Court of Appeal for Ontario: A Debtor’s Insurances Can Delay the “Discovery” of a Claim – Litigation, Mediation and Arbitration

In its recent decision, Thermal Exchange Service Inc. c. Metropolitan Toronto Condominium Corporation No. 12892022 ONCA 186,
(“Heat Exchange Services”)the Ontario Court of Appeal has ruled that, in certain circumstances, a debtor may postpone the start of a limitation period on a claim for unpaid debts if assurances are provided that the debts can and will be paid.

For most civil actions in Ontario, the general rule is that a party cannot sue another party after two years from the date the claim was “discovered”. There is a legal presumption that a claim is discovered and the two-year limitation period begins to run from the date the injury, loss or damage occurred.

One of the means by which a claimant can rebut this presumption is found in subparagraph 5(1)(a)(iv) of the Limitation Act 2002which states that a claim is not “discovered” until a reasonable person in the claimant’s position knew that a proceeding would be the appropriate remedy for the claim.

Facts

From 2002 to 2015, Plaintiff, Thermal Exchange Service Inc. (“Heat exchange“), provided HVAC services to defendant, Metropolitan Toronto Condominium Corporation No. 1289 (“Condominium companyThermal Exchange’s invoices for services rendered required payment to be made within 30 days of the invoice being issued; however, Condo Corp’s payments were often late – often up to 300 days.

In 2008, Condo Corp completely stopped paying some of its bills. When Thermal Exchange contacted Condo Corp’s property manager to inquire about the non-payment, the property manager indicated that she was “terribly busy and unable to take care of the matter immediately, but was “working “on invoices”. Based on these assurances, Thermal Exchange was led to believe that receiving payment was nothing more than a matter of encouraging the property manager to process the invoices.

Importantly, Thermal Exchange’s belief was based on the understanding that Condo Corp maintained a “checking account”, which was credited with funds whenever Thermal Exchange received payment from Condo Corp. The existence of the checking account suggested that Condo Corp could meet its obligations and that the property manager was merely postponing his duties to return the funds.

In an effort to get the property manager to finally address the outstanding debt, Thermal Exchange sent a demand letter to Condo Corp demanding payment. However, on November 4, 2016, the property manager advised Thermal Exchange that Condo Corp could not honor the debt payment.

As a result, in August 2017, Thermal Exchange filed a lawsuit against Condo Corp seeking damages for unpaid invoices issued between 2008 and 2015. Thermal Exchange won at trial and Condo Corp appealed.

decision

The central issue on appeal was whether the trial judge erred in finding that Thermal Exchange’s action was not statute-barred by Ontario’s two-year limitation period. Condo Corp argued that the statute of limitations had expired since the claim related to invoices that were several years old.

Invoking subparagraph 5(1)(a)(iv) of the Ontario Act Limitation Act 2002 and relevant case law, the Court of Appeal held that the trial judge did not err in her decision. The court determined that Thermal Exchange had rebutted its statutory presumption that the statute of limitations began to run when the nonpayment first occurred.

Due to assurances from the property manager that it was “working on” paying the bills, Thermal Exchange reasonably believed that litigation was not the appropriate way to seek redress until Condo Corp informed it that it could not honor the payment.

Therefore, the claim was not “discovered” until November 4, 2016, when Condo Corp’s property manager first announced that the outstanding debts could not be paid. It was on this date that Thermal Exchange first realized it had to sue Condo Corp.

Since the action was filed in 2017, within two years of the date the claim was discovered, the defendant’s limitation argument failed and the appeal was dismissed.

Take away food

The decision of the Court of Appeal in Heat Exchange Servicessuggests that the “discovery” of an overdue debt may be influenced by communications between a debtor and a creditor. Therefore, when engaging in discussions regarding outstanding debt, parties should be aware that an assurance may be construed as an extension of a statute of limitations. Therefore, detailed notes should be taken in any such discussion.

We caution, however, that this decision does not mean that
all a debtor’s insurance will delay the start of a limitation period. The court said that the question of when Thermal Exchange knew that a proceeding would be the appropriate means to seek compensation for its loss could “be answered only in the specific context of the legal relationship of the parties and their business relationships.“For this reason, notwithstanding a debtor’s assurances, creditors must continue to exercise due diligence in investigating potential losses and must pursue claims and potential claims in a timely manner.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.