Loans and Limitation Periods

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is a litigation lawyer practicing at Perley-Robertson, Hill & McDougall LLP in Ottawa, Ontario. He may be reached at 613.566.2823 or obourns@perlaw.ca.

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There are almost an infinite variety of loan formats and types.  At the more formal end you have mortgages and at the other end of the spectrum you have personal oral agreements between family and/or friends.  Then there is everything else in between.  Regardless of the type of loan, what the lender needs to be aware of is when his or her rights to enforce and collect on that loan will legally expire, because once the right is lost it cannot be revived.

In Ontario, the starting point is the Limitations Act, 2002 1 which establishes a comprehensive deadline to start a claim within 2 years from the date the claim was “discovered”.  For many disputes the date of a claim was discovered is completely non-contentious.  However, in the case of a loan the day a claim is “discovered” could, in theory, be a number of dates, including; the day the loan was executed, the day a default occurs under the agreement, or the day a demand is made for payment.

The first step in identifying a deadline to commence a claim relating to a loan is to determine whether the loan agreement has created a “demand obligation” or a “contingent obligation”.

Contingent Obligation Loans

A contingent obligation are debts which need not be repaid until some contingent event has occurred. For example, money lent to be repaid: (a) on a set schedule; (b) when a piece of real estate is sold; (c) repaid on someone’s death, etc.

In these cases, if and when the contingent event occurs then the lender knows (ie. discovers) that it is time to be paid back and has two years from the occurrence of the contingent event to bring a claim to recover the loaned amount.  Where there is a schedule for repayment of a loan then the contingent event would be the borrower’s failure to make a payment.  Thus, if a borrower stops making payments under a loan and no steps are taken for over 2 years then the lender would not be able to pursue recovery of the loaned amount in court.

Demand Obligation Loans

Demand obligations are debt instruments that; (a) are expressly payable on demand of the lender, or (b) in which no time for payment is expressed.2  Commercial loans, private loans, and promissory notes that are to be payable “upon demand” are all commonly used demand loan debt instruments.

The new Limitations Act, 2002, came into force in 2002 and unfortunately was drafted in such a manner that, with respect for demand obligations, it deviated from long standing common law principles.  This was exemplified in Hare v. Hare 3 where the Court of Appeal determined that, under the Limitations Act, as it was then, the limitation period for a demand note begins to run when the note is delivered (ie. when the loan agreement is executed).  The logic was that because repayment of the loan could be requested and required immediately that discovery occurred at that time.

The decision in Hare v. Hare was sufficiently controversial that as a result the Ontario Bar Association wrote to the Attorney General of Ontario rquesting that there be a further amendment to the new Limitations Act so that the two-year limitation period not start running until a default occurred following a demand for payment occurs. In 2008 the province enacted such an amendment, as reflected by s.5(3) of the current version of the Act:

Demand obligations 

(3) For the purposes of subclause (1) (a) (i), the day on which injury, loss or damage occurs in relation to a demand obligation is the first day on which there is a failure to perform the obligation, once a demand for the performance is made. 2008, c. 19, Sched. L, s. 1.

Since the 2008 amendment to the Limitations Act the Ontario courts have confirmed that where a loan agreement creates a demand obligation, as opposed to a contingent obligation, then s.5(3) of the Limitations Act applies and the limitation period of 2 years begins to run once a formal demand for payment is made. 4

Once we have established the discovery date then by default we have the deadline by which point a claim must be commenced, being two years after the discovery date.  However, it is important to also note that the deadline to start a claim can be extended pursuant to section 13 of the Limitations Act, which states:

Acknowledgments

13.  (1)  If a person acknowledges liability in respect of a claim for payment of a liquidated sum, the recovery of personal property, the enforcement of a charge on personal property or relief from enforcement of a charge on personal property, the act or omission on which the claim is based shall be deemed to have taken place on the day on which the acknowledgment was made.

[…]

(10)  Subsections (1), (2), (3), (6) and (7) do not apply unless the acknowledgment is in writing and signed by the person making it or the person’s agent. 2002, c. 24, Sched. B, s. 13 (10).

The upshot is that if the borrower acknowledges the debt in writing then the two year deadline to start a claim is reset in accordance with the acknowledgement in writing.  The Court of Appeal has also held that a payment towards principal or interest satisfies the s.13 requirement for acknowledgment in writing.5  However, the extensions in s.13 are only available provided the initial limitation period, from the date of discovery, has not already expired (see s.13.(9)).

Keep in mind that the situations outlined above are the default positions based on the Ontario Limitations Act and the common law as presently developed.  As loans are inherently contractual arrangements, the discovery date and limitations restrictions are all subject and mostly subservient to the words of the contract between the parties.

__________________________________________________________________________________________

  1. Limitations Act, 2002, SO 2002, c 24, Sch B
  2. Skuy v. Greenough Harbour Corp., (2002) ONSC 6998 (Ont. S.C.J.) at para 31; Azman v. Viola, (2010) ONSC 6455 (Ont. S.C.J.) at para 39 
  3. Hare v. Hare, (2006) 83 O.R. (3d) 766 (Ont. C.A.)
  4. 2148251 Ontario Inc. v. Catan Canada Inc., (2013) ONSC 4049 (Ont. S.C.J.) at para 19; Peca v. Peca, (2011) ONSC 770 (Ont. S.C.J.) at paras 21-22; Shaw v. Anderson, (2010) ONSC 1164 (Ont. S.C.J.) at paras 17-18
  5. Hare v. Hare at para 16
3 comments
Louise Johnston
Louise Johnston

I've got a question about Statute of Limitations.  My son had a mortgage with a local credit union.  He was only early 20's and very trusting.  The bank recommended he blend his mortgage that he had with them to save on interest - he thought it was great and agreed.  The bank did not provide full disclosure, they did not provide any documentation to him or to his co-signer, and he did not sign anything - it was all verbal.  He was not aware, nor was his co-signer  that blending the mortgage also meant the mortgage term was extended by 2 years.  He would not have agreed - as he had his house up for sale and the bank was aware of this.  The bank was never able to locate any of these documents that they claimed my son signed, yet they still charged him a huge penalty as if his mortgage renewal date was 2 years more than what we all thought.


We tried fighting it - through the complaints department and the Ombudsman - which was a real joke.


The bank cannot locate the documents indicating that his mortgage was extended.  His penalty upon sale was $8500 approx - instead of $1500 what the bank manager had verbally quoted to me.


We were planning on filing a claim against them - but am worried that the Statutes of Limitations has passed.


How do we determine from what date the statute of limitations starts - the last letter from the Ombudsman was August of 2014,  But I was wondering if we can go by the mortgage maturity date which the bank claims was January 2015 - as my son was charged penalties and interest up to that point.


Thanks


Louise Johnston

Luigimun
Luigimun

Fantastic article.  Here is a question for you: is credit card debt considered a contingent obligation or a demand obligation loan?


Depending on the answer, that would determine when the debt is discovered: is it at the time when the account goes into default - credit card holder stops making minimum monthly payments - , or when it is discharged?

DanielleFloyd
DanielleFloyd

Hi, I have a question I hope you can help me with.

Originally I loaned $5000 with an agreement that it would be paid back $500 a month for 11 months (1 month extra for emergencies).  I never received a payment in this amount but I agreed to accept what the person could pay.  Can I claim that at that point the loan became a contingent loan based on the ability of that person to pay?   I have since found out that they have gotten a  car since I loaned them the money so they obviously have a lot more money than they led me to believe.  Can I say that I the two years started on the day I discovered this?