Ordinarily, where no time for repayment is specified in a contract of loan founded on simple contract and the loan was expressed to be repayable on demand, the lender’s cause of action generally accrues when the loan is made and time for recovery of the loan begins to run from that moment. Consequently, once the loan is outstanding for more than 6 years – which often happens in the case of loans between friends and family, the lender’s right to recover the loan becomes time-barred, even if no demand for payment has been made.
However, there exceptions to this, namely; a lender’s right of action on a contract of loan is not time-barred after 6 years from the date of the loan: if –
- a contract of loan does not provide for repayment of the debt on or before a fixed or determinable date; and
- does not effectively make the obligation to repay the debt conditional on a demand for repayment made by or on behalf of the lender or on any other matter;
Instead, the 6 year period does not start to run unless and until a demand in writing for repayment is made by or on behalf of the lender. I.e. the lender will have 6 years from the date of the demand to recover the debt.
One needs to look to the terms of the loan agreement to ascertain whether there is a fixed or determinable date for repayment and if so, whether the fixed date has expired or whether there has been a triggering event to determine repayment of the loan, although if the latter applies, it is a question of construction when the 6 years runs from.
It is advisable to have a loan agreement professionally drafted by solicitors so as to ensure a clear fixed or determinable date for repayment and/or if you are in the unfortunate position of having to issue or defend County Court proceedings in relation to an unpaid loan, seek legal advice from solicitors as to the enforceability of the loan.
There are a different set of rules for loans from lending institutions and/or if a guarantee is in place.