ARTICLE
9 June 2010

Demand Obligations: Divergences in Provincial Limitation and Prescription Periods

MT
McCarthy Tétrault LLP

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McCarthy Tétrault LLP provides a broad range of legal services, advising on large and complex assignments for Canadian and international interests. The firm has substantial presence in Canada’s major commercial centres and in New York City, US and London, UK.
A recent ruling of the Ontario Court of Appeal, Bank of Nova Scotia v. Williamson, provides an opportunity to address the divergent ways that limitation periods in different provinces apply to various forms of demand obligation.
Canada Finance and Banking

Overview

A recent ruling of the Ontario Court of Appeal, Bank of Nova Scotia v. Williamson, 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 at which this period begins. 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 following significant amendments made to the Ontario Limitations Act, 2002 in November 2008. The Ontario Act establishes a "basic limitation period" of two years, applicable to most claims that fall under it. This period begins on the date a claim arises or on 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 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.

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 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 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. 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.

Regarding demand suretyships or demand guarantees, prescription begins to run on the date of the default of the principal debtor. 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. BC 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.

For collateral demand obligations, such as demand guarantees, the six-year limitation period runs from the date of the demand.

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.

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 that a promissory note was signed.

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). The Act further provides that the limitation period provided by the Act can be extended by express agreement.

The Alberta Act makes specific reference to "demand obligations" (a term that is not defined), and provides that the ultimate limitation period commences running upon the default of the obligor, after a demand has been made.

In at least one ruling, 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. 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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