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In Time

In keeping with our policy of announcing when a case demonstrates that a position we previously took was correct and, conversely, forever burying evidence when we were incorrect, we bring you the decision of Bank of Nova Scotia v. Williamson, a 2009 decision of the Ontario Court of Appeal. We first discussed the trial decision in this case in our newsletter of April 2009.

Facts

A bank loaned money to a corporate debtor; the corporation’s principal guaranteed the loan. The guarantee stated that the guarantor’s liability to make “payment under this guarantee shall arise forthwith after demand for payment has been made…”

The bank demanded payment from the debtor in October 2004. At the same time, it sent a letter to the guarantor stating, “We have demanded payment of the Borrower’s obligations to us. A copy of our demand is enclosed. If payment of our demand is not made as required, we will take steps to recover payment from you.”

The debtor ultimately became bankrupt and its assets were sold to pay down the debt. Once the bank ascertained the shortfall, it wrote to the guarantor in June 2007 and stated, “We hereby demand payment from you under the said guarantee.” 

The bank commenced its action in July 2007. The guarantor argued that the limitation period had passed because, he said, the cause of action against him on the guarantee arose at the same time that the cause of action arose against the debtor. 

The motions judge held that the limitation period ran from the date of the demand in June 2007 and granted summary judgment. The guarantor appealed.

Cause of Action 

The Court of Appeal set out the following principles:

1.   A loan that is payable on demand is payable from the date that the money is loaned. The “demand part” is redundant.

2.   A guarantee payable on demand is payable from the date of demand because the guarantor must be given some time to marshal sufficient resources to comply with the obligation.

3.   The limitation period for a guarantee payable on demand starts from the date of the demand on the guarantor, not from the date that the debt being guaranteed arises, becomes due, or is demanded from the debtor.

The Court held that the October 2004 letter was not a demand. The only demand was made in its letter of June 2007 and only then did the limitation period start to run. Since the action was commenced only one month later, it was commenced well within the two-year limitation period.

As an aside, the Court of Appeal had previously used the first principle set out above in its decision in Hare v. Hare. It disallowed an older woman’s action against a relative on a promissory note because she had not commenced the action within 2 years of the demand loan – even though she had not made a demand on the loan until years later. The outcry over this decision was so great that, within a year, the Ontario legislature amended the Limitations Act such that the limitation period on a demand note now starts to run only from demand.

Correct 

“So why were you right?” you ask. The motions judge had distinguished a prior case on a number of grounds. We said, “We feel that the Williamson judge missed the most important aspect that distinguished the two cases. In Chorny, the guarantee did not state that the plaintiff had to demand payment before the guarantor’s liability to pay arose. Accordingly, its cause of action arose when the debtor’s debt became due. In Williamson, the bank’s cause of action did not arise until it demanded payment. That was the crucial “new fact”.

The Court of Appeal said, in referencing Chorny, “However, that case is distinguishable because, although demand was made, there is nothing in the recitation of the facts that indicates that the terms of the guarantees required a demand.” 

Occasionally, we get it right.