Article

Note: To assure repayment of a loan by Bank of Nova Scotia (Lender/Beneficiary) to Ancon Industries, Inc. (Borrower/Principal), Anthony R. Williamson (Guarantor), an officer, director and shareholder of Borrower/Principal, issued a Guarantee that provided that it was payable on demand. The text of the Guarantee follows this Note. In 2004, Borrower/Principal defaulted on its obligations to Lender/Beneficiary, which in turn informed Guarantor of its demand on Borrower/ Principal in a letter, stating that "if payment of our demand is not made as required, we will take steps to recover payment from you." Several years later, when the estate of Borrower/Principal was settled, Lender/Beneficiary demanded payment of a deficiency of C$166,201.68 on the Guarantee by letter dated 12 June 2007. On Guarantor's failure to pay, Lender/Beneficiary sued for wrongful dishonor. On Lender/Beneficiary's motion, the Motion Judge granted summary judgment in its favor. On appeal, the Ontario Court of Appeals, R.G. Juriansz, J.L. McFarland, JJ and K.N. Feldman, J., in an opinion by K.N. Feldman, J., dismissed the appeal.

Guarantor argued that the action was too late under the applicable two-year limitation period because no demand was required to commence the running of the limitations period. The appellate court rejected this argument. While noting that, at common law, the commencement of the limitations period for "on demand" promissory notes and demand mortgages began at the time where they were issued, the court's opinion distinguished "a collateral obligation such as a guarantee or collateral mortgage given by a third party to secure the debt obligation of the primary debtor. Where the obligation of a third party guarantor is to pay on demand, then demand is a condition precedent to that obligation. The rationale is that where the guarantee obligation is made on demand, the third party guarantor is given an opportunity to marshal the funds before the obligation is due." The opinion stated, "where a demand is a condition of the guarantee obligation, the time for commencing an action does not begin to run until a demand is made." The court noted that the Guarantee required a demand.

Guarantor argued that the decision of the Motion Judge promoted "indefinite liability." The appellate court noted that the result would have been the same under the prior statute of limitations, that the parties could have agreed otherwise, and that "section 15 of the Limitations Act, 2002 imposes a 15 year ultimate limitation period so that liability will not be indefinite." The Appellate opinion also noted a subsequent clarifying amendment to the Act, namely,

Demand Obligations: 5.(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.

The appellate opinion observed that "[t]his amendment demonstrates the intent of the legislature that for all demand obligations, a demand is a condition precedent for the commencement of the limitation period. The legislature may be taken to have recognized that this puts the creditor in the position to extend the limitation period by failing to make a prompt demand. However, it creates more certainty in establishing the commencement date for the limitation period. Although this new section does not affect this case, it affirms the law regarding third party demand guarantees."

Noting that "[a] demand under a demand guarantee must be clear and unequivocal," the appellate opinion found no error in the Motion Judge's conclusion that Lender's second letter to Guarantor rather than the first constituted a demand. The court compared the letters, concluding that it was the second letter that unequivocally demanded payment, not the first, and that the first letter was merely an advice, warning, or courtesy to the Guarantor.

Comments:

1. The court correctly noted the distinction between a demand under a promissory note and one under an independent demand guarantee, characterizing the demand under the independent demand guarantee as a condition precedent to the guarantor's obligation. While the guarantor's obligation under a demand guarantee is conditioned on the demand, it may be questioned whether the obligation under the promissory note is "conditional". A condition is an event whose occurrence is uncertain. The obligation under the demand guarantee is contingent whereas the obligation under a promissory note is not. The only question is whether or not the obligation on the note has matured and the passage of time is not a condition.

2. Questions related to time limitations regarding independent obligations are often confusing. There are several sorts of questions. One relates to the time within which an action must be brought after a demand has been made and refused. Another relates to the time for which an obligation is outstanding. The Bank of Nova Scotia appellate court properly concludes that its problem falls within the latter question since the first letter was not a demand.

3. The former problem is a typical statute of limitations issue. The latter problem relates to the perpetuity of obligations and whether or not they can be limited. Both the UN LC Convention in Article 12 and US UCC Section 5-106 impose limitations on independent undertakings, the former of six years where the undertaking does not state an expiry date and the latter of one year where there is no expiration date stated and five years where the undertaking is perpetual.

4. It is interesting to note that Canadian law would impose a 15 year period on the obligation.

Section 15 of the Canadian Limitations Act, 2002 provides:

Ultimate Limitation Periods

15. (1) Even if the limitation period established by any other section of this Act in respect of a claim has not expired, no proceeding shall be commenced in respect of the claim after the expiry of a limitation period established by this section. 2002, c. 24, Sched. B, s. 15 (1).

General

(2) No proceeding shall be commenced in respect of any claim after the 15th anniversary of the day on which the act or omission on which the claim is based took place. 2002, c. 24, Sched. B, s. 15 (2).

Exception, purchasers for value

(3) Despite subsection (2), no proceeding against a purchaser of personal property for value acting in good faith shall be commenced in respect of conversion of the property after the second anniversary of the day on which the property was converted. 2002, c. 24, Sched. B, s. 15 (3).

Period not to run

(4) The limitation period established by subsection

(2) does not run during any time in which,

(a) the person with the claim,

(i) is incapable of commencing a proceeding in respect of the claim because of his or her physical, mental or psychological condition, and

(ii) is not represented by a litigation guardian in relation to the claim;

(b) the person with the claim is a minor and is not represented by a litigation guardian in relation the claim; or

(c) the person against whom the claim is made,

(i) wilfully conceals from the person with the claim the fact that injury, loss or damage has occurred, that it was caused by or contributed to by an act or omission or that the act or omission was that of the person against whom the claim is made, or

(ii) wilfully misleads the person with the claim as to the appropriateness of a proceeding as a means of remedying the injury, loss or damage. 2002, c. 24, Sched. B, s. 15 (4).

Burden

(5) Subject to section 10, the burden of proving that subsection (4) applies is on the person with the claim. 2002, c. 24, Sched. B, s. 15 (5).

Day of occurrence

(6) For the purposes of this section, the day an act or omission on which a claim is based takes place is,

(a) in the case of a continuous act or omission, the day on which the act or omission ceases;

(b) in the case of a series of acts or omissions in respect of the same obligation, the day on which the last act or omission in the series occurs;

(c) in the case of an act or omission in respect of a demand obligation, the first day on which there is a failure to perform the obligation, once a demand for the performance is made. 2002, c. 24, Sched. B, s. 15 (6); 2008, c. 19, Sched. L, s. 2 (1).

Application, demand obligations

(7) Clause (6) (c) applies in respect of every demand obligation created on or after January 1, 2004. 2008, c. 19, Sched. L, s. 2 (2).

5. The Institute has been provided with the text of the Guarantee. It provides:

Click here to view attachment

[JEB/sal]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.