The Latest on Guarantees And Limitation Periods

The recent decision of the Ontario Superior Court in Strashin v. Benzacar is a useful reminder of the relationship between guarantees and limitation periods.

For a number of years, cases involving attempts by lenders to enforce guarantees gave rise to highly creative and ingenious defences being asserted by guarantors who, generally speaking, knew full well they were liable to pay on their guarantees. The incentive to defend these claims using imaginative and sometimes novel approaches was provided by a number of cases, some of which were exceedingly high authority, that made it clear that guarantees are highly technical documents and that lenders were going to be put to a standard of perfection in terms of both the guarantee document and the circumstances surrounding the execution of the guarantee before the Court would enforce payment.

It seemed that every time the Court dismissed an action on a guarantee for some technical reason, institutional lenders revised their standard form guarantees to cover whatever loophole some imaginative lawyer had been able to find.

As a result, there seems to have been a significant decrease in a number of these cases. In ordinary circumstances, it is probably safe to say that it is exceedingly difficult in the current jurisprudence for a guarantor to escape liability.

Nevertheless, such efforts continue to be made.

In Strashin v. Benzacar, the defendant had signed a guarantee in August, 2001 in respect of the indebtedness of a corporation under certain promissory notes. The creditor made demand on the guarantee in April, 2010, almost 9 years later. The defendant refused to pay and the creditor sued.

The defendant’s main defence was that the creditor was out of time, whether the applicable limitation period was 6 years as had been provided by the legislation in force at the time of the guarantee, or 2 years as is currently the case.

The Court disagreed and made it clear, yet again, that the limitation period for an action on a guarantee commences on the date of demand for payment. This is because demand is a condition precedent to the guarantor’s obligation to pay. The date that the guarantee was provided is not relevant.

As a practical matter, then, it is important for business people to remember that if they provide guarantees when financing is originally arranged for their corporations, for example, and the company remains in business with the same financing in place for any number of years, the lender can call on the guarantor to repay the debt long after the guarantor has forgotten about his or her potential liability.

It is worth noting that guarantees usually contain termination rights. It is ordinarily the case that a guarantor can simply terminate his obligation under a guarantee by means of written notice to the lender. Whether or not this is a realistic step to take as a practical matter it will depend on the circumstances of each case. However, if you signed a guarantee many years or decades ago and you have forgotten about it until you found a copy of it at the bottom of your desk drawer, don’t assume that it is no longer enforceable by the lender simply because of its age

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