When does the limitation period begin to run on a guarantee in Ontario? Under the Limitations Act, 2002 (Ontario), a creditor must commence a proceeding to enforce a guarantee within two years of "discovering a claim". If the guaranteed obligations are considered to be "co-extensive" with the principal debt, the limitation period for a guarantee commences when the limitation period for the principal debt commences. If the principal debt and the guaranteed obligations are considered to be independent, the limitation period for a guarantee will depend on the terms of the guarantee. In the latter situation, the limitation period for the principal debt and for the guarantee may commence at different times. Recent caselaw in Ontario has been troubling, as the co-extensiveness principle has been misapplied. However, the recent case of The Bank of Nova Scotia v. Williamson, following the latter, more traditional, approach has endeavoured to clarify the law on this point in Ontario. The issue is relevant not only to when actions are commenced against guarantors, but also to how guarantees are drafted.
The Bank of Nova Scotia v. Williamson
In 2001, The Bank of Nova Scotia (the "Bank") made a loan to Ancon Industries Inc. ("Ancon"). On March 20, 2002, Williamson executed a limited guarantee of Ancon’s loans. The guarantee contained the following provision:
The Guarantor’s liability to make payment under this guarantee shall arise forthwith after demand for payment has been made in writing on the undersigned…
Ancon defaulted on its loans, and on October 20, 2004 the Bank demanded repayment from Ancon. On the same day, the Bank sent a letter to Williamson, which provided in part:
If payment of our demand is not made as required, we will take steps to recover payment from you.
Following Ancon’s receivership, the Bank suffered a shortfall. On June 12, 2007, the Bank delivered a letter to Williamson which demanded on the guarantee.
Williamson argued that the two-year limitation period for enforcing the guarantee began either when it received the Bank’s letter of October 20, 2004 or when the Bank knew it would suffer a shortfall; in any event, the limitation period had elapsed. The Bank argued that the demand was made on June 12, 2007 and that when a guarantee provides for a demand as a condition precedent to the guarantor’s obligations being triggered, as was the case here, the guarantor is not liable until demand is actually made.
The court found in favour of the Bank. The court quoted the Supreme Court of Canada in Canadian Pickles,2 noting that "there is nothing inherent in the nature of a guarantee that requires liability to be contingent upon a formal demand", but:
…when the parties to a guarantee agreement clearly incorporate a demand as a condition precedent to the guarantor’s liability, liability does not crystallize until a proper demand has been made… [u]nless it is otherwise stipulated, there is no requirement that the demand be made upon the guarantor and the principal debtor at the same time. This flows from the fact that the guarantee relationship constitutes an independent contractual relationship with the lender. Moreover, the guarantor may never be called upon to pay if the principal debtor is able to satisfy the debt. But this may not be known until attempts to recover from the principal debtor have been completed, perhaps years later. Accordingly, the authorities support the proposition that, where the terms of the guarantee require that a demand be made upon the guarantor, the limitation period commences upon the receipt of the demand…
In making this finding, the court distinguished 2105673 Ontario Inc. v. Chorny,3 which case had applied the "co-extensiveness" approach.
2105673 Ontario Inc. v. Chorny
In Chorny, the lender extended several loans to the borrower between August 16 and 30, 2005, which were due in 30 days. Guarantees of these loans were executed contemporaneously. The defendants defaulted on the loans on September 16 and 30, 2005 respectively. Demand was made on the guarantors on January 15, 2006. The lender commenced an action against the guarantors on September 21, 2006. At that time, the lendercorporation was dissolved. Articles of revival were filed on October 19, 2007.
The lender argued that the limitation period for the guarantees did not commence until a demand was made on the guarantees, and the limitation period had not lapsed on the guarantees until after the revival of the lender.
The court held that if the limitation period does not start to run against a guarantor until a demand is made, then conceivably the limitation period could be extended to 15 years under the "ceiling" provision in s. 15 of the Limitations Act, 2002 (Ontario) and the obligation on the guarantee could long survive the principal obligations. The court decided this could not be true. The court stated that the two-year limitation period for the principal debt commenced when the borrower defaulted on the principal debt and the limitation period for the principal debt passed without any action having been commenced. The principal debt was therefore unenforceable. As the principle of co-extensiveness applied to the guaranteed obligations, the court held, the limitation period on the guarantee lapsed when the limitation period lapsed on the principal debt. By the time the lender-corporation was revived, the limitation period for the guarantees had lapsed.
Chorny stands for the proposition that, based on the "principle of co-extensiveness" (referred to in a different context) by the Supreme Court of Canada in Canadian Pickles, a guarantee becomes unenforceable upon the expiry of the limitation period applicable to the underlying debt. This represents a departure from the traditional view in Ontario.
For that reason, while both Chorny and Williamson were decided by the Superior Court of Ontario, the court in Williamson tried to distinguish Chorny as follows: First, in Chorny, the limitation period elapsed as against the principal debtor when the lender was dissolved, resulting in the principal debt becoming unenforceable, and therefore the action on the guarantee was also statute-barred. Second, in Chorny, the loan had a specific due date, whereas in Williamson the loan was advanced over time and repayable on demand. Third, the court in Williamson felt that it was unfair to permit the lender to proceed against Chorny when its action was barred as against the principal debtor, whereas there was no such unfairness in Williamson. It is also noteworthy that the court in Williamson stated that the guarantee in question in Chorny included a term requiring the lender make a demand upon the guarantor, even though the court in Chorny was silent on the terms of the guarantee.
Traditionally, with some exceptions, case-law has viewed guarantees as contracts which are independent of the contracts which govern the underlying debt. Accordingly, again with some exceptions, traditionally, limitation periods on guarantees in Ontario have run independently of limitation periods on the underlying debt. Chorny raised the spectre of having to commence an action on a guarantee within the limitation period applicable to the underlying debt, even if a demand had not been made on the guarantee. Williamson endeavours to return case-law to its more traditional roots. Particularly if a guarantee includes a provision which provides that the liability under the guarantee does not commence until a demand has been made, Williamson bolsters the view that the limitation period on a guarantee does not commence until demand has been made on the guarantee. Therefore, it will be particularly important to ensure that when drafting a guarantee, a provision is included, among other protections for the lender, stating that the obligation to pay does not commence until demand has been made.