied upon as relevant relate to repayment on demand.
If a debtor contracts to repay on demand, does his obligation to repay arise only upon demand, or does it arise immediately upon the making of the contract? As I understand it, the common law says it arises immediately. So that effectively - a word I repeat from the Statute - effectively it does not make the obligation to repay conditional under a demand, despite what it purports to do."
So far, that seems to me to be an entirely accurate paraphrase of the inquiry enjoined by the subsection. He then continued:
"If that be so, it seems to me that the terms of the promissory note would not fall outside s.6."
That finding, too, appears to me to be entirely justified. The terms of the promissory note did indeed satisfy both conditions of a qualifying loan: no repayment date was stated; and no effective provision was made for repayment on demand.
It represented a finding from which, in my judgment, only one possible conclusion could be drawn; namely that the loan agreement had retained its status as a qualifying loan under section 6 because the terms of the promissory note would not, if applied directly to repayment of the debt, exclude the application of section 6 to the contract of loan. The judge, however, came to the opposite conclusion. He seems to have thought that the result of his finding was that the exclusion operated, and that the protection afforded by section 6(2) was lost. That is clear from the conclusion which, after criticising the terms of a statute that he described as irreconcilable with common sense or justice, he expressed in these terms:
"Therefore - with reluctance - I feel compelled to find that s.6 does not in fact apply in such a way as to disapply s.5. In short, I find that the Stature of Limitations bites, and it is not open to the plaintiff to proceed in his attempt to recover this debt from the debtor."
I confess that, for my part, I am unable to find any logical basis for that conclusion in the findings which the judge had already made. The inference becomes inevitable that he must have misread the subsection by treating what is expressed as an exception to the application of section 6 as an exception to its non-application. That impression is confirmed by an earlier passage in his judgment where, after making his uncriticised finding that the loan satisfied the conditions of a qualifying loan, he said:
"So prima facie the contract falls within the saving provisions of s.6; that is, until one comes to the exception which follows the sub-sections (2)(a) and (2)(b), because that provides that s.6 does not apply except where in connection with taking the loan the debtor enters into any collateral obligation to pay the amount of the debt or any part of it, as (for example) by delivering a promissory note as security for the debt on terms which would exclude the application of this section to the contract of loan if they applied to repayment of the debt. It is with the words of that exception that I have to grapple."
That passage mis-states the effect of section 6(2) by reversing its import entirely. The relevant words of exclusion are expressed, as enacted, to apply by way of exception to the application of section 6, whereas the judge treats them in the precisely contrary sense of an exception to its non-application. His error may be explicable as a drafting casualty of the kind that is liable to be suffered when the complexities of exception, exclusion, and a deeming provision are all introduced together into one single subsection; but it is a major error all the same.
The correct conclusion in my judgment is the one to which the judge would himself have wished to come if he had felt free to do so, namely that the loan satisfied the conditions of section 6(2) and was supported by a collateral security which escaped the exclusion in the closing words of that subsection.
I would allow the appeal and restore the order of the district judge dismissing the summons to strike out the action.
SIR IAIN GLIDEWELL: I agree.
LORD JUSTICE LEGGATT: The judge got it wrong when he said at page 3F of the transcript of his judgment that section 6 of the 1980 Act provides that the section does not apply except where the debtor enters into a collateral obligation. Section 6 does apply, subject to the exception. Apart from that I agree with the judge up to and including his statement (page 4E) that:
"... the terms of the promissory note would not fall outside s.6."
The terms would therefore fall within it. The exception does not operate to prevent section 6 from applying to the contract of loan because, if that contract had transposed into it the term of the promissory note requiring the debt to be repaid on demand, that would not take the contract outside the scope of section 6(2)(b). So section 5 does not bar the right of action.
The appeal will be allowed and the judge's order will be varied so as to dismiss the defendant's appeal against the district judge's order.
Order: Appeal allowed; defendant to pay the costs of the appeal to the County Court Judge, not to be enforced without further order of the County Court; order nisi made against the Legal Aid Board in relation to the plaintiff's costs in the Court of Appeal; legal aid taxation of both parties' costs.