When Does the Clock Start? Dealing with the commencement of limitation dates for third party indemnity and guarantee obligations.

Payment obligations are often backstopped by indemnity or guarantee agreements from third parties. This occurs in a variety of commercial contexts and iterations. Where Party A has a claim against Party B, there may be a Party C who will take on the responsibilities that B has to A. As it plays out in real life, if Party B fails Party A, Party A has a claim for payment from Party B and Party A may also make a demand against Party C. That A-B-C relationship may have terms about the timing of a demand.

Party A’s recourse against Party B in the courts is governed by the Limitation Act SBC 2012, c.13, and is usually two years from the date on which Party A knew or ought to have known they had a cause of action against Party B.  This article examines whether there is a different timeframe in effect if Party A decides to pursue Party C for damages.

First, the answer depends on the nature and wording of the agreement between Party A and Party C. That agreement may be embedded in the terms of the A-B relationship, or it may be a stand-alone commitment by Party C to Party A.

For any number of reasons, Party A might be slow to chase Party C due to different interests that relate to their status as a third party. They might elect to pursue Party B first. They may have business reasons to refrain. Party A could even be motivated by kindness or public perception that chasing a kind elderly relative for their brash third cousin’s business bullishness would cause reputational damage. Regardless, Party A ought to know that the decision to chase a debt from a third party indemnitor or guarantor can, in some circumstances, be extended later than their limitation date to pursue Party B.

Cases in point

Below, we summarize three cases that describe instances where the timeline to sue a third party indemnitor or guarantor can be extended.

Tarion Warranty Corporation and New Millennium Homes Inc., 2013 ONSC 4339 (aff’d 2015 ONCA 246) contemplates a situation where a construction company built a home with defects, and the warranty company repaired the home.  As is common in the new home warranty industry, the the home builder had agreed, in advance, to indemnify the warranty provider in advance. The warranty provider rejected the builder’s argument that the limitation period started when the warranty company knew there were issues with the home’s construction. Rather, the triggering date of the limitation period commenced when the warranty company incurred an expense:

[21]      If the plaintiff’s case as presented at trial was based upon negligence, I should agree that the action would be statute-barred. However, that is not the basis of the claim. Instead, the claim seeks payment under contractual terms of indemnification entered into by the defendants, and only relates to the three 2006 invoices described in detail above.

[22]      It appears to be settled law that the limitation period for an indemnification claim does not commence to run until the plaintiff actually suffers the loss, i.e. pays out money to a third party, and not from the time when the event which causes the loss happens. This is discussed at paragraphs 20 to 24 of the decision of Philp, J. in Ontario New Home Warranty Program v. 567292 Ontario Ltd., reported at 1990 CanLII 6614 (ON SC), [1990] O.J. No. 7. Each payment has its own limitation period.

[23]      The rationale for this appears to me to be that recovery under an indemnification is in the nature of redressing an unjust enrichment to the defendant.  That unjust enrichment occurs when the plaintiff actually pays out monies in respect of a wrong against which the defendant has provided indemnification.  Here, the plaintiff made three payments out to Venditti Engineering and EBS Engineering & Consulting Limited for services in regard to investigation and remedial work at the subject home in 2006, each such payment occurring within the two year shadow cast by the statement of claim issued in 2007. The claim is in respect of those payouts only, and not earlier ones which could be caught by expiry of the limitation period.

The take-home point from Tarion v. New Millenium is that indemnity obligations are distinct from a duty of care.  If a party (whether Party B or C) makes a financial commitment in a contract, it is contractual liability that triggers the limitation clock.

In Boake v Blair, 2019 BCSC 830 a warranty provider was given even more grace in ascertaining the commencement of a limitation period, by identifying the triggering date as “after the remedial work was done and a demand made” with the subsequent paragraph indicating a potential rolling limitation period for subsequent debts arising:

[87]        The NHW also required BCL to indemnify it on demand after the plaintiff had expended to correct deficiencies in the construction. Those monies would not become due until after the remedial work was done and a demand made.

[88]        I conclude the limitation actions for recovery of amounts due under the indemnity expired two years after any payments were made by the plaintiff or became payable. Presumably the debt became due sometime after March 7, 2016 when the plaintiff put Mr. Curtis and BCL on notice that it would have no alternative but to hire a contractor to correct defects and more likely around April 2018 when it demanded indemnification. In this case the limitation period likely remains open until sometime in 2020; it has not expired for the contract claims. There may be a rolling limitation triggered by each payment made by the plaintiff and recovery demanded from BCL.

The take-home point from Boake v. Blair is that if the contract between Party A and an indemnitor contemplates a demand being sent, the limitation clock is not ticking until the deadline in the demand letter has expired. This should be considered with caution. Surely, Party A should not intentionally delay issuing a demand to extend a delay period. However, a court will assess a contract on its face before importing an implicit term.

Sometimes, payment obligations are payable “on demand”. Where a payment obligation is a “demand obligation”, whereby the debt is payable only on demand, the limitation period may not begin until payment is demanded and the deadline for payment lapses. For example, in Leatherman v. 0969708 B.C. Ltd., 2018 BCCA 33, a debtor under a mortgage agreement failed to make a required interest payment in October 2013. The creditor did not issue a demand for payment of the principal and interest until November 2016 and an action was filed December 2016.  The Court of Appeal considered section 14 of the Limitation Act and found that the limitation date for the payment obligation had not lapsed as it was only payable on demand, in spite of the breach of interest obligation 3 years prior. Interestingly, the Court of Appeal also held that the limitation period for the creditor to enforce the security interest did lapse by application of section 15 of the Limitation Act, notwithstanding that the payment obligation that was governed by section 14 of the Limitation Act had not lapsed.

Conclusion

Indemnity obligations are commonplace in today’s commercial marketplace. The application of when the right to sue on a payment obligation arises and lapses depends on each individual context. No matter the size of the payment obligation, it is important to keep track of who owes the obligation, when that obligation is triggered, and when the applicable limitation period lapses.

Where an indemnity agreement includes a right to claim indemnity, the limitation clock may begin to run at the very moment when a loss arises, but can sometimes extend to the either the date when a payment is made by a creditor to a third party, or the deadline of that demand when the debtor fails to pay. It is important for creditors to not only keep track of when losses arise, but also keep track of demand letters and the deadline date on a demand letter.

More important than anything, creditor parties should always stay ahead of the clock. There is rarely anything gained by delaying a demand or an action.