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Promissory notes get new limitation period
By David Street

March 13 2009 issue


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Lawyers who draft promissory notes will be relieved to know that recent amendments to Ontario's Limitations Act, 2002 provide that the limitation period on such notes begins to run not as soon as the note is issued — as was the case — but following a default after a demand for payment.

Hare v. Hare

Much to the surprise and consternation of many practitioners, in Hare v. Hare, [2006] O.J. No. 4955 the Ontario Court of Appeal held 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 Jan. 1, 2004, when the basic limitation period was changed from six years to two years, became statute-barred two years from issuance unless there was a payment of interest or principal or a written acknowledgement of indebtedness that would restart the clock on the limitation period.

Often, in estate planning, private corporations or loans among family members, no payments of interest or principal occur for many years. In Hare, a mother was unable to sue her son on a demand note when her statement of claim was issued more than six years after her son’s last payment, although it was only a few months after she had demanded payment.

In order to avoid demand notes becoming inadvertently unenforceable after Hare, lawyers were forced to revise their demand note precedents to draft around the decision. Revisions included providing that a note only became due a certain period after demand, that the limitation periods didn’t start to run until after a default following a demand, or contracting out of limitation
periods altogether.

None of these approaches helped for demand notes already outstanding, unless those notes could be replaced with revised notes. They also wouldn’t help practitioners unaware that their long-standing demand note precedents needed revision in light of Hare.

Various groups, including the Ontario Bar Association, drew the problem to the attention of officials in the Ministry of the Attorney General in the first half of 2007. They took note and amendments to the Act were attached as Schedule L to Bill 114, Budget Measures and Interim Appropriation Act, 2008 (No. 2). The amendments took effect on Nov. 27, 2008, when they received royal assent.

The members of the legislature deserve credit in that, despite an intervening election, a simple but effective legislative fix was enacted within 18 months of the problem being drawn to their attention.

Legislative amendments

The amendments make two significant changes directed at Hare. First, for claims that start the two-year limitation period, the Act now provides that the time starts to run from “the first day on which there is a failure to perform the obligation, once a demand for the performance is made” for demand obligations. Identical wording was adopted to clarify the running of the ultimate 15-year limitation period for demand obligations.

Second, the amendments apply “in respect of every demand obligation created on or after January 1, 2004,” thus giving the amendments retroactive effect to the date the new Act came into force.
Practitioners can breathe a sigh of relief. They can go back to their old demand promissory note precedents safe in the knowledge that any notes they draft today, or that they drafted on or after Jan. 1, 2004, are not in danger of becoming statute-barred by the mere passage of time. Until there is a default following a demand for payment, limitation periods don’t start to run. The law is now in accord with the expectations held by most practitioners prior to Hare.

Do any problems remain? Yes, the amendments apply only to demand obligations created on or after Jan. 1, 2004, and thus do not apply to demand notes issued prior to that date — such as the one issued to Mrs. Hare by her son. For those notes, Hare will continue to apply, meaning that the limitation period starts to run from the date the note is issued. Based on Hare and the transitional provisions of the Act, the old limitation period of six years from the date of issue will apply to
such notes.

If practitioners are aware, or become aware, of demand notes issued prior to Jan. 1, 2004, they need to consider whether they are already, or are in danger of, becoming statute-barred. They need  to discuss an appropriate course of action with their clients. For example, a demand note issued on Dec. 31, 2003 will become statute-barred on Dec. 31, 2009 if there have been no payments or acknowledgment of indebtedness to restart the limitation period.

While its application has been severely curtailed, the final chapter of the Hare saga may not yet have been written, and it shouldn’t be forgotten just yet.

David Street is a partner at Lerners LLP in Toronto. He practises primarily
corporate/commercial law.

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