On January 1, 2004, Ontario's Limitations Act, 2002 (the "Limitations Act 2002") came into force. The Limitations Act 2002 limits the period of time during which a person may initiate court proceedings in Ontario in respect of a claim. For purposes of the Limitations Act 2002, a "claim" is one to remedy an injury, loss or damage from an act or omission. The Limitations Act 2002 was amended in 2006 to permit parties to a business agreement entered into at any time on or after October 19, 2006 to vary, that is, extend, shorten or suspend the application of the basic limitation period fixed by the Limitations Act 2002.
A business agreement is one in which neither party is a consumer as defined in the Consumer Protection Act (Ontario).
In addition, the ultimate 15-year limitation period (see below) may be suspended or extended, provided the claim in question has been discovered at the time the agreement to suspend or extend is made. Parties to a business agreement cannot vary the ultimate limitation period before any claim is known to exist. For example, it is not possible to provide in an Ontario contract that one party will have the right to make an indemnity at any time in the future, without limitation.
The following is a brief description of an area of the law.
The Two-Year Basic Limitation Period
The new basic limitation period (the time during which an action may be commenced in Ontario) is two years from the earlier of the day on which the essential elements (act or omission by a known person resulting in damages to the claimant) of the claim are known to the claimant and the day on which they are discoverable. There is a rebuttable presumption that a claimant discovered all the essential elements of the claim on the day on which the act or omission giving rise to the subject loss or damage occurred (see below). The foregoing represents a codification of the existing common law rules.
There are a number of exceptions to the basic two-year rule. Where the two-year rule applies, it represents a significant reduction from the general six-year limitation period for contract and tort claims in effect in Ontario until December 31, 2003, and it represents an increase in certain other limitation periods. For example, the period during which a claim for unpaid wages may be prosecuted against corporate directors will increase from six months to two years. However, it does mean that a number of limitation periods of varying lengths have been eliminated. There are circumstances where the running of a limitation period will be suspended (see below).
The 15-Year Ultimate Limitation Period
In addition to the basic limitation period, there is an ultimate limitation period of 15 years from the day on which the act or omission takes place, regardless of whether the essential elements of the claim become known to the claimant or were discoverable during the 15-year period and whether any other limitation period has not run. The only exceptions to this rule are (i) where at any time after October 19, 2006, the parties to a business agreement become aware of a claim and thereafter agree to suspend the operation of the ultimate limitation period; and (ii) where the claim in question is for conversion against a bona fide purchaser of personal property, in which case, the ultimate limitation period is fixed at two years from the date of the sale of the property to the purchaser.
Certain Claims Subject to No Limitation Periods
There are claims that are not subject to any limitation period, for example, a proceeding:
- for a declaration where no consequential relief is sought;
- to enforce an order;
- to obtain support under the Family Law Act;
- to enforce an award under the Arbitration Act, 1991;
- by a debtor in possession of collateral to redeem it;
- by a creditor in possession of collateral to realize against it;
- by the Crown to recover fines, taxes, penalties and interest;
- to recover student loans, awards, social assistance recoveries and grants; and
- for an environmental claim that has not been discovered.
Certain Existing Statutory Limitation Periods Unchanged
There is a lengthy list of specific statutory limitation period provisions, referenced in a schedule to the Limitations Act 2002, that will be left unchanged. The list includes provisions under the following Ontario statutes involving court applications:
- Bulk Sales Act (six-month limitation period for setting aside sales retained)
- Construction Lien Act (45-day limitation period and sheltering concepts retained)
- Insurance Act (one-year period retained)
- Libel and Slander Act (three-month limitation period retained)
- Mortgages Act (a proceeding to recover under a building mortgage still must be commenced within one year of the mortgage's maturity date)
- Reciprocal Enforcement of Judgments Act (six-year limitation period following original judgment retained)
- Remedies for Organized Crime and Other Unlawful Activities Act, 2001 (15-year limitation period retained)
- Securities Act (the 90-day rescission period under section 135 and the 180-day/three-year limitation period under section 138 retained)
- Trustee Act (action under section 38 still may not be brought after two years from the date of the death of the deceased)
- Judicial Review Procedure Act (proceedings and appeals unaffected)
- Provincial Offences Act (proceedings unaffected)
- Constitution Act, 1982 (aboriginal claims against the Crown continue to be governed by section 35)
- Part 1 of the Limitations Act 2002, was renamed as the Real Property Limitations Act (real estate limitation periods in effect as at January 2004 unchanged).
Statutory Notice Periods Unaffected
Do not confuse the two-year basic limitation period during which a claimant can prosecute a claim in the courts with an obligation imposed by statute that a claimant in a specified period of time give a written notice of claim (e.g., to a governmental body or insurer) as a pre-condition to a claim. The Limitations Act 2002 has not changed any notice provisions in any Ontario statutes.
No Exception for Equitable Remedies
Actions for equitable remedies such as detrimental reliance and unjust enrichment are subject to the new rules.
The following are the transition rules from the old regime to the new one:
- Where no proceeding in respect of a claim has been commenced before January 1, 2004 based on acts or omissions that occurred prior to that time, if the prior limitation period has expired, no proceeding may be commenced after January 1, 2004.
- Where the prior limitation period has not expired, and if the Limitations Act 2002 provides for a limitation period for claims of the nature in question and if the claim has not been discovered by the claimant, then the said causal act or omission will be deemed to have occurred on January 1, 2004. If the claim has been discovered by the claimant, then the former limitation period applies. This latter rule means that many long-term contracts such as insurance policies (and, in particular, disability insurance policies) existing as at December 31, 2003 will continue to be governed by the old rules well past a time when these rules are likely to be widely understood. There are traps for the unwary in any change of the law.
