|
In our recent Business
Law Update (November 2003), we set out in general terms how the
Limitations Act, 2002, due to come into force on January 1,
2004, radically changes the time frame for bringing a lawsuit in Ontario.
This update focuses on those provisions particularly relevant to banking.
As in other commercial areas, the prohibition on contracting out of
the Act’s limitation periods is likely to cause most concern.
Demand Notes
The introduction of the basic limitation period of two years is one
of the key features of the Act. The clock starts ticking from the day
on which a “claim” is discovered. “Claim” is defined
at the beginning of the Act as “a claim to remedy an injury,
loss or damage” that occurred as a result of an act or omission
(our italics). Case law has established that promissory notes payable
on demand create an obligation to pay from the time the note is created
and this may start the clock running on the limitation period, notwithstanding
that at that time no loss or damage has occurred. Even though “debt”
is not part of the definition of claim, a claim on a promissory note
will commence on the day it is created if existing case law continues
to be relevant under the Act.
Since “claim” was not previously defined under the old Act,
there is an argument that as it now is under the new Act, the definition
should not include demand debt such as promissory notes, or not at least
until loss or damage has actually occurred under the notes (ie demand
being made and failure to pay). However, until this point has been judicially
determined, it is more prudent to treat the effect of the new legislation
as reducing the limitation period for enforcing payment on promissory
notes from six years to two.
Acknowledging Liability
Case law also makes it clear that an acknowledgement of a debt re-starts
the limitation period on demand notes. Acknowledgement can take many
forms – partial payment, payment of interest or written acknowledgement
of the debt. Section 13 of the Act specifically deals with acknowledgements
of liability. If a person acknowledges liability in respect of a claim
for (1) payment of a liquidated sum, (2) the recovery of personal property,
(3) the enforcement (or relief from enforcement) of a charge on personal
property, or (4) other enumerated claims, the claim is effective on
the day on which the acknowledgement was made. Accordingly, the two-year
period begins again on the date of discovery of this acknowledgement.
The prudent approach will be to continue to provide for a written acknowledgement
of the debt relating to a demand note to the extent not otherwise specifically
acknowledged.
Section 13 also codifies existing case law in relation to the effect
of acknowledging particular types of liability. For example an acknowledgement
of liability on a claim for interest is an acknowledgement of liability
for the principal and an acknowledgement of a claim to realize on or
redeem collateral under a security agreement is an acknowledgement by
somebody else who later comes into possession of it.
These acknowledgements must be made to the person with the claim, the
person’s agent or an official receiver or trustee under the Bankruptcy
and Insolvency Act (Canada). As a general rule, the acknowledgement
must be in writing and signed by the person making it or the person’s
agent, although this does not apply to claims by the creditor for realization
or by the debtor for redemption of the collateral under the agreement
or to part payment of a liquidated sum.
Ultimate Limitation Period
One of the other key features of the Act is the introduction of the
ultimate limitation period of 15 years. Section 15(6)(c)of the Act states
that, for the purposes of the ultimate limitation period, the period
begins in the case of a default in performing a demand obligation “on
the day on which the default occurs”.
It is not clear whether the day of default is the day the demand promissory
note was made (in line with the interpretation of existing case law
discussed above) or the date on which the debtor failed to comply with
a demand for payment. This latter argument may be more attractive on
the basis that debtors are not really expected to pay until a demand
has been made and until this point of time no “loss” has crystallized
or occurred. Whether this interpretation is correct remains to be seen,
but again the emphasis should be on continuing to require debtor acknowledgements
of the debt and assuming the existing case law and approach applies
until otherwise decided.
No Limitation Period
Under Section 16 of the Act there is no limitation period at all in
a number of proceedings. These are set out in full in our general Business
Law Update. The two which are particularly relevant to the banking practice
area are a proceeding by a debtor in possession of collateral to redeem
it and a proceeding by a creditor in possession of collateral
to realize on it (our italics). Note also that some specific limitation
periods remain in force under certain Acts (e.g. the Mortgages Act,
Personal Property Security Act, Bulk Sales Act, Commodity Futures Act).
Guarantees
The act is also silent on guarantees. Although guarantees generally
take the form of a demand obligation, the guarantor becomes obliged
to pay the debt of the principal debtor only if the person primarily
liable fails to perform. Where a guarantor contracts to pay upon failure
to pay of the debtor, the demand must be made before an action can be
brought against the guarantor. Typically, the clock will start ticking
for the limitation period when the debtor fails to pay as that is when
the “claim” against the guarantor arises. It may also be at
that time that demand for payment is made to the guarantor (in some
cases, it may not be made at that time for strategic reasons). Under
the Act, then, the limitation will again be reduced to two years, subject
to the creditor obtaining acknowledgement of the guarantee liability.
A few issues arise from this. Creditors in insolvency proceedings against
a debtor in some circumstances do not immediately make demand or commence
a claim under a guarantee. With the reduced limitation period, any such
claims must arguably be brought within two years of the initial failure
to pay by the debtor on the basis that that is the date the creditor
became aware of a claim for loss. This may be even more problematic
where there is a stay of proceedings in an insolvency scenario with
respect to the guarantor where it is in similar circumstances to the
debtor. An order to lift the stay to make the demand may have to be
sought in circumstances where demand has not been made. Furthermore,
in other circumstances, it is perfectly possible that a remedy against
the principal may be statute barred by the Act but not against the guarantor,
who may remain liable as the limitation period under a guarantee may
not have expired even though it has expired on the principal debt.
Contracting out of the Act’s limitation periods
Under the existing law of limitations, parties can agree to lengthen
or shorten or not to enforce limitation periods. However, under the
new Act parties can no longer contract out of a limitation period. Section
22(1) provides that: “A limitation period under this Act applies
despite any agreement to vary or exclude it.” This provision does
not apply to agreements entered into before January 1, 2004. As we discussed
on our Business Law Update, this particularly affects tolling agreements
and representation and warranty clauses.
It seems unlikely that the legislators intended to interfere with the
freedom of contracting parties to shorten or set time limits on the
periods in which warranty claims, for instance, can be made. Nevertheless
it may be prudent to review these clauses in any standard form agreements,
precedents or agreements under negotiation to ensure that they are drafted
in such a way that they do not suggest an attempt to interfere with
the limitations periods set by the legislation. In addition, account
agreements with customers should be examined and shelf prospectuses
for bank issuers should be reviewed for any references to limitation
periods applicable to payment on the notes.
Governing Law
The question of governing law is also relevant when considering the
applicable limitation period. The Act states that the limitations law
of Ontario or any other jurisdiction is a matter of substantive law.
This means, for example, that for a contract dispute before an Ontario
court the governing law of the contract should govern the limitations
issue also and for tort claims the governing limitations law would be
that of the place where the tort is committed. This should alleviate
some of the confusion in the case law as to whether limitations periods
are substantive or procedural (the laws of the forum applying to procedural
matters). Still, the conflict of laws issues will need to be carefully
considered, particularly with regard to the application of section 22,
as not all jurisdictions treat limitations laws as substantive (e.g.
Alberta).
|
