What is a Limitation Period and How Does it Affect the Collection of a Loan?
Problems posed by limitation periods should also be considered in an earlier blog I wrote about loans versus gifts. In many cases where there is no issue that an advance of money was a loan, the claim for repayment of the loan can still be defeated if there is a limitation period problem. Lenders must never lose sight that his or her rights to enforce and collect upon the loan may legally expire or become prescribed and if that happens they are gone forever. Many a good claim has been lost because of an intervening limitation period. On the other hand, if one is the borrower, the intervention of a limitation period is a blessing.
In Ontario, the starting point is the Limitations Act, 2002. This provincial statute provides a comprehensive list of claims that must be commenced within two years from the date that the claim was “discovered.” In most cases, it is quite obvious when the claim was discovered or should have been discovered. When it comes to cases involving loans, that discovery date can mean a multiple number of dates, including the date that the loan agreement was signed, the date the borrower “defaulted” on his or her obligations to pay, or when a request or what is commonly known as a “demand for payment” was made.
When attempting to figure out if the two year limitation period has passed or intervened, one must decide whether he or she is dealing with a “contingent loan” or a “demand loan.” The former relates to debts that need not be repaid until some undetermined event happens, including payment pursuant to a set schedule of payments. For example, many loans require a fixed payment on the first of each and every month. In this situation, the “discovery date” is the date upon which the monthly payment was missed. Accordingly, if the lender allows more than two years to pass from the cessation of monthly payments, then his or her loan to the borrower will have become prescribed or unenforceable. There are certain exceptions where one can get around having his or her loan declared prescribed or unenforceable, including where the borrower acknowledges in writing that the two year limitation period has restarted or if a payment towards principal or interest that satisfies the Limitations Act is made. On the other hand, demand obligations are debts that are payable on the demand of the lender, or at an unexpressed date in the future to be chosen by the lender.