How Long is Too Long? Limitation Periods and Suing for Unpaid Debts
Making a Loan: Personal Dynamics and Paper Trails
When loaning money, it is preferable to have the terms of the loan properly documented and agreed to in writing by the parties involved. However, sometimes loans are made informally, such as between friends or relatives. In these instances, the terms of the loan might be entirely verbal. Alternatively, the parties might draft loan documents themselves. They might do this to try and save money on the upfront costs of papering a loan or because they honestly believe there will not be problems with repayment.
Unfortunately, if a debtor defaults on such a loan and a creditor is considering litigation to recover the outstanding debt, there will likely be little documentation evidencing the loan other than a cheque or bank statement showing the original money transfer from the creditor to debtor. Further, where the creditor and debtor are friends, relatives, business partners, or have some other personal relationship, it is common for the creditor to wait months or even years after the debtor’s default until taking legal action. Where personal dynamics are involved, a creditor will often fall silent or provide endless second chances to a debtor before acting.
Two to Sue: The Basic Two-Year Limitation Period
When a creditor waits for a prolonged period before pursuing litigation, she risks running afoul of Ontario’s basic limitation period. In Ontario, the Limitations Act, 2002 sets out a basic limitation period of two (2) years. This means a claimant has two years to start a legal proceeding from the day she discovers the claim. Discovery means the claimant knew (or ought to have known) that the defendant did or failed to do something that caused the claimant harm. After the two-year period, the claimant is typically out of time.
Tricks Up Your Sleeve: Written Acknowledgements and Partial Payments
There is good news, though, for creditors who have waited and given second chances to debtors before turning to litigation. According to subsection 13(1) of the Limitations Act, 2002, when a debtor acknowledges his/her liability for an outstanding debt, the two-year limitation period is deemed to start from the date of the acknowledgement1. This acknowledgment must be written and signed by the debtor or the debtor’s agent, and it must be made before the original two-year limitation period expires.2
An acknowledgement of liability can be short and sweet. It does not have to contain specific promises from the debtor to pay amounts owing. Also, it does not have to specifically state the amount of debt owing.3
To keep up with modern times, Ontario courts have accepted emails with digital signatures as written, signed acknowledgements of amounts owing. Where an email does not contain an e-signature, the court will consider other indicators of its authenticity. In one case, the court accepted an email that did not contain the debtor’s e-signature but otherwise contained the debtor’s name and was clearly sent from the debtor’s valid email address. The court was satisfied that it was an authentic email sent by the debtor, and so it met the requirements for acknowledgement.4
As an additional tool, where a debtor makes a partial payment toward an amount owing, subsection 13(11) of the Limitations Act, 2002 treats this partial payment as an acknowledgment of liability.5 This payment restarts the two-year clock if made within the original limitation period.
Ideally, parties would document their loans thoroughly and in writing, defaults under the loan would not occur, and if a default does occur it is remedied quickly! However, real life is complicated, and the creditor-debtor relationship might become more difficult to navigate than anticipated.
Where this is the case, creditors should keep in mind the two-year limitation period and the need to act diligently if they believe legal action is necessary to recover outstanding debts. If it is not feasible to act within two years of default, creditors should seek an acknowledgement of liability from the debtor or request a small partial payment to extend the limitation period and preserve the viability of legal action.
How We Can Help
If you have questions about this post or if you are owed money as a creditor and want to know what options are available to recover amounts owing, the Litigation Team at Merovitz Potechin LLP would be pleased to assist you.
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