Canada: Limitation Periods On Guarantees

Last Updated: October 16 2008
Article by Ian Aversa

Limitation Periods in Ontario

On January 1, 2004, Ontario's Limitations Act, 20021 (the "Act") came into force. The Act limits the period of time during which a person may initiate court proceedings in respect of a claim. For the purposes of the Act, a claim is defined as "a claim to remedy an injury, loss or damage that occurred as a result of an act or omission."2

The Act establishes a basic two year limitation period (the "Basic Period"), subject to certain exceptions, which commences on the earlier of the day the essential elements of a claim are known to the claimant and the day a reasonable person ought to have discovered them. There is a rebuttable presumption that a claimant discovered all of the essential elements of the claim on the day the act or omission causing the loss or damage occurred.

In addition to the Basic Period, the Act establishes an ultimate fifteen year limitation period (the "Ultimate Period"), which commences on the day an act or omission takes place, regardless of whether the essential elements of the claim became known to or ought to have been discovered by the claimant.

Contracting Out of the Limitations Act, 2002

In 2006, the Act was amended to permit parties to suspend or extend the Basic Period by an agreement made on or after October 19, 2006. In addition to suspending or extending the Basic Period, parties to a business agreement (made by parties none of whom is a consumer as defined in the Consumer Protection Act, 20023) may also agree to shorten or exclude the Basic Period.

The new provisions also permit the Ultimate Period to be suspended or extended by an agreement made on or after October 19, 2006, provided the claim in question has been discovered at the time the agreement to suspend or extend is made. In addition to suspending or extending the Ultimate Period, parties to a business agreement may also agree to shorten or exclude the Ultimate Period.

2015673 Ontario Inc. v. Chorny

Since the Act and the new amendments came into force, the financial community has been anxiously waiting to see how the courts would interpret the new provisions. The recent decision of the Ontario Superior Court in 2015673 Ontario Inc. v. Chorny4 ("Chorny") is worth discussing in more detail because it concerns the application of the Act to guarantees. The Chorny decision holds that the Basic Period for a claim under a guarantee does not run from the time a creditor demands payment from a guarantor and is not paid but, rather, from the time when the principal debtor defaults in payment.

In Chorny, three separate term loans were guaranteed by Mr. Chorny, each of which contained similar language. The guarantees provided that the Guarantor

hereby guarantees payment to [the lender] immediately upon demand (as provided hereinafter) of the liabilities [of the borrower] ...

Specifically, the guarantees provided that:

[t]he Guarantor shall make payment under this guarantee immediately after demand is made in writing. ... The liability of the Guarantor shall bear interest from the date of demand ...

In the decision, the Court reasoned that the loans matured and became payable between September and October 2005. On January 15, 2006, demand was made on the guarantees. On December 4, 2007, the guarantor applied to have the action brought by the creditor dismissed on the grounds that the limitation period had expired.

The Court ruled that the limitation period had expired and granted the motion to dismiss. Justice Low referred to the Supreme Court of Canada's decision in Communities Economic Development Fund v. Canadian Pickles Corp.,6 which held that a guarantee's existence is coterminous with the underlying debt, such that if the principal debt is void or unenforceable, then the guarantee is likewise void or unenforceable. Applying the principal of co-existence, Justice Low held that the limitation period on the guarantee commenced to run when the debt was due and owing and not when demand was made on the guarantor.

This case is important because it now appears that an action against the guarantor needs to be brought within two years of the underlying debt becoming due. The situation is, however, further complicated because the extent of a creditor's rights against a guarantor may not be known for some time.

After the Ontario Court of Appeal's decision in Hare v. Hare, it had been thought that the solution to the "demand loan" problem was to draft guarantees and demand promissory notes to make the amount of the note payable only after actual demand in writing. After Chorny it appears that this step is not enough. The practical answer now is that an express provision should be inserted into both the loan agreement and the guarantee and, of course, into demand promissory notes clearly stating that the limitation period is to be some period longer than the two years in the Act, and that the period only starts to run from the date of the demand.


1.S.O. 2002, c. 24, Sch. B.

2.Section 1.

3.S.O. 2002, c. 30, Sch. A.

4.(2008), 90 O.R. (3d) 207, 44 B.L.R. (4th) 101 (S.C.J.).

5.[1991] 3 S.C.R. 388.

6.(2006), 83 O.R. (3d) 766, 24 B.L.R. (4th) 230 (C.A.).

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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