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2148251 Ontario Inc. v. Catan Canada Inc., 2013 ONSC 4049 (Applicable Limitation Period for Promissory Notes)

By Dentons Limitations Law Group
January 1, 2014
  • Demand Obligations
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In 2148251 Ontario Inc. v. Catan Canada Inc., 2013 ONSC 4049, the Ontario Superior Court of Justice clarified when the limitation period for a promissory note starts to run. The Court held that the applicable limitation period will depend on whether the promissory note is classified as either a demand obligation or a contingent obligation. The difficulty with promissory notes is that they can be either a demand obligation or contingent obligation.  If the promissory note is a true demand obligation then the limitation period will not begin to run until the demand for performance is made (pursuant to section 5(3) of the Limitations Act, 2002).  Thus, a creditor is in the position of extending the limitation period by not making a demand, after which the limitation period will begin to run (see Bank of Nova Scotia v. Williamson, 2009 ONCA 754 at para. 19).   If it is a contingent obligation, then the commencement of the limitation period will depend upon the date when the lender is aware or ought to have been aware that he or she may sue to enforce the loan because there has been a breach of the lending contract (pursuant to the basic limitation period under s. 4 of the Limitations Act, 2002).

In Catan, the following facts are relevant. On April 25, 2008, the parties signed a $500,000 promissory note (the “Note”) with a maturity of one year. The terms of the Note required that interest be paid “from and including the 25thday of May 2008 to and including the 25th day of April 2009”. On May 31, 2010, the plaintiff made a demand for payment. No interest was ever paid on the Note. and so on April 20, 2011, a statement of claim was issued. The Court had to determine whether the limitation period started to run from (i) the date when the first interest payment was due (June 25, 2008), (ii) the maturity date (April 25, 2009), or (iii) the date of demand (May 31, 2010).

The Court held that determining whether a promissory note is a demand obligation or not is a matter of contractual interpretation and a matter of the legal nature of the obligation that determines whether an actual demand is necessary to enforce the obligation (i.e. whether a demand is a constituent element of the cause of action to enforce the debt obligation).   In Catan, the Court considered sections 22 and 23 of the Bills of Exchange Act to determine whether the promissory note was, in fact, a demand obligation:

  • Section 22 of the BEA defines a demand obligation as one that is (a) “expressed to be payable on demand or on presentation” or (b) “in which no time for payment is expressed”.
  • Alternatively, a contingent obligation is payable after a “determinable future time”. Section 23 of the BEA states that a “determinable future time” can either be a (a) “fixed period after date”  or a (b) “fixed period after the occurrence of a specified event that is certain to happen” (i.e. a death, a default of payment, etc.)

In Catan, the terms of the Note explicitly stated that the principal would only become payable on the happening of an event, such as the non-payment of interest when due, but if and only if payment was demanded “at the discretion of the payee” (para. 30).  The Court interpreted these terms and concluded that while the maturity date was determinable future time, the use of the words “on demand,” coupled with the discretion afforded to the payee to demand payment, made it clear that the Note was truly a demand obligation.

As a result, the Court concluded that the limitation period started to run from the date of the demand (i.e. May 31, 2010) and therefore, the action was properly commenced within the two year limitation period. The Court emphasized the importance of lending credence to contractual terms when they can be enforced on their plain meaning as to hold otherwise “would make no commercial or common sense” (para. 32).

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