- Where no applicable prior limitation period exists, but the Limitations Act 2002 provides for a limitation period for claims of the nature in question and if the claim has not been discovered by the claimant, then the causal act or omission will be deemed to have occurred on January 1, 2004. If the claim has been discovered by the claimant, then no limitation period applies to the claim.
There are special general and transition rules under the Limitations Act 2002 for claims based on an assault or a sexual assault.
The Meaning of Discoverable
A claim is discoverable on the earlier of the day on which:
- The person with the claim first knew each of the following: (i) that the injury, loss or damage had occurred, (ii) that the injury, loss or damage was caused by an act or omission by the person against whom the claim is made, and (iii) that a proceeding would be an appropriate means to seek a remedy. Unless the claimant can prove otherwise, the claimant is presumed to know all of the foregoing on the day on which the act or omission took place; and
- A reasonable person with the abilities of the claimant and in the circumstances of the claimant first ought to have known each of the elements of the claim set out above.
Running of Limitation Periods Suspended in Certain Circumstances
The running of the basic limitation period is suspended for minors or incapable persons unless and until a litigation guardian has been appointed for such person. Everyone is presumed to be capable of initiating a proceeding unless the contrary is proven. A claimant may apply to the courts for the appointment of a litigation guardian for a potential defendant and may give a written notice of claim to a potential defendant containing statements regarding each of the elements of the claim. The notice of claim can be considered by a court in determining when the defendant discovered the claim in question.
The running of both the basic and the ultimate limitation periods is suspended where the claimant and the prospective defendant have agreed to engage an independent third party to resolve the claim or assist in its resolution until the earliest of (i) the date on which the claim is resolved, (ii) the date on which the attempted resolution terminates, and (iii) the date on which one of the parties withdraws from the agreement.
Contracting Out of the Limitations Act 2002
Unless one of the following circumstances apply, any limitation period established by the Limitations Act 2004 applies despite an agreement to vary or exclude it. The exceptions to this general rule are as follows: (i) The basic (2 year) limitation period and the ultimate limitation period (15 years) may be varied or excluded by an agreement made prior to January 1, 2004. (ii) The basic limitation period may be suspended or extended by agreement made at any time from and after October 19, 2006. (iii) The ultimate (15 year) limitation period may be suspended or extended by agreement made at any time from and after October 19, 2006 but only if the relevant claim has been discovered at the time of such agreement. (iv) For "business agreements" (that is, an agreement made by parties none of whom is a consumer as defined in the Consumer Protection Act, 2002), the basic limitation period may be varied or excluded by an agreement made from and after October 19, 2006. (v) Finally, for business agreements, the ultimate limitation period may be suspended or extended by agreement made at any time from and after October 19, 2006 but only if the relevant claim has been discovered at the time of such agreement.
Prior to enactment of the Limitations Act 2002, it had been a common practice in Ontario for litigants to enter into an agreement to suspend the running of the 6-year limitation period under the prior Act for extended or indefinite periods (commonly referred to as a "tolling agreement"). Prior to the October 2006 amendment, section 22 of the Limitations Act 2002 this practice was prohibited from and after January 1, 2004. Tolling agreements are now permitted to the extent summarized in the exceptions described above.
Debt Obligations that Are Due on Demand
Hare v. Hare, a December 2006 decision of the Ontario Court of Appeal, has important implications for the use of demand promissory notes generally and, in particular in tax planning. Legal and tax planners should be aware that standard drafting language used in promissory notes may bring about unintended consequences.
In Hare, the taxpayer loaned a sum of money to her son and secured the loan with a promissory note. Although some interest payments were made under the note, the son did not respond to a demand for payment of the loan and the taxpayer brought an action for recovery.
At trial and on appeal, the defendant claimed the action was barred because it was made after the statutory limitation period had expired. The issue was whether the two-year basic limitation period under the Limitations Act 2002 had started to run at the time the note was issued, or on the demand for payment under the note. If the former, the action was statute-barred; if the latter, the action could proceed.
The Limitations Act 2002 provides that the two-year limitation period begins to run on the discovery of the claim. The Court of Appeal emphasized that the law that a creditor has the right to immediate repayment of a demand loan is well-settled. As the creditor under a demand note has the right to immediate payment, there is nothing to be discovered by the creditor before he or she becomes aware of their claim, which is established immediately on receipt of the demand promissory note. The Court of Appeal, therefore, found that the discovery of the claim occurred at the time the note was issued, as the creditor was in a position to enforce the note as of that date. The action was, therefore, statute-barred because it was commenced more than two years after discovery of the claim.
Payments and Acknowledgements
The practical outcome of the decision is that the limitation period for ordinary demand promissory notes will start to run on the execution and delivery of the promissory note by the debtor. Under the Limitations Act 2002, each payment of interest or principal, if made within two years of the later of (i) the date the note is made; and (ii) the last such payment, will restart the limitation period. Similarly, a written acknowledgement of the debtor made within the basic limitation period will restart the limitation period under the Limitations Act 2002.
If the said two-year limitation period expires before demand is made and a statement of claim issued by the holder, the holder is prevented by law from enforcing a claim against the debtor by court proceedings. Although this may not necessarily invalidate the promissory note as an obligation per se, for all practical purposes the note then has no value. It is commonplace to use demand promissory notes in many situations, and the expiration of collection rights under such notes two years after the later of the date the note is made and the date of the last payment would have grave consequences.
Therefore, as a result of this decision, it would be prudent to add language to demand promissory notes used for business purposes to the effect that:
- the promissory note is made for business purposes and is a business agreement as defined in the Limitations Act 2002; and
- to the extent permitted by law, each limitation period provided for in the Limitations Act 2002 applicable to the promissory note is hereby suspended.