A promissory note is a written promise by a borrower to pay a sum of money to a lender upon the occurrence of an event, usually a demand for payment. Promissory notes are often used by friends and family members to record loans made between them. No one expects there to be problems at the outset and all are sure the loan will be repaid at some point. But how long do promissory notes remain enforceable? What happens if the friendly understanding behind the loan is undermined by a falling out? The short answer is whether a promissory note remains enforceable depends both on what type of note it is and when it was given.
In law, there are two types of promissory notes: a note for a demand loan and a note for a contingent loan. A demand loan is a loan payable on demand by the lender. A contingent loan is a loan payable at a future date upon the occurrence of a specified event. Prior to the enactment of the current Limitation Act, the limitation period for a demand loan began to run on the day the loan was advanced, not on the date demand was subsequently made. Despite the fact that the loan was not repayable until “demand”, courts held that the limitation period for such loans began to run on the day of the advance because, as a matter of law, it was not necessary to make demand before suing on the note. If a lender did not sue on the promissory note within six years of the date of the loan, the claim was barred by the Limitation Act. Six years was the applicable limitation period.
However, the same was not so for promissory notes for contingent loans. For these notes, the limitation period only begins to run from the date of the contingent event that triggers the obligation to repay. One type of contingent loan is that repayment is not required until a stated period after demand has been made, such as in the case of Ewachniuk Estate v. Ewachniauk. Another common example would be a loan from parents to assist in buying a house and which is not repayable until after the house is sold. In such a case, the parents had six years (now two) after the sale of the house to sue for repayment of the loan, no matter how long ago the loan was first given.
If you hold a promissory note for a demand loan made more than six years ago, then you may have difficulty suing to recover the money lent. Such were the circumstances in the recent decision of Kong v. Saunders. The Kongs lent money to their son and his wife to help the couple buy a house. The loan was recorded in a promissory note as a demand loan. Many years later, the son separated from his wife and they both fell out with the parents. The Kongs sued to recover the $160,000 loan. The Court of Appeal held that, as it was a demand loan, the limitation period had expired long before the Kongs sued and it was now too late to do so.
Things changed on June 1, 2013 when the current iteration of the Limitation Act came into force. Though it reduced the basic limitation period from six years to only two, it also enacted a provision that changed the previous law on when a demand loan limitation period begins. The new provision, section 14, provides that “a claim for a demand obligation is discovered on the first day that there is a failure to perform the obligation after a demand for performance has been made”. Though the language appears odd, it echoes other sections in the Limitation Act that address when a limitation period begins. In short, a limitation period begins once the claim is “discovered”. This means that a demand loan is now truly a demand loan: it only becomes payable once demand is made; not, as previously, on the date the loan is first made. But, this new provision is only applicable to promissory notes made after June 1, 2013. The old law and old Limitation Act apply to loans and promissory notes granted before that date.
If you are the holder of a promissory note, you should make sure that you are aware of which iteration of the Limitation Act applies and when the limitation period applicable to this demand obligation begins to run. If you do not, you may discover that the loan is unenforceable when you do seek repayment.