March 17th 2025
In this newsletter, we will look at promissory notes. In our next article we will compare promissory notes with mortgages and understand how they differ, and how the rights and obligations relating to these debt instruments may impact you as a consumer or as someone who is considering lending money.
A promissory note establishes the terms that a borrower must comply with in repaying a loan. However, promissory notes in Ontario are subject to the Limitations Act. This act establishes a basic limitation period of two years from the date a claim is discovered or ought to have been discovered. This means that for individuals who have lent money, events of non-payment by the borrower can often lead to further questions about legal rights for enforcement. As this article explores, the application of the limitation period is not always straightforward.
Limitation Periods and Promissory Notes
The Limitations Act was intended to promote certainty for consumers in Ontario by creating a two-year limitation period after a plaintiff discovers (or should have known) that they have a claim. However, there are several exceptions to this two-year rule, creating some uncertainty for borrowers and lenders as to what their legal rights are.
One key factor in determining when a limitation period begins is the "appropriate means" doctrine, outlined in section 5(1)(a)(iv) of the Act. This doctrine states that the two-year clock starts running only when the plaintiff knows they have suffered a loss, and that litigation is an appropriate means to remedy that loss. This means that if a borrower for a promissory note is supposed to pay on a given day, and fail to make payment, the person lending the funds should seek legal advice on what their risk is by not taking legal action. Depending on the circumstances, it might be clear that the only way forward is by taking legal action, and if that is the case, a lender may lose the right to sue after the expiry of the due date for the promissory note.
Impact of Part Payments and Acknowledgements
Interestingly, the limitation period can be affected by partial payments or acknowledgements of the debt. Under section 13(11) of the Limitations Act, a part payment or written acknowledgement of the debt can restart the two-year limitation period. For instance, if a debtor makes a partial payment towards a debt within the original two-year limitation period, this payment is treated as an acknowledgement of liability. This action effectively restarts the two-year clock from the date of the partial payment.
Similarly, a written acknowledgement of the debt can also restart the limitation period. This provision allows creditors to potentially extend their window for legal action if the debtor makes a payment or acknowledges the debt in writing.
Although written acknowledgements and proof of part payments towards a debt may be a sufficient way to extend the limitation period, Ontario has an ultimate limitation period of 15 years. This period is not subject to discoverability and begins to run from the day on which the act or omission on which the claim is based took place, so borrowers and lenders should keep this in mind and seek legal advice if debts have been outstanding for some lengthy period of time.
One of the main challenges with promissory notes is that lenders and borrowers often can be family members, adding complexity to the situation. Liddiard Law is experienced in handling difficult personal circumstances, so if you are owed a sum of money or are considering lending money, do not hesitate to reach out to Liddiard Law today.
Michael
michael@liddiardlaw.ca
Michael Liddiard
Liddiard Law Professional Corporation