Limitation Periods and Debtor’s Obligations – A Recent Ontario Court of Appeal Ruling May Have Unintended Consequences

If you ask most litigants to name the thing that makes us most nervous, the answer usually misses a statute of limitations.

No matter how strong our cases, courts often stick to the deadline for initiating a cause of action – that is (in most cases), two years from the date when the cause of action is discovered, in accordance with Ontario law. Limitation Act (there “Law”). Although statutes of limitations make us lose sleep as they can cost our clients their entire lawsuits, we are nonetheless grateful. This is not only because they constitute a perfect defense against a trial out of time, but also because they impose an important unshakeable rule in our system of justice. However, over the years, creative litigants have found more variability in the rule and have been able to create exceptions to statutes of limitations.

A recent decision by the Ontario Court of Appeal has raised more uncertainty and may have introduced an exception to the limitation defense that could have the possibly unintended consequence of a very long limitation period, particularly in debtor-creditor cases.

In Thermal Exchange Service Inc v. Metropolitan Toronto Condominium Corporation No. 1289Heat Exchange Services Inc. (“Thermal Exchange”), an HVAC contractor, provided his services to Metropolitan Condominium Corporation No. 1289 (the “Co-ownership company”) between 2002 and 2015. When Thermal Exchange received work orders from Condominium Corporation property manager Helen Da Ponte (“Da Ponte”), an invoice would be issued after the execution of the requested work. While payment was due within 30 days of the invoice date, the condo corporation typically made payments much later, often up to 300 days later. Despite this, Thermal Exchange continued to provide its services, issuing new invoices each time.

In 2008, a number of Thermal Exchange invoices remained unpaid. When requests for payment were made, Da Ponte replied that she was “awfully busy and unable to attend to the matter immediately, but was ‘working’ on the invoices”. There was never any refusal to pay or indication of an inability to pay. Thermal Exchange believed that receiving payment was simply to encourage Da Ponte to process invoices in a timely manner.

In October 2015, the Condominium Corporation was in arrears, and Thermal Exchange asked its lawyer to write a demand letter to Da Ponte, hoping that it would cause him to reprioritize and begin to process invoices. Instead, in November 2016, Da Ponte took the unexpected position that the condo corporation was not responsible for paying the bills and claimed they were chargebacks to unit owners for payment.

In August 2017, Thermal Exchange filed a claim against the condo company, seeking payment for all of its unpaid bills, some of which dated back to 2008. The condo company argued that since many of the bills were issued two years before the claim was issued, the action was out of time and barred by the two-year limitation period provided in the Law. The trial judge disagreed and found that Thermal Exchange brought the action as soon as it knew it would have to go to court to remedy the nonpayment issue, even though a number invoices were over two years old.

Specifically, the trial judge found that the statute of limitations began to run in October 2015 when Thermal Exchange sent its demand letter, because that’s when it knew it could having to take legal action, such as Article 5(1)(iv) of the Law provides that the limitation period begins to run when a party discovers that legal proceedings are the appropriate remedy. Because the action was brought within two years of that date, the action was found not to be statute-barred and the condominium corporation was ordered to pay all unpaid amounts for invoices issued between 2008 and 2015 .

Further, the trial judge found that Thermal Exchange operated on the basis that the condominium corporation had[TRADUCTION]“one current account and each time funds were received, they were credited to this account”. Therefore, the limitation period did not run after the date each bill was issued, even though the condominium corporation had paid individual bills in the past.

The condominium corporation appealed the decision on the grounds that the trial judge erred in finding that the action was not statute-barred because 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 it would be a “proper way” to remedy the condominium corporation’s non-payment, as required by section 5(1)(iv) of the Law.

The Court of Appeal agreed with the trial judge’s finding that Da Ponte’s assurances that she was “working on” the invoices had led Thermal Exchange “to reasonably believe that [its] problem could and would be solved without the need to go to court”. 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 bills would eventually be paid.

The Court of Appeal also noted the nature of the commercial relationship between the parties, particularly in the context of the current account which, according to it, “gave the Bourse Thermale no reason to believe that it was contesting the invoices, and that the late payments were the result of further demands on the property manager’s time”. The Court of Appeal concluded that the statute of limitations began to run in November 2016 (and not October 2015), when Da Ponte took the position that the condominium company was not responsible for paying the bills, because this is when Thermal Exchange became aware of the issue they were facing. As the action was brought within two years of that date, the Court of Appeal upheld the trial judge’s dismissal of the limitation defence.

While there is some logic to the court’s reasoning in this case, given the nature of the parties’ past business relationships, this decision raises some concerns about the toll of statutes of limitations.

Most notably, the court admitted that Thermal Exchange saw no need to take legal action based on Da Ponte’s statement that it was “working” on the unpaid invoices and did not deny the obligation to pay them. . In this specific case, there was nothing unusual about the debtor taking his time to pay his bills, but one wonders how this logic would apply in other situations.

For example, what if it was a new debtor-creditor relationship (not a pre-existing one) and the debtor said he was “planning” to pay the bills (or something for this purpose), but then made the decision not to pay the creditor after two years? Or, what if the debtor disputes the amounts owed, but still acknowledges an obligation to pay part of the debt? Unfortunately, this decision does not give a clear answer as to whether the statute of limitations would not apply in these cases.

On top of that, it was held that the statute of limitations only started to run when the condominium corporation refused to pay the bills, some 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 raises the question of when it is reasonable to assume that legal action against a debtor is necessary to recover a debt. This decision does not specify whether the statute of limitations will be suspended indefinitely if a debtor is reminded of the debt and never reneges on an obligation to fulfill it.

It is, of course, too early to tell what effect this ruling will have on statute of limitations defenses going forward. But given the issues it raises; it will be interesting to see if this could have any unintended consequences.