Loans between family or friends is a common practice. These agreements are often free of the interest rates and nexus of paperwork attached to loans provided by financial institutions. While the prospect of helping out a loved one may seem like an attractive opportunity, the informal nature of these loans carries the risk of non-payment. For many friends or friends advancing these loans, they rely on the goodwill of the borrower that they will be repaid. However, goodwill is not a guarantee. Relationships change and goodwill can disappear. When the goodwill is gone and the loan remains outstanding, lenders may have to turn to legal claims to recoup their funds.
Most legal claims are subject to the two-year limitation period outlined in the Limitations Act, 2002. This period begins on the day that the claim was “discoverable.” According to Section 5, a claim is discoverable on:
(a) the day on which the person with the claim first knew,
(i) that the injury, loss or damage had occurred,
(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,
(iii) that the act or omission was that of the person against whom the claim is made, and
(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and
(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause.
In the context of informal loans, what does that mean? Does the limitation period begin once the loan is advanced or afterwards? Does the breakdown of a relationship between the lender and the borrower impact the limitation period?
The Court of Appeal for Ontario’s recent decision of T.O. Estate v D.O., 2024 ONCA 603 provides some clarity for claims involving the repayment of informal loans. In this case, the husband owned a corporation that loaned funds to Ridgeway, a corporation, indirectly owned by the wife, through a numbered company called 201, of which the wife was the sole shareholder. In 2012 and 2013, the husband advanced over $381,000 to Ridgeway. The wife did not sign any documentation acknowledging the loan. In 2018, the marriage broke down and the funds were never repaid.
In 2019, the husband commenced an application against the wife seeking repayment of the loans and, and in 2020, sent a letter demanding repayment. In 2021, the application was amended to add Ridgeway and 201 as respondents (“Amended Application”).
The application judge dismissed the husband’s Amended Application because the claims were commenced after the two-year limitation period. While the application judge agreed with the husband that funds given to the wife were a loan subject to repayment, he also found the very latest the husband could have commenced his application was in 2018 – when the marriage broke down. Since the Amended Application was not commenced until 2021, this went beyond the limitation period.
On appeal, the Court disagreed with the application judge’s finding. The Court clarified the components for discoverability under the Limitations Act, specifically the importance of knowledge that an “injury, loss or damage had occurred.” In the context of loans, the discoverability begins once a demand for repayment has been made and there is a failure to fulfill that demand. Citing Bank of Nova Scotia v. Williamson, the Court held that a demand is a condition precedent for the commencement of the limitation period.
It did not matter than the relationship between the husband and wife had soured in 2018, nor did it matter that as time elapsed, the husband was less likely to recover the funds. The limitation period only began to run when the husband issued a demand for repayment. In this case, the first instance of demand was in 2019. The Amended Application was brought in 2021 – within the two-year limitation period. Therefore, the application judge erred in finding that the claim had expired. The breakdown of the marriage in 2018 is not akin to a demand of repayment.
While it is best practice to have a formal written agreement when money is loaned to anyone – even close family and friends – the decision in T.O. Estate reiterates that there may be legal avenues when such agreements are absent. While the husband passed away before the appeal decision was reached, his estate was still entitled to collect payment on his behalf.
