Canada: The Ticking Of The Limitation Clock On Demand Loans

Last Updated: October 22 2018
Article by Katie Mak

The new Limitation Act came into effect in British Columbia on June 1, 2013, and with it came some significant changes to the laws governing how long a person has to bring a civil lawsuit, particularly when in relation to certain commercial debt instruments such as demand loans and promissory notes. It was not until recently that the sections of the new Act and its application to such debt instruments came before the Courts for interpretation.

Generally speaking, the current Limitation Act provides for two limitation periods: a two-year basic limitation period applying to most civil claims and an ultimate limitation period of fifteen years applying to all claims. The basic limitation period is the time period that normally applies, absent special circumstances that would justify stopping the clock. A person has two years from the date he or she "discovers" that he or she has a legal claim to obtain legal advice and start a civil lawsuit, unless otherwise specified in the new Act or another statute which contains a specific time period. The ultimate limitation period describes the maximum outside time limit past which a basic limitation period cannot extend. This means a person has fifteen years from the act or omission to discover his or her legal claim and, within that basic limitation period, start a civil lawsuit. Under the new Act, a person has ten years after the date of judgment to enforce or sue on a judgment for the payment of money.

These changes to the limitations regime in British Columbia had a significant impact on demand debt instruments which did not have fixed terms of repayment of the principal loan amount, except that payment from the borrower is to be made "upon demand" from the lender. While the previous Act was silent on the limitation period pertaining to such loans, the new Act contains special exceptions to the general rules of discoverability in these situations:

  • 14   A claim for a demand obligation is discovered on the first day that there is a failure to perform the obligation after a demand for the performance has been made.
  • 15   A claim to realize or redeem security is discovered on the first day that the right to enforce the security arises.

The leading case on these sections is the B.C. Court of Appeal decision in Leatherman v. 0969708 B.C. Ltd., 2018 BCCA 33 [Leatherman]. Earlier this month, the Supreme Court of Canada dismissed the leave to appeal the B.C. Court of Appeal's decision in Leatherman.

In Leatherman, the Court of Appeal considered whether the lender's claim was out of time because the mortgage was a "contingent loan with a demand element" under section 15 and the limitation act began to run when the first default occurred, thereby triggering the lender's right to enforce on the security, leaving the claim statute barred as it was brought outside the 2 year limitation period. The lender argued that the mortgage and security were demand obligations and that, pursuant to section 14, the limitation period for its claim only began to run after it made demand, which was within the 2 year limitation period.

Like most mortgages, the mortgage included both a covenant to pay and security for the debt. The covenant to pay stated that "if a default occurs, all the mortgage money then owing to the lender will, if the lender chooses, at once become due and payable". The Court of Appeal held that the covenant was, on its face, a demand obligation to pay principal and accordingly, section 14 applied and the limitation period for the action to recover the mortgage principal began to run after the formal demand was made.

However, with respect to the provision which provided that the property mortgaged is security for the debt, the Court of Appeal found that section 15 applied as the mortgage provided that the trigger for realization was default (as opposed to demand) and consequently, the limitation period started to run when the security became enforceable, which in Leatherman was at the time of the first default in interest payment.

Accordingly, in Leatherman, the result was that the lender was entitled to sue on the principal and for interest that was not more than two years overdue. The lender, however, was barred from suing for interest that was more than two years overdue or to realize on its security.

While every case is specific to its particular facts, the Leatherman case serves as an important reminder that lenders should carefully consider whether their loans are sufficiently clear around when the lenders' ability to exercise both their repayment and realization remedies are triggered.

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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