The Bank of Nova Scotia (the "Bank") v. Anthony R. Williamson ("Williamson"), 2009 ONCA 754, Ontario Court of Appeal (the "Williamson Appeal")

Facts:

In our March 2009 Financial Services Update, we summarized the decision of the Ontario Superior Court of Justice in The Bank of Nova Scotia v. Anthony R. Williamson, [2008] O.J. No. 4756 (the "Williamson Judgement"), in which the Court agreed with the Bank in holding that the limitation period for the principal debt and for the guarantee may commence at different times and that there is no requirement that demand must be made upon the guarantor and the principal debtor at the same time.

Williamson appealed the decision to the Ontario Court of Appeal, which considered whether a demand guarantee requires a demand before it is enforceable and the impact of the Limitations Act, 2002 amendments in respect of the commencement of the limitation period for demand obligations.

In the Williamson Appeal, the Court of Appeal held that where the obligation of a third party guarantor is to pay on demand, as was the case, the demand is a condition precedent to the obligation to pay. It follows that the time for commencing an action on a demand guarantee does not begin to run until a demand has been made.

Analysis:

Collateral obligations which include an obligation to pay on demand, such as guarantees or collateral mortgages given by third parties to secure the debt obligation of a primary debtor, require a demand before they are enforceable.

In respect of the November 28, 2008 amendments to the Limitations Act, 2002, which provide that the limitation period with respect to a demand obligation starts to run on the first day on which there is a failure to perform the obligation, once a demand for performance is made, the Court of Appeal confirmed that it was the intent of the legislature that for all demand obligations a demand is a condition precedent to the commencement of the limitation period.

In so doing, the Court of Appeal has affirmed that the Limitations Act, 2002 amendments have the effect of overturning its controversial decision in Hare v. Hare ((2006), 83 O.R. (3d) 766), in which it was held that the Limitations Act, 2002 did not, nor was intended to change the common law position that a debt is owed as soon as the monies are advanced.

Consistent with the decision in the Williamson Judgment, the decision in the Williamson Appeal is favourable to lenders in that it solidifies the view that the limitation period on a guarantee does not commence until demand has been made on the guarantee, and affirms our reading of the Limitations Act, 2002 amendments such that lenders, among others, will have two years from the date of the demand to commence a claim for recovery.

Overall Impact

In respect of guarantees, we continue to advise that demand phrasing should be explicitly included in guarantees, as should enforceability phrasing indicating that the guaranteed obligation is payable or enforceable at a certain time period after demand is made. It would also be prudent to add a provision regarding the Limitations Act, 2002 indicating that the basic period of two years does not apply, which is permitted under the Limitations Act, 2002 in that one can contract out of a limitation period in respect of "business agreements".