The High Court has ruled on whether the operation of the Limitations Act can be set aside by a waiver in a mortgage contract, deciding that the Limitations Act does not automatically prevent mortgagees from taking action to recover a 20-year old debt.
It is an important decision for lenders because it confirms that parties to a loan contract can contract out statutory limitations periods with a lender.
The case, Price v Spoor, goes back to 1998, when the trustees of “a small pension fund”, Kerry and Christine Spoor, loaned A$320,000 to members of the Price family. The loans were secured by two mortgages. Under the terms of the mortgages, the money was to be repaid the following year.
When it was not repaid by the due date a new agreement was entered into and the repayment date extended to 2000.
When the money was not repaid by the later deadline, some of the mortgaged land was sold and $116,157 was paid to the mortgagee in November 2000. Once interest and fees were taken into account, the principal outstanding was reduced by $50,000.
From that time there were no more repayments.
Litigation started in the Supreme Court of Queensland in 2017, where the Spoors claimed that more than $4 million was owing to them. The amount was based on interest accruing at 16.25 per cent.
The borrowers’ defence was that the mortgagees were barred under the Queensland Limitations of Action Act and that the mortgages had been extinguished. The Act says a claim for breach of contract cannot be brought more than six years after the claim arose and an action to recover land cannot be brought more than 12 years after the right to bring the action arose.
The provisions of the Act are mirrored in other state legislation.
The Spoors argued that a clause in each mortgage contract (clause 24) amounted to a “covenant not to plead a defence of limitation”.
The court ruled that the Limitations Act operated to extinguish the mortgagee’s title to the lands subject to the mortgages. The court ruled that the clause in the contracts did not prevent the borrowers from using the limitations defence. The Spoors had “made their claim out of time”.
The Spoors took their case to the Court of Appeal, which reversed the primary ruling.
The borrowers then took the matter to the High Court, which handed down a ruling last month. It said that the provisions of the Limitations Act do not act as a statutory bar to bringing proceedings or operate automatically to extinguish title, but instead give a party a defence to plead.
It said a person on whom a statute confers a right may waive that right unless it would be contrary to the statute to do that. The Limitations Act conferred rights on individuals rather than fulfilling any public need and therefore the contractual provision under which the mortgagor waived its rights was effective.
“By agreeing to the terms in clause 24, the appellants effectively gave up the benefit provided by the Limitations Act,” the court said.
In a note to clients on the case, law firm Macpherson Kelley said: “Following this decision, lenders can feel confident that properly drafted loan documentation will protect their right to recover debts, even if there is a delay in taking action.
“However, the case did not rule out the possibility that the type of contractual provision in question in this case may be held void if ultimately found to be an unfair contract term under the Australian Consumer Law.”