Promissory Notes: The Dangers of Limitation Periods
Lee Mayzes
Promissory notes can be a useful tool in many contexts. Whether in settling a dispute
or securing payment in a business transaction, promissory notes can create valuable
flexibility in the payment of a debt. However, creditors need to be aware of some special
restrictions that have developed in the law with respect to promissory notes.
Most creditors know that the Limitations Act restricts their ability to sue on a debt to
within two years after the debtor's liability arises. What many may not know, however,
is that the 2 year period may begin sooner than is anticipated.
Many promissory notes provide that payment shall be made "on demand" or "on sight".
Often it is not necessary to present the debtor with the note to constitute a demand
(i.e. "presentment has been waived"). The ability of a creditor to call in a note on
demand has been considered useful as it allows the creditor to extend the limitation
period within which a note could be collected in that it is often thought the debtor's
liability does not arise until a demand is made. Contrary to what one might assume
however, an actual demand is not required for the debtor to become liable. Rather, the
debtor's obligation is immediate, unless otherwise specified, (as is the creditor's right
to take action) and begins upon execution of the note, which as a result triggers the
start of the limitation period.
Therefore, on a promissory note made payable on demand without the need for
presentment, there are only two years from the date of endorsement or delivery for a
creditor to recover the amount owed. Failure to appreciate this fact has caused more
than a few to have their recovery rights unexpectedly barred by the Limitations Act.
This aspect of commercial law is both very old and very well entrenched in the Canadian
legal system. Fortunately for creditors, it is also very restricted. Where a promissory
note contains anything that delays the debtor's liability, the commencement of the
limitation period is similarly delayed. There are several ways for creditors to create
promissory notes with "delays".
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First, a creditor can make a note payable on a fixed or determinable date rather than
"on demand". Since the debtor's liability to pay does not arise until that date, the
commencement of the limitation period is postponed as well. Second, a creditor can
make a note payable in installments with only certain sums owed on specified dates.
In such a case the debtor’s liability arises separately and “afresh” for each individual
payment. Accordingly, separate limitation periods also commence on each payment date
and, therefore, a creditor can stretch out the “ultimate” limitation period. It should be
noted, however, that only those payments falling due within two years of the action’s
commencement will be recoverable.
As stated, while fixed or determinable dates (whether for total sums or part payments)
allow a creditor to postpone or “stretch out” a limitation period, they also deprive
creditors of the flexibility that comes with demand debtor liability. There are other
strategies, however, which do not. For example, a creditor can make a promissory
note payable on demand but with a requirement: (a) that the note be presented to the
debtor, and (b) that liability for payment will arise on a fixed date after presentment
(say, one day). In this manner, the debtor’s liability (and thus the start of the limitation
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Promissory Notes
period) is delayed while the creditor maintains his or her
flexibility in deciding when the note should be called. It
must be cautioned, nevertheless, that if the note states
payment is owed at presentment rather than at a time
after presentment, the law will deem it identical to any
other note “payable on demand”. Liability will arise and
the limitation period will commence upon endorsement
or delivery.
In the alternative, the Limitations Act will allow creditors
and debtors to expressly agree to an extension of the
limitation period under the Act, if such an agreement
is in writing and is signed by the debtor. By utilizing
such an agreement a creditor can potentially negotiate
any limitation period, no matter how lengthy. It seems
unlikely, though, that the provision’s wording would
allow an agreement of no period at all.
Finally, the Act allows a limitation period to “begin
again” if the debtor acknowledges the debt. There are
two forms of acceptable acknowledgement. First, the
debtor can acknowledge the debt by making partial
payment before the expiration of the original period.
Second, the debtor can acknowledge the debt by making
an admission of liability. To be effective, however, the
admission must be in writing and be signed by the
debtor.
It is clear there are several strategies by which creditors
can postpone or extend the two year limitation period
and protect their recovery rights under promissory
notes. Dates can be fixed, presentment can be required,
or agreements can be made. Simply recognizing the
potential danger is the necessary first step in fixing
problems with existing notes and for avoiding limitation
difficulties in the future.
DISCLAIMER
this article should not be interpreted as
providing legal advice. Consult your legal adviser before acting on any of the
information contained in it. Questions, comments, suggestions and address
updates are most appreciated and should be directed to:
The Corporate Commercial Solicitors Group
Edmonton 780-423-3003
Calgary 403-260-8500
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