Ontario Acts To Correct Inequities Relating To Demand Loans Arising From New 2-Year Limitation Period

In Our Autumn 2008 Newsletter, We Advised Lenders To Review Demand Loan Documents In Light Of A Recent Ontario Court Decision On The New 2-Year Limitation Period Under The Limitations Act, 2002 (Ontario). The Decision In Question Held That The Limitation Period For Demand Loans Begins Running Not When The Borrower Failed To Pay On Demand But When The Lender Advanced The Money. Our Advice Has, Fortunately, Been Made Moot Now That The Ontario Government Has Recently Passed An Amendment To The Act, Which Amendment Provides That The Limitation Period With Respect To A ―Demand Obligation‖ Begins To Run On The First Day On Which There Is Failure To Perform The Obligation, Once A Demand For The Performance Is Made. The Change Is Retroactive To Jan. 1/04.

Notwithstanding The Amendments, One Needs To Remain Vigilant With Respect To The Application Of The Limitations Act, 2002 To Guarantees.

The 2-Year Limitation Period Will Continue To Impact The Treatment Of Guarantees. In The Recent Ontario Superior Court Decision Of 2015673 Ontario Inc. V. Chorny, It Was Held That The Limitation Period For A Claim Under A Guarantee Does Not Run From The Time A Creditor Demands Payment From A Guarantor And Is Not Paid, But Rather From The Time When The Principal Debtor Defaults In Payment. In Other Words, An Action Against A Guarantor Needs To Be Brought Within Two Years Of The Underlying Debt Becoming Due. Turning To The Recent Amendments To The Act, It Is Doubtful Whether A Guarantee Would Be Considered A ―Demand Obligation‖ Within The Meaning Of The Act. As A Result, We Recommend That Lenders Include Language In Guarantees Stating That A Claim May Be Brought At Any Time Within A Specified Time Period Following Demand. This Is Now Permissible Because The Act Was Amended In 2006 To Now Permit Parties To Suspend Or Extend Certain Of The Limitation Periods Under The Act.