Limitation Periods and Debtor Obligations – Recent Decision from the Ontario Court of Appeal may have Unintended Consequences

Published on: April 2022 | What's Trending

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If you ask most litigators to name the one thing that makes us most nervous, the answer is usually missing a limitation period.

No matter how strong our cases are, courts often hold hard and fast on the deadline for commencing a cause of action – that is, (in most cases), two years from the date on which the cause of action is discovered, as per Ontario’s Limitations Act (the “Act”). Although limitation periods make us lose sleep because they can cost our clients their entire lawsuits, we are nonetheless grateful for their existence. This is not just because they make a perfect defence to a lawsuit which is out of time, but also because they impose an important steadfast rule in our justice system. However, over the years, creative litigators have found more variability in the rule and have been able to carve out exceptions to limitation periods.

A recent ruling from the Ontario Court of Appeal has raised more uncertainty and may have introduced an exception to the limitations defence which could result in the perhaps unintended consequence of a very long limitations period, especially in debtor-creditor cases.

In Thermal Exchange Service Inc v Metropolitan Toronto Condominium Corporation No. 1289, Thermal Exchange Services Inc. (“Thermal Exchange”), an HVAC contractor, provided its services to Metropolitan Condominium Corporation No. 1289 (the “Condominium Corporation”) between 2002 and 2015. When Thermal Exchange received work orders from the Condominium Corporation’s property manager, Helen Da Ponte (“Da Ponte”), an invoice would be issued after the requested work was completed. While payment was due within 30 days of the date of the invoice, the Condominium Corporation typically made payments much later, often as much as 300 days later. Despite this, Thermal Exchange continued to provide its services, tendering fresh invoices each time.

By 2008, a number of Thermal Exchange’s invoices remained unpaid. When requests for payment were made, Da Ponte would respond that she was “terribly busy and unable to attend to the matter immediately but was ‘working on’ the invoices”. There was never any refusal to pay or any indication of an inability to pay. Thermal Exchange believed that receipt of payment was merely a matter of encouraging Da Ponte to process the invoices in due course.

In October 2015, the Condominium Corporation was behind on payments and Thermal Exchange had its lawyer write a demand letter to Da Ponte, hoping it would get her to reprioritize her time and start processing the invoices. Instead, in November 2016, Da Ponte took the unexpected position that the Condominium Corporation was not responsible for payment of the invoices and asserted that they were chargebacks to unit owners for payment.

In August 2017, Thermal Exchange filed a Claim against the Condominium Corporation, seeking payment of all of its unpaid invoices, some of which went as far back as 2008. The Condominium Corporation argued that given that many of the invoices were issued two years before the claim was issued, the action was out of time, and barred by the two-year limitation period set out in the Act. The trial judge disagreed and held that Thermal Exchange had commenced the action as soon as it knew that it would have to proceed to court to remedy the non-payment issue, even though a number of the invoices were more than two years old.

Specifically, the trial judge held that the limitations period had began to run in October 2015 when Thermal Exchange sent its demand letter, as that is when it knew that it may have to seek legal recourse, as section 5(1)(iv) of the Act provides that the limitations clock starts running when a party discovers that a legal proceeding is the appropriate remedy. Since the action was commenced within two years of that date, it was held that the action was not statute-barred and the Condominium Corporation was ordered to pay all amounts outstanding from invoices issued between 2008 and 2015.

Additionally, the trial judge found that Thermal Exchange was operating on the basis that the Condominium Corporation had “one running account, and whenever funds were received, they were credited to that one account”. Accordingly, the limitation period did not run after the date of issuance for each invoice, even though the Condominium Corporation had paid individual invoices in the past.

The Condominium Corporation appealed the decision on the basis that the trial judge had erred in holding that the action was not statute-barred by virtue of the Limitations Act. The Ontario Court of Appeal upheld the trial judge’s decision, noting that the action was brought by Thermal Exchange as soon as it knew that it would be an “appropriate means” to remedy the non-payment by the Condominium Corporation, as required by section 5(1)(iv) of the Act.

The Court of Appeal agreed with the trial judge’s finding that Da Ponte’s assurances that she was “working on” the invoices led Thermal Exchange “to the reasonable belief that [its] problem could and would be remedied without the need to have a recourse to the courts”. It was stated that Thermal Exchange sincerely believed that the Condominium Corporation was dealing with it in good faith and that Da Ponte’s promises meant that its invoices would eventually be paid.

The Court of Appeal also noted the nature of the commercial relationship between the parties, in particular in the context of the running account, which it said “gave Thermal Exchange no reason to believe it was disputing the invoices, and that delays in payment were the result of other demands on the property manager’s time”. The Court of Appeal concluded that the limitations clock began to run in November 2016 (not October 2015), when Da Ponte took the position that the Condominium Corporation was not responsible for payment of the invoices, as that was when Thermal Exchange became aware of the problem it was facing. As the action was started within two years of that date, the Court of Appeal upheld the trial judge’s rejection of the limitation period defence.

Although there is some logic to the court’s reasoning in this case, given the nature of the parties’ past business relationship, this decision does raise some concerns about the tolling of limitation periods.

Most notably, the court accepted that Thermal Exchange did not see the need to seek recourse from the courts on the basis of Da Ponte’s statement that she was “working on” the outstanding invoices and did not deny the obligation to pay them. In this specific instance, there was nothing unusual about the debtor taking its time to pay invoices, but it still begs the question as to how this logic would apply in other situations.

For instance, what if it was a new debtor-creditor relationship (and not a pre-existing one), and the debtor made a statement that it was “looking into” paying the invoices (or something to that effect), but then made the decision not to pay the creditor after two years had elapsed? Or, what if the debtor were to take issue with the amounts payable, but still acknowledged an obligation to pay part of the debt? This decision unfortunately does not give a clear answer on whether the limitation period would not apply in those instances.

On top of that, it was held that the limitations clock did not start running until the Condominium Corporation refused to pay the invoices, which was about eight years after some of them were issued. Thermal Exchange took ten years from the date of the invoices to successfully commence its claim. This begs the question as to when it is reasonable to assume that legal action against a debtor is necessary to collect on a debt obligation. This decision does not clarify whether the limitations clock will be suspended indefinitely if a debtor is reminded of the debt and never denies an obligation to fulfill it.

It is, of course, too soon to say what effect this decision will have on limitation period defences going forward. But given the issues it raises; it will be interesting to see whether it could have unintended consequences.

Author: Daniel Waldman, Lawyer

The author would like to thank Saghi Khalili, Student-at-Law, for her assistance with this blog.