Simple contract
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Under the Limitation Act 1980 a “Simple contract” is one that is neither a “specialty”[1] nor an insurance contract[2] nor a “contract of loan” which has no fixed repayment date, where repayment is not conditional on a demand, [warning:strap yourselves in for this next bit]
“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.”
We quote that last bit in full because, for a short extract, it is bloody hard to decipher. There are no explanatory notes to the Limitation Act 1980, but for help we have that Law Commission bunker buster which says:
“Section 6 does not apply where the debtor enters into a collateral obligation to pay the amount of the debt or any part of it on a fixed or determinable date or conditional on a demand for repayment (or other condition).”
So if the promissory note itself is a demand loan, but it is pledged as collateral for another debt which isn’t, then it counts as having a payment date. That’s the best I can do.
Note: “repayment on a stated maturity date, conditional upon demand by the creditor”, sounds a lot like the process for redeeming a bond — at least when held in physical, definitive form. Thus, definitive debt securities are not simple contracts.
Whether this is true of electronically cleared debt securities — that is, ahhh — all of them, these days — is a an interesting question, as these are paid out automatically to account holders in clearing systems. The expression a “contract of loan” finds voice in Section 6 of the Limitation Act 1980. It is a term of legislative art, used in distinction to “simple contract” dealt with in Section 5.
It isn’t entirely clear what it means, but by our best guess it applies to any monetary loan regardless of form — so including deposits, debt securities and so on. But would it extend to the loan of property, the transfer of which doesn’t confer title? The context — which speaks of creditors, and “repayment of the debt”, as if there must be one — suggests not. As does common sense: if I lend you my car and forget to ask you for it back, does it become yours after six years? No, because you never own it in the first place. But my ability to sue you for rental income on it might.
But what of contracts that we call loans, but which economically don’t resemble loans? full collateralised stock loans, for example? Here, title is automatically transferred, and the obligation to “return” is indeterminate, absent a demand. One one hand, it would seem odd if these loans could suddenly by extinguished if undemanded for six years. On the other hand, other liabilities arising under a stock loan contract, before its termination — to manufacture a dividend for example — are payable on a fixed or determinable date.[3] Are these not time barred either, simply because the stock loan repayment itself is time barred?
See also
- ↑ A written document like a security deed that has been sealed, delivered and given as security for the payment of a specific debt.
- ↑ Perhaps not “simple” because of the implied duty of utmost good faith — who knows?
- ↑ Namely, on the date they are paid by the underlying issuer — see Section 6.2.