Canada: Limitation Periods For Demand Promissory Notes: Something Old And Something New

The existing Limitation Act (British Columbia) (Limitation Act) establishes a six-year limitation period for creditors to bring an action to enforce payment on a promissory note. This limitation period begins to run on the date that the right to sue under the promissory note arises. The date the right to sue arises has often been litigated and differs depending on whether the promissory note is a demand promissory note (Demand Note), which allows a creditor to enforce payment at any time, or a delayed-demand promissory note (Delayed Note), which requires that a demand be made and that a specified period of time elapse before payment can be enforced.

In Ewachniuk Estate v. Ewachniuk (Ewachniuk) (reasons for judgment released on December 14, 2011), the British Columbia Court of Appeal (BCCA) clarified when the limitation period begins to run with respect to both Demand Notes and Delayed Notes. In Ewachniuk, the debtor had given his parents a Delayed Note, executed in December 1980, obligating him to repay $750,000 to his parents one year after demand. The debtor's parents died without ever having made a demand for payment. The administrator of the mother's estate demanded payment under such Delayed Note in November 2008, almost 30 years after its execution. The debtor refused to pay and, in July 2009, the administrator commenced an action to recover the amount allegedly owing.

At trial, the debtor contended that, although the promissory note was a Delayed Note, it was no different from a Demand Note and should be treated as such. He argued that the promissory note became actionable one year after it was executed in December 1980 and that the limitation period expired in December 1987 (i.e., six years later). The trial judge, however, confirmed the distinction between a Delayed Note and a Demand Note and held that the six-year limitation period in respect of the promissory note began to run in November 2009, one year after the administrator demanded payment. Accordingly, the administrator's action was not barred by the expiry of the six-year limitation period.

The debtor's appeal was dismissed by the BCCA. In its decision, the BCCA relied upon the following principles:

• General rule on the application of the limitation period to Demand Notes. A Demand Note is actionable immediately at the time that it is executed. No prior demand is necessary for the right to sue to arise, and the limitation period begins to run from the date of execution of the Demand Note.
• Delayed Notes are an exception to the general rule. The demand under a Delayed Note may properly be characterized as a contingent future event. Therefore, the end of the specified period following the date a demand is made marks the moment when the cause of action arises and the limitation period begins to run.
• Delayed Notes are not commercially uncertain. The debtor's argument that there is effectively no limitation period governing a Delayed Note because the demand required under a Delayed Note may never be made has no merit. Although the ultimate limitation period of 30 years set out in section 8(1)(c) of the Limitation Act would not apply to Delayed Notes for which no demand has been made, section 2(c) of the Limitation Act provides for equitable defences based on inexcusable delay that would mitigate the risk of indeterminate liability.

The principles confirmed by the BCCA in Ewachniuk make it important for both creditors and developers to consider carefully promissory notes given by developers. Creditors should be particularly aware of the limitation period affecting Demand Notes in connection with loans with a term of over six years and may wish to seek greater protection by requiring a Delayed Note instead. Conversely, developers should be aware that Demand Notes are unenforceable against them six years after the date of execution and that there is a risk of long-term liability under a Delayed Note.

It should be noted that British Columbia's new Limitation Act (Bill 34) (New Act), which will come into force on June 1, 2013, shortens the limitation period for creditors to bring an action to enforce payment on a promissory note from six years to two years after the claim is discovered. The shortened period will obviously require creditors to be more alert and act more promptly in commencing legal action when a claim is discovered, while potential defendants will benefit from increased certainty due to shortened time limits.

More importantly and more relevant to the Ewachniuk decision, the New Act also specifically provides that a claim for a demand obligation is discovered, and thus the limitation period begins to run, on the first day that there is a failure to perform the obligation after a demand for the performance has been made. On its face, this would appear to make the current law relating to Delayed Notes apply to Demand Notes, such that the rules set out in Ewachniuk regarding Demand Notes are unlikely to remain good law once the New Act comes into force.

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.