Article

Note: From January 2004 through October 2007, Greenough Harbour Corporation (Borrower) borrowed various amounts from Percy and Elsa Skuy and Morrey and Lenore Solway (Lenders), which totaled CAD 205,000 and were endorsed by a series of promissory notes. Borrower and John Keeso (Guarantor) also issued "Guarantees" in corresponding amounts. Various amounts were paid on these debts, and there were miscellaneous communications but no demand was made on the notes or guarantees until commencement of the action. Both Lenders separately sued Borrower on the promissory notes and Guarantors for failure to pay the Guarantees and moved for summary judgment. The Ontario Superior Court of Justice, Perell, J., granted the motions.

The Limitations Act, 2002 provides that "the limitation period for a demand obligation begins to run only from when a demand is made." The Judge reasoned that the guarantees were demand obligations for which no demand was ever made and the limitation period never began to run with respect to the guarantees. In addition, the Judge analyzed promissory notes to not be included or characterized as a demand obligation. Due to this finding, the promissory note would require an acknowledgement in order to restart the running of the limitation period. The alleged acknowledgements presented in this case were found to not satisfy the necessary requirements for an acknowledgement.

Borrower and Guarantors argued that Lenders' claim on the promissory notes and Guarantees were time barred by the applicable limitations statute which excludes claims after the second anniversary of the date that the claim was discovered.

Lenders responded that the limitations period only began to run when the actions were filed.

The Judge quoted from the Limitations Act, 2002 which provided:

"Basic limitation period

4. Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered. 2002, c. 24, Sched. B, s. 4.

Discovery

5.(1) A claim is discovered on the earlier of, (a) the day on which the person with the claim first knew, (i) that the injury, loss or damage had occurred,"

and

"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."

The Judge also noted that "[t]he Limitations Act, 2002 was amended on November 27, 2008 to deal specially with the commencement of the limitation period for demand obligations. Demand obligations can include promissory notes, demand mortgages, and demand guarantees".

In order to apply this statutory scheme, the Judge considered what constituted a "demand obligation". He noted that the Canadian Bills of Exchange Act indicated that an undertaking was payable on demand if it expressly so stated or if no time for payment was expressed. The Judge noted that under the Limitations Act, "[e]ven if the creditor knows that the demand obligation is unlikely to be paid, the limitation period does not begin to run until the creditor makes a demand" and stated that this provision overruled the common law rule under which the limitation period begins to run on delivery of the promissory note by its maker.

The Judge stated, however, that this rule "did not apply to demand guarantees or demand collateral mortgages, for which the limitation period did not begin to run until a demand for payment was made" based on a rationale that "where the obligation is made on demand, the third party guarantor is given an opportunity to marshal the funds before the obligation is due". The Judge observed that the effect of the amendment was to treat all demand obligations in the same manner so that "[a] creditor claiming under a guarantee is not required to make a demand before action unless the plain wording of the guarantee requires this to be done".

The Judge stated that the terms of the undertaking dictate its treatment "for all demand obligations, the limitation period only commences with a demand, but for some obligations no actual demand is necessary or the statement of claim can serve as the demand. The law differentiates between demand obligations that may be enforced only with a prior demand and demand obligations where the statement of claim would be sufficient to constitute the demand. In this regard, the law differentiates between a 'present debt' of the obligor and a 'collateral debt' of the obligor". Distinguished from obligations such as a promise to pay a present debt for which no demand need be made and:

"some demand obligations, including collateral obligations, that are not actionable unless the required demand has been made" . . . . "For this type of demand obligation, an action brought before demand will be dismissed as premature, but the plaintiff's claim will not be statute-barred, and he or she can subsequently make a proper demand and commence a new action . . . ."

. . . .

. . . In other words, a document that states it is payable 'on demand' does not always require an actual demand to be made before the demand obligation can be enforced; it depends on the nature of the obligation and the construction of the document" (citations omitted).

The Judge concluded that the major issue of the case was whether the guarantees are "demand obligations". He concluded that the promissory notes were not demand obligations and these actions were time barred. As to the Guarantees, he concluded:

"[T]he guarantees are not expressly payable on demand and they are an obligation for which no time for payment is expressed. Thus, they are demand obligations.

In my opinion, they are free-standing demand obligations. Under the guarantees, [Borrower] and [Guarantor] are 'primary obligors and not merely sureties.' The guarantee is 'absolute, present and unconditional.' Under the guarantees 'the intent of [Borrower and Guarantor] [is] that their obligations hereunder shall not be discharged except by payment in full of all amounts owing by, and performance and compliance with all of the other obligations of, the [Borrower] pursuant to the Notes.'

That under the guarantee [Borrower and Guarantor] waive demand does not mean that the guarantees are not demand guarantees. It simply means that the guarantees are enforceable precisely in the manner in which [Lenders] have chosen to enforce the notes by an action without a demand as a pre-requisite to that action.

The guarantees do not have a maturity date that would disqualify them as demand obligations."

The Judge added: "In my opinion, the guarantees are demand obligations for which no demand was ever made and the limitation period never began to run with respect to the guarantees. It is also my opinion, that although demand obligations, the guarantees in the case at bar are of the type that do not require an actual demand to have been made or for which the statement of claim can provide the necessary demand."

[JEB/jdc]

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