Canada: Demand Loans And The Limitations Act, 2002

Background And Overview

The former Limitations Act (the act in force in Ontario before January, 2004) was applied awkwardly to demand loans. It was based in part on English legislation going back to the sixteenth and seventeenth centuries. The key concept underlying the former act was that of a cause of action "arising." In the case of an ordinary contract like a contract for the sale of land, an employment contract, a loan (other than a demand loan) or that between a solicitor and his or her client, the cause of action would generally arise on breach. For reasons which are not relevant now, the courts held that, in the case of a demand loan (a loan payable on demand), the cause of action arose not when the borrower failed to pay on demand, but when the lender advanced the money.

The Limitations Act, 2002 radically changed the law. Under the new Act, the basic concept triggering the running of the limitation period is that of a "claim" and, in particular, the discovery of a claim. Leaving aside some special kinds of claims, a claim is barred two years after it was (or, subject to some conditions, should have been) discovered.

It had been hoped by those who had worried about the treatment of demand loans under the new Act that when applying the concept of "claim," the limitation period for a demand loan would start only when the demand was made. Unfortunately, the Court of Appeal has made it clear that such hopes were unfounded. In Hare v. Hare, (2006), 83 O.R. (3d) 766, the Court held that the former rule for demand loans still applies with the result that the new (and much shorter) limitation period runs from the date when the funds are advanced by the lender under a demand loan.

Future Loans

As a result of the Court's decision in Hare v. Hare, it is necessary to re-draft most standard form promissory notes for demand loans. If it is intended that interest will not be paid within two years of the date of the loan advance, it is necessary to add text such as that underlined below to the following standard promissory note provision:

"FOR VALUE RECEIVED, the undersigned hereby acknowledges itself indebted and promises to pay to or to the order of x (the "Holder") the principal sum of x dollars ($x) in lawful money of Canada at the head office of the Holder. The principal amount due under this note shall be payable only after actual demand by the Holder in writing."

Alternatively, language such as the following could be added to the standard language of a demand promissory note:

"The Maker and the Holder agree that the limitation period with respect to this loan shall be x years and shall not begin until actual demand has been made by the Holder."

As parties now have more leeway to contract out of the limitation period provisions under the new Act, they appear to be free to choose a limitation period of up to 15 years (see Sections 15 and 22 of the new Act).

Existing Loans

Demand loans acknowledged by a promissory note with the original language (stating simply the loan is payable on demand) where the loan was advanced at any time after January 1, 2004, and where no interest has been paid on the loan, may now be unenforceable two years after the loan was advanced as a result of the new Act and the decision in Hare.

Where the loan is not yet unenforceable, the holder of the note should, prior to the expiry of the two year period, make a formal demand for payment. The borrower should then be required either to execute a new promissory note with the additional language suggested above, or to acknowledge the debt in writing. Either step gives the lender at least a further two-year period to claim under the promissory note.

Where the loan is already unenforceable because of the limitation period, it may be in the interest of both the holder and the maker of the promissory note that the loan be enforceable. In this case, an acknowledgement by the debtor, in writing, of the debt will "revive" the loan and restart the limitation period. Note, however, that under the Income Tax Act, once a debt is no longer enforceable because of the running of a limitation period, the parties' decision to revive the debt may have no effect on the tax consequences of the loan being barred by the running of the limitation period.

Although the lender may be unable to commence an action to enforce the terms of the promissory note, the expiry of the limitation period does not destroy the underlying obligation. The lender may be able to seek recourse against the borrower under a guarantee or other security given for the debt. As a result, lenders may still have the right to seize and sell the property, exercise a power of sale or foreclose.

Moving Forward

Although the courts in Ontario have only just begun to deal with the unexpected implications of the new Act, it appears that such implications have been recognized by the government. It is hoped that the definition of "claim" in the Act will be re-defined. As it is not clear when the government will make such a change, it is necessary to adjust to the new framework.

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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