Ontario Court of Appeal confirms that limitation period on demand guarantees begins to run on date of demand

The Ontario Court of Appeal recently affirmed a lower court decision granting summary judgment to a lender in its action to enforce a guarantee.1 In so doing, the Court of Appeal confirmed that the limitation period for a guarantee payable upon demand starts to run on the date that a demand is made.

Bank of Nova Scotia v. Williamson2: the factual rundown

Mr. Williamson (“Williamson”) gave the Bank of Nova Scotia (the “Bank”) a written guarantee (the “Guarantee”) in respect of certain loan facilities (the “Loans”) provided by the Bank to Ancon Industries Inc. (“Ancon”). Shortly after Ancon defaulted on the terms of the Loans in October 2004, the Bank sent a demand letter to Ancon. On the same date, the Bank also sent a letter to Williamson indicating that demand for payment was made to Ancon and stating that “if payment of our demand is not made as required, we will take steps to recover payment from you.”

In December 2004, a receiver was appointed over the property and assets of Ancon. Shortly thereafter, Ancon was deemed bankrupt. In February 2007, after realization of Ancon’s assets, the receiver was discharged. At such time, Ancon still owed over $1,000,000 to the Bank.

In June 2007, the Bank wrote a second letter to Williamson in which it demanded payment on the Guarantee. When Williamson did not pay, the Bank brought a claim against him.

the guarantor’s arguments and the Court’s response

Williamson’s arguments in defence of the claim were based on the Limitations Act, 2002,3 (the “Act”). Williamson claimed that the Bank’s action was commenced outside of the 2-year limitation period set out in the Act. Williamson contended that the limitation period started when the Bank first discovered that Ancon couldn’t pay its debt, in October 2004, such that the two-year limitation period ended in October 2006. Williamson also argued that even if a demand was required to trigger the limitation period, the first letter constituted a demand and the clock on the limitation period started to run in October 2004.

The Court rejected both of these arguments, holding that at common law, a third party guarantor who agrees to pay on demand will not be obligated to pay the obligation until it receives a demand. The demand is a requirement, or condition precedent, which must be fulfilled before the obligation can be enforced. It allows the guarantor “an opportunity to marshal the funds before the obligation is due.” The Court thus concluded that, for this type of guarantee, the limitation period does not begin to run until a demand is made.

Referring to its prior decision pertaining to the operation of demand promissory notes, the Court held that the Act does not, nor was intended to, alter the common law relating to demand guarantees. In this regard, the Court noted amendments to the Act that came into force in 2008 which provide that the limitation period on an outstanding demand obligation begins to run on the date that a demand is made. The Court cited such amendments as demonstrative of the legislature’s intent that for all demand obligations, a demand is a condition precedent for the commencement of the limitation period.

In rejecting the appellant’s second argument, the Court held that the Bank’s letters to Williamson were clear and unequivocal. The first letter was delivered as a courtesy to Williamson and the second letter was a demand. Accordingly, the limitation period did not commence until the second letter was delivered, in June 2007, and the Bank’s claim was commenced within the limitation period.

what the decision means to lenders

As noted by the Court of Appeal, with the 2008 amendments to sections 5(3) and 5(4) of the Act, the law regarding limitation periods with respect to demand guarantees is now settled. The decision in Williamson confirms that the Act does not supplant the common law pertaining to the limitation period applicable to demand obligations and, in particular, when the limitation period commences. The clock starts on the date that a demand is made.

It is thus important for lenders who seek guarantees on loans to draft the guarantee so that its terms clearly indicate that the guarantee obligation arises only upon demand. Otherwise, it is possible that the limitation period will be held to expire on the same date that the limitation period on the principal debt expires. A guarantee that is only payable on demand affords a lender greater flexibility with respect to the timing of enforcement against a guarantor.