In the fall 2008 Chorny1 decision of the
Ontario Superior Court of Justice, it was held that the limitation
period on a guarantee was co-extensive with that on the principal
debt. In that decision, the Court applied the principle of
co-extensiveness to find that the limitation period on the
guarantee lapsed at the same time as it did on the principal
Later in 2008, in the Williamson2 decision,
the Bank demanded on a guarantee following the principal
debtor's inability to repay the Bank. Williamson argued that
the two-year limitation period under the Limitations
Act3 began to run either when the demand was made
on the principal debtor or when the Bank knew that it would suffer
a shortfall; and, in any event, that the limitation period had
lapsed. The Bank argued that when a guarantee provides for a demand
as a condition precedent to the guarantor's obligations being
triggered, as was the case here, the guarantor is not liable until
demand is actually made.
The Ontario Superior Court of Justice agreed with the Bank in
holding that the limitation period for the principal debt and for
the guarantee may commence at different times. The Court held that
"when the parties to a guarantee agreement clearly incorporate
a demand as a condition precedent to the guarantor's liability,
liability does not crystallize until a proper demand has been
Further, the Court indicated that there is no requirement that
the demand be made upon the guarantor and the principal debtor at
the same time, as the guarantee relationship constitutes an
independent contractual relationship with the lender. The Court
also went on to indicate that "the authorities support the
proposition that, where the terms of the guarantee require that a
demand be made upon the guarantor, the limitation period commences
upon the receipt of the demand".
The Court distinguished its decision in Williamson from
that in the Chorny case.
Limitations Act Amendments
The amendments to the Limitations Act, made as of
November 28, 2008, but retroactive to January 1, 2004, provide that
the limitation period with respect to a demand obligation starts to
run on the first day on which there is failure to perform the
obligation, once a demand for the performance is made.
Williamson has clarified the law in Ontario, and
follows the more traditional approach in which the limitation
period for the principal debt and for the guarantee may commence at
different times. Williamson bolsters the view that the
limitation period on a guarantee does not commence until demand has
been made on the guarantee.
The amendments to the Limitations Act have the effect
of overturning the controversial decision of the Ontario Court of
Appeal in Hare v. Hare4 and are favourable to
lenders, among others, who previously had only two years from the
date of a demand was issued to commence a claim to recover on the
In respect of guarantees, we continue to advise that demand
phrasing should be explicitly included in guarantees, as should
enforceability phrasing indicating that the guaranteed obligation
is payable or enforceable at a certain time period after demand is
made. It would also be prudent to add a provision regarding the
Limitations Act indicating that the basic period of two
years does not apply, which is permitted under the Limitations
Act in that one can contract out of a limitation period in
respect of "business agreements".
1. 2015673 Ontario Inc. v. Beaumont Chorny et
al.,  O.J. No. 760
2. The Bank of Nova Scotia (the
"Bank") v. Anthony R.
Williamson,  O.J. No. 4756, Ontario Superior Court of
3. Limitations Act, 2002, S.O. 2002 (the
On February 24, the Supreme Court of Canada heard the appeal in Teva Canada Inc. v. Bank of Montreal. The appeal concerns who bears the loss for cheques payable to fictitious or non-existing payees, which were fraudulently issued by an employee.
Cassels Brock developed this Lessons Learned series based on our experience with priority disputes between secured creditors and the realization that many secured parties make fundamental errors of law...
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