‘Contracting out’ of limitation periods - against public policy?
In Price v Spoor, the High Court recently considered whether parties can ‘contract out’ of statutory limitation periods, or whether such a clause would be contrary to public policy, and invalid.
The Limitation of Actions Act 1974 (Qld) (Limitation Act), which is in terms similar to corresponding provisions in the Victorian and New South Wales Acts, prevents borrowers from commencing actions after 6 years for recovery of unpaid debt and 12 years for the recovery of possession of land. Section 10 provides that actions for breach of contract cannot be brought after the expiration of 6 years from the date of breach. Section 24 of the Limitation Act provides that, where the 12-year limitation period for an action to recover land has expired, the person’s title to that land is extinguished.
In this case, Spoor (Lenders) brought proceedings against Price (Borrowers) for the recovery of monies owing and possession of land secured by two mortgages. In their defence, the Borrowers argued that the Lenders were statute-barred and 'out of time' under sections 10 and 13 of the Limitation Act and that the Lenders’ right to land title was extinguished by operation of section 24.
The Lenders relied upon clause 24 in each of the mortgages, by which (the Lenders argued) the Borrowers agreed not to rely on limitation periods as a defence.
At first instance, Dalton J in the Queensland Supreme Court entered judgment for the Borrowers. The Queensland Court of Appeal allowed an appeal from that decision and gave judgment for the Lenders, finding that parties may contract out of the defences available to them under the Limitation Act. The High Court granted special leave to the Borrowers to appeal and on appeal considered three questions:
- Can parties ‘contract out’ of limitation periods, or is such an agreement unenforceable because it is contrary to public policy?
- Does section 24 of the Limitation Act operate independently of section 13, or do both sections need to be read together in order to extinguish title?
- Did clause 24, on its proper construction, operate to prevent the Borrowers from pleading that the Lenders were time-barred?
Public policy – ‘finality in litigation’
The Court accepted that the Limitation Act’s legislative purpose of ensuring finality in litigation is a legitimate public policy objective. However, the High Court held (unanimously, but in 3 separate judgments) that a contractual provision pursuant to which a party agrees not to plead a limitation defence is not void nor unenforceable for being against that public policy.
As a starting point, the Court confirmed that statutory time bars do not go to a Court’s jurisdiction to entertain a claim, but rather to the remedy that is available. A cause of action is not extinguished by the statute, but creates a defence to the action, which must be pleaded. The Court concluded that a statutory limitation period confers a right on an individual defendant to elect to plead a limitation period – an individual right that a defendant may agree, by contract, to forego.
Construction of clause 24
Clause 24 of the mortgage provided:
“the mortgagor covenants with mortgagee that all statutory provisions now or in the future whereby any powers, rights and remedies of Mortgagee and obligations of Mortgagor may be curtailed, suspended, postponed, defeated or extinguished do not apply and are expressly excluded insofar as this can be lawfully done.”
In ascertaining the meaning of this clause, the High Court considered what a ‘reasonable business person’ would have understood the term to mean, having regard to the ‘text, context and purpose’ of the contract. Despite describing the wording of clause 24 as ‘clumsy’, and having ‘obvious shortcomings’, the High Court determined that the parties clearly intended for it to have a wide operation. The language showed a clear promise from the Borrowers not to invoke a benefit conferred by statute which permits the Borrowers to defeat the Lenders’ powers, rights and remedies.
Separately, the Borrowers also brought an argument that, irrespective of the limitation period in section 13, the Lenders’ right to title was extinguished by the independent operation of section 24. The High Court rejected this argument and confirmed that section 24 did not operate independently, but was an ancillary provision intended to facilitate the operation of the limitation period in section 13.
The High Court’s decision was made by reference to the rights of mortgagees and mortgagors, and to limitation periods affecting parties to a mortgage and actions to recover land. However, the principles on which the decision relies will likely apply broadly to the operation of limitation periods both in the Queensland Limitation Act, and in corresponding legislation in other states, where there is no express provision that permits or prohibits contracting out of limitation periods.
However, contracting parties should not assume that a provision which purports to limit a person’s right to plead the operation of a statutory limitation period will always be enforceable. The contract in question in this case was a mortgage, which the Court expressly recognised was ‘the product of free negotiation between parties contracting at arm's length’. Each judgment proceeds having regard to the commercial nature of the agreement. There may, therefore, be circumstances (such as in a consumer context) where a Court could find that, having regard to the relative negotiating power of the respective parties, a clause purporting to prevent a party from relying on limitation periods may constitute an unfair contract term, and be unenforceable on that basis.
 Price v Spoor  HCA 20
 Limitation of Actions Act 1974 (Qld)
 Limitation of Actions Act 1958 (Vic), Limitation Act 1969 (NSW)
 Limitation of Actions Act 1974 (Qld) s ss 13 and 24(1).
 Price v Spoor  HCA 20, , .
 Price v Spoor  HCA 20, .
 Price v Spoor  HCA 20, 
 See, for example, section 45 of the Limitation Act 2005 (WA), which provides that ‘nothing in this Act prevents a person from agreeing to extend or shorten a limitation period provided for under this Act’.
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