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Demand Obligations — Divergences in Provincial Limitation and Prescription Periods

Date

August 2, 2010

AUTHOR(s)

Anthony M.C. Alexander
Martin Boodman
Mendy M. Chernos
Byran Gibson
Daniel E. Sears
Harry Underwood


Overview

The recent ruling of the Ontario Court of Appeal in Bank of Nova Scotia v. Williamson, 2009 ONCA 754 provides an opportunity to address the divergent ways that limitation periods in different provinces apply to various forms of demand obligation.

Demand obligations play a key role in many financing transactions, and fall into two broad categories: (i) primary demand obligations (such as demand promissory notes and demand mortgages), and (ii) secondary demand obligations (such as demand guarantees and third-party demand collateral mortgages). Each form of demand obligation has its own specific legal characteristics.

Of particular significance to both lenders and borrowers is the limitation period (or, in Québec, the prescription period) applicable to both primary and secondary demand obligations. A limitation or prescription period is, of course, the time frame within which a creditor must commence a legal proceeding against the borrower, guarantor, or other obligor, seeking to enforce the obligation in question. Once the limitation or prescription has expired, the right to commence such an enforcement action is generally lost.

Limitation and prescription periods are established by provincial legislation. Thus, the limitation or prescription applicable to a particular demand obligation will flow from the provincial law selected by the parties to govern their relationship more generally. The law varies from province to province as to both the length of the relevant limitation or prescription period and the date this time begins to run. This fact may make the parties’ selection of the relevant governing law a potentially important negotiating point.

Recent Developments in Ontario

In its recent Williamson ruling, the Ontario Court of Appeal considered the limitation principles applicable to various categories of demand obligation, both historically and in light of significant amendments made to the Ontario Limitations Act, 2002 in November 2008. This Act establishes a "basic limitation period" of two years, applicable to most claims falling under it. The period begins from the date a claim arises or from the date it is first reasonably discoverable by a plaintiff.

Ontario limitations legislation had, prior to the November 2008 amendments, been silent with regard to demand obligations. However, the common law had developed distinctly different approaches to the running of those limitation periods applicable to primary and secondary demand obligations:

  • With regard to secondary obligations, such as demand guarantees or third-party demand collateral mortgages, the relevant limitation period only began running against the creditor after the creditor had actually made the requisite demand against the obligor.
  • In contrast, a more draconian common law principle applied to creditors seeking to enforce a primary obligation (e.g., a demand promissory note or a demand mortgage). In such cases, the relevant limitation period was deemed to commence running immediately (i.e., from the date that the primary demand obligation came into existence), rather than at the point in the future when the demand was actually made.

These common law rules had been in force in Ontario for many years, and in earlier rulings the Court of Appeal had confirmed that they continued to apply even after the coming into force of the Ontario Act on January 1, 2004. (See Hare v. Hare (2006), 83 O.R. (3d) 766 (C.A.) and The Mortgage Company of Canada v. Grant Estate, 2009 ONCA 655.)

The potential confusion flowing from these common law rules was finally addressed in November 2008, when the Legislature amended the Ontario Act to ensure that the limitation period applicable to "demand obligations" (an undefined term) would only commence running after a demand had actually been made by the creditor against the obligor. This amendment was made retroactive, so that it applied to every "demand obligation" created on or after January 1, 2004.

In interpreting this retroactive amendment, the Court of Appeal in the Williamson case has confirmed that the traditional common law rule governing the running of the limitation period applicable to demand promissory notes (as primary obligations) has been radically changed, and has been made consistent with the very different rule previously applicable to demand guarantees (as secondary obligations). The Court of Appeal accepted that, for both categories of "demand obligation" created after January 1, 2004 and governed by Ontario law, the relevant limitation period will only commence running after a demand has actually been made by a creditor against an obligor.

An interesting fact that was not expressly addressed by the Court of Appeal in Williamson is that certain key limitation periods applicable to mortgages appear in a separate statute, the Ontario Real Property Limitations Act. Since the Legislature has not yet implemented parallel amendments specifically addressing "demand obligations" in that latter statute, the running of such limitation periods against both demand mortgages and demand collateral mortgages may require further judicial clarification.

