In Bank of Nova Scotia v Williamson, The Bank of Nova Scotia (the “Bank”) advanced loans to Ancon Industries Inc. (“Ancon”). The loans were guaranteed (the “Guarantee”) by an individual guarantor (the “Guarantor”) who was an officer, director and shareholder of Ancon.
In October 2004, Ancon’s loans went into default and the Bank demanded payment from Ancon. On the same day, the Bank sent a letter to the Guarantor (the “2004 Letter”) stating, among other things, that “If payment of our demand is not made as required, we will take steps to recover from you.”
In December 2004, Ancon was deemed bankrupt. Final administration of Ancon's estate was not completed until February 2007, at which point, the Bank was still owed over $1 million. As a result, the Bank sent a demand letter to the Guarantor (the “2007 Letter”) and took subsequent judicial action when the Guarantor failed to pay under the Guarantee.
At trial, the Guarantor argued that the 2004 Letter was a formal demand for payment and as such the 2004 Letter triggered the commencement of the limitation period under the Limitations Act (Ontario). Alternatively, the Guarantor argued that the limitation period should have commenced when the Bank either knew or ought to have known that it would not fully recover from Ancon. Under either scenario, the Guarantor argued that the limitation period had expired, thus the Bank was statute barred from bringing an action to recover on the Guarantee. Conversely, the Bank argued that the 2004 Letter was merely a courtesy notice to the Guarantor indicating that if Ancon did not fully pay its debts the Bank would look to the Guarantor for payment.
The trial judge rejected both the Guarantor’s characterization that the 2004 Letter constituted a formal demand for payment and the Guarantor’s argument that the limitation period under the Guarantee should have commenced when the Bank knew, or ought to have known, that it would not fully recover from Ancon.
On appeal, the Ontario Court of Appeal (the “Court of Appeal”) stated that recent amendments to the Limitation Act (Ontario) made it clear that the limitation period under a demand obligation commences on the first day after there is a failure to perform the obligation under a guarantee and not when it is known, or ought to have known, that the principal debt would not be repaid.
Furthermore, in upholding the trial judge’s decision, the Court of Appeal stated that a demand must be unequivocal and clear and that the 2004 Letter was merely a courtesy notice to advise the Guarantor that if Ancon did not fully pay its debt, then the Bank would look to the Guarantor for payment. As such, a formal demand under the Guarantee was made by the Bank only as a result of the 2007 Letter.