Wednesday, May 27, 2009

Limitation Act amended for Demand Promissory Notes

Many in the Ontario business community were surprised when the Ontario Court of Appeal held in 2006 that the limitation period for demand promissory notes began to run as soon as the note was issued and not following a default after a demand for payment. This meant that demand notes issued after January 1, 2004 (when the basic limitation period was changed from 6 years to 2 years) became statute-barred 2 years from the date they were issued unless the debtor paid interest or principal or acknowledged the debt in writing. In those cases, the clock on the limitation period restarted after that event.

However, there were many situations, where payments of interest or principal would not be made for many years. For example, in the case of Hare v. Hare, a mother was unable to sue her son on a demand note when her statement of claim was issued more than 6 years after her son's last payment, although it was only a few months after she had demanded payment.

As a result, lawyers were forced to revise their demand notes to draft around the Court's decision. But such creative drafting did not resolve the problem that existed with notes that were already outstanding. As a result of intensive lobbying by various groups, the Ministry of the Attorney General enacted amendments to the Limitations Act which took effect on November 27, 2008.

The amendments make 2 significant changes directed at the decision in Hare. First, for demand obligations, the 2 year limitation period starts to run on "the first day on which there is a failure to perform the obligation, once a demand for the performance is made".

Second, the amendments apply "in respect of every demand obligations created on or after January 1, 2004" thus giving the amendments retroactive effect to the date that the new Act came into force. Now, until there is a default following a demand for payment, the limitation period doesn't start to run.



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