Background

In the fall 2008 Chorny1 decision of the Ontario Superior Court of Justice, it was held that the limitation period on a guarantee was co-extensive with that on the principal debt. In that decision, the Court applied the principle of co-extensiveness to find that the limitation period on the guarantee lapsed at the same time as it did on the principal obligations.

Williamson

Later in 2008, in the Williamson2 decision, the Bank demanded on a guarantee following the principal debtor's inability to repay the Bank. Williamson argued that the two-year limitation period under the Limitations Act3 began to run either when the demand was made on the principal debtor or when the Bank knew that it would suffer a shortfall; and, in any event, that the limitation period had lapsed. The Bank argued 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 Ontario Superior Court of Justice agreed with the Bank in holding that the limitation period for the principal debt and for the guarantee may commence at different times. The Court held that "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."

Further, the Court indicated that there is no requirement that the demand be made upon the guarantor and the principal debtor at the same time, as the guarantee relationship constitutes an independent contractual relationship with the lender. The Court also went on to indicate that "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".

The Court distinguished its decision in Williamson from that in the Chorny case.

Limitations Act amendments

The amendments to the Limitations Act, made as of November 28, 2008, but retroactive to January 1, 2004, provide that the limitation period with respect to a demand obligation starts to run on the first day on which there is failure to perform the obligation, once a demand for the performance is made.

Analysis

Williamson has clarified the law in Ontario, and follows the more traditional approach in which the limitation period for the principal debt and for the guarantee may commence at different times. Williamson bolsters the view that the limitation period on a guarantee does not commence until demand has been made on the guarantee.

The amendments to the Limitations Act have the effect of overturning the controversial decision of the Ontario Court of Appeal in Hare v. Hare4 and are favourable to lenders, among others, who previously had only two years from the date of a demand was issued to commence a claim to recover on the note.

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 indicating that the basic period of two years does not apply, which is permitted under the Limitations Act in that one can contract out of a limitation period in respect of "business agreements".