The Governing Principles in Québec

There is no specific provision in the Civil Code of Québec regulating the starting date of the prescription or limitation period for a demand obligation. According to the generally applicable rules of prescription, the prescription period for a demand obligation is three years beginning from the date of the cause of action of the creditor.

Regarding demand loans, under the law of Québec prescription begins to run on the date of the advance of funds. (See Charron v. Investissement Royal Montréal Inc., 2008 QCCS 157; and 9022-8818 Québec inc. (Magil Construction Inc.) (Syndic de) 2005 QCCA 275).) Similarly, the prescription period for a demand note begins on the date of issuance of the note, rather than on the date of presentation for payment. (See Stone (Syndic de), 2007 QCCA 534; and G.G. Guertin inc. v. Sevan, 2008 QCCQ 12724.)

Regarding demand suretyships or demand guarantees, prescription begins to run on the date of the default of the principal debtor.(See Caisse populaire Desjardins de la Vallée de l’Or v. Dion, 2001 CanLII 2403 (C.S.); Banque Nationale du Canada v. Campeau, 2003 CanLII, 20051 (C.Q.).) The starting date for prescription of the claim against the surety may, however, be affected by the terms of the contract of suretyship where, for example, it requires a formal demand against the surety prior enforcing a claim against him.

The Governing Principles in British Columbia

Similarly, the British Columbia Limitations Act does not specifically provide for creditors’ claims. Consequently, these claims are captured by the BC Act’s general six-year limitation period, calculated from the date that the right to bring a cause of action arises. British Columbia has not made any legislative changes to the common law principles governing primary and secondary demand obligations.

For primary demand obligations, the limitation period runs from the date the obligation is created. For example, the limitation period for a demand promissory note runs from the date the note is made and the funds are advanced. (See Berry v. Page (1989), 38 B.C.L.R. (2d) 244 (C.A.); Barclay Construction Corporation v. Bank of Montreal (1988), 28 B.C.L.R. (2d) 376 (S.C.); and Ponti v. Marathon Motors Limited (1978), 9 B.C.L.R. 46 (Co. Ct.).)

For collateral demand obligations, such as demand guarantees, the six-year limitation period runs from the date of the demand. (See Canadian Imperial Bank of Commerce v. Sayani (1994), 100 B.C.L.R. (2d) 294 (S.C.); and Canadian Imperial Bank of Commerce v. Pittstone Developments Ltd. (1985), 69 B.C.L.R. 292 (S.C.).)

The Governing Principles in Alberta

Under the previous limitations regime, and subject to the wording of the governing document, claims in Alberta respecting a breach of contract (including a claim pursuant to a collateral demand obligation, such as a guarantee) were subject to a six-year limitation period running from the date of the breach and not from the date the breach was discovered. (See Alberta Treasury Branches v. Jarvis Engineering [1998] A.J. No. 285 (Master); and James H. Meek Trust v. San Juan Resources Inc., 2005 ABCA 448.)

For a primary demand obligation, such as a promissory note, a six-year limitation period applied, running from the date the obligation was created. As a result, the limitation period began to run from the date a promissory note was signed. (See Royal Bank v. Dwigans, [1933] 1 W.W.R. 672 (Alta. C.A.); and Canada Trustco Mortgage Co. v. 112293 Holdings Ltd., [1984] A.J. No. 126 (C.A.).)

With the coming into force of the current Alberta Limitations Act, the law on point appears to have changed. The Alberta Act provides that a claim is statute barred after the expiry of the earlier of (i) a two-year limitation period (running from the date the claim should have been reasonably discovered), and (ii) a 10-year ultimate limitation period (running from the date the claim arose). It further provides that the limitation period provided by the Alberta Act can be extended by express agreement.

The Alberta Act makes specific reference to "demand obligations" (an undefined term), and provides that the ultimate limitation period commences running upon the default of the obligor, after a demand has been made.

The Alberta Court of Queen’s Bench has noted the apparent change to the law with respect to demand obligations, but has declined to engage in an interpretation of the Alberta Act on that point. (See Kendell v. Kendell, [2006] 411 A.R. 332.) Accordingly, the effect of the legislative change in Alberta is not yet clear. A plain reading of the Alberta Act would seem to suggest that both collateral and primary demand obligations are subject to a two-year discoverability limitation period and an ultimate limitation period of 10 years, with the latter period running only after a demand for performance has been made.

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