Has the Limitations Act, 2002 changed the law of limitations for enforcing on guarantees? The Ontario Superior Court's recent decision in Bank of Nova Scotia v. Williamson says it has not, reaffirming the principle that the limitation period for enforcing a guarantee that requires a lender to make a demand on the guarantor is independent of the limitation period for the principal debt, and starts to run when the demand is made.
The Traditional Case Law
The distinction between co-extensive and independent guarantees is well settled. Where a guarantee is found to be co-extensive with the principal debt, the limitation period commences at the same time as the limitation period for the principal debt. Where a guarantee is found to be independent of the principal debt, the limitation period may commence at a different time, and will depend on the language of the guarantee.
The Limitations Act, 2002 codified the principle of discoverability in Ontario, requiring that proceedings in a claim must be commenced within two years of the date the "injury, loss or damage" is "discovered". The date of discoverability in the context of a guarantee obligation will depend on whether the guarantee is co-extensive or independent.
Blurring the Lines: the Chorny case
Recent case law has led to some confusion on this subject. In 2105673 Ontario Inc. v. Chorny, the Ontario Superior Court found that a demand made on a guarantee was unenforceable after the limitation period applying to the principal debt expired.
In Chorny, the court warned that if a limitation period does not start to run until a demand is made of a guarantor, the limitation period could conceivably be extended to 15 years under the ultimate limitation provision in s. 15 of the Limitations Act, 2002, and the obligation on the guarantee could long survive the principal obligation. Although the terms of the guarantee required the lender to demand repayment, the court found the guarantee was "co-extensive" and thus subject to the same limitation period as the principal debt.
Bank of Nova Scotia v. Williamson
Williamson resolves some of the confusion resulting from Chorny. In Williamson, the Bank of Nova Scotia provided loans to Ancon Industries Inc. in 2001. In 2002, Williamson executed a guarantee of the loans, which provided that liability under the guarantee would arise "forthwith after demand for payment has been made".
After Ancon defaulted on its loans in 2004, the Bank demanded repayment from Ancon, and contemporaneously advised Williamson in writing that it would take steps to enforce the guarantee if it could not recover payment from Ancon. The Bank was unable to recover the full amount from Ancon, and in 2007 formally demanded payment on the guarantee from Williamson.
The Bank brought a summary judgment motion against Williamson in October 2008, arguing that when a guarantee requires that a demand be made to trigger a guarantor's obligations, the guarantor is not liable until the demand is actually made. Williamson argued that the limitation period should run either from the Bank's 2004 letter to Williamson, or alternatively, should be deemed to run from the time when the Bank knew that it would suffer a shortfall after the sale of Ancon's assets based on discoverability.
Reasons for the Decision
The court found in favour of the Bank, holding that the guarantor's liability did not arise until the Bank sent its formal demand letter in 2007. As a guarantee is an independent contract between a guarantor and a lender, there is no requirement that a demand be made upon the guarantor and principal debtor at the same time. Where the parties to a guarantee clearly incorporate a term requiring liability to be contingent on a proper demand, liability does not crystallize until a proper demand is made.
The Effect of the Limitations Act, 2002
Williamson stands for the proposition that the new limitations regime has not altered the common law on limitation periods for guarantees. The court held that the Bank's "injury, loss or damage" under the guarantee did not arise until the principal debtor failed to make payment on its obligation under the loan.
The court rejected Williamson's argument that the claim was discovered under s. 5(1)(b) of the new Limitations Act when the Bank realized that it might not recover payment from the principal debtor. There was no indication that the legislature had intended to alter the common law concerning the obligations of a guarantor when it passed the new Limitations Act.
Although the decisions seem difficult to reconcile, the court Williamson did not explicitly overturn Chorny, choosing instead to distinguish Chorny on its particular facts.
The court also noted that in Chorny, it would have been unfair to allow the plaintiff to proceed against the guarantor when its action was time-barred as against the principal debtor. This unfairness was not present in Williamson, as the Bank had pursued its remedies against the debtor, Ancon, within the limitation period for the principal debt.
While the court acknowledged Chorny's concern that a guarantor may be liable long after the principal debt is unenforceable, it commented that the parties in Williamson were free to structure the guarantee contract as they wished, and to not enforce the demand against the guarantor would be to re-draft the guarantee after the fact.
Since coming into force in 2004, the new Limitations Act has raised questions in many areas of previously settled law. The court's decision in Williamson should provide lenders and creditors with some reassurance that this new limitations regime has not affected their ability to enforce a clearly drafted independent guarantee.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
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