For Whom the Bell Tolls: Know Your Limitations

Published: 04/02/2012

By Geoffrey Breen, Robert B. Cohen

Litigants looking to suspend a limitation period should pay close attention to the recent Ontario Court of Appeal decision in Hamilton (City) v. Metcalfe & Mansfield Capital Corp., 2012 ONCA 156. In this case, the City of Hamilton unsuccessfully appealed a decision that found that the City’s claims of misrepresentation, conspiracy and unjust enrichment in respect of $10 million worth of non-bank sponsored asset backed commercial paper (“ABCP”) purchased in 2007 was statute barred despite the fact that the City had commenced its action within 2 years of the ABCP coming due.

By way of background, the ABCP was purchased by the City on July 24, 2007. However, on August 13, 2007, the Canadian non-bank sponsored ABCP market collapsed. In an effort to address the collapse, various banks and investors, including the City, entered into an agreement known as the “Montreal Accord” on August 23, 2007, which included a 60-day standstill agreement pursuant to which the signatories agreed to refrain from taking any action that would precipitate a default by the issuers of the ABCP.

When the City’s ABCP matured on September 26, 2007 (during the standstill period), the issuer, Metcalfe, failed to make repayment. The standstill was subsequently extended and expired on January 10, 2008. On September 25, 2009, the City commenced its action against Metcalfe, which was one day prior to the second anniversary of the ABCP coming due. While such a claim appeared to be issued just within the 2 year limitation period, a judge of the Ontario Superior Court of Justice held that the City’s claim was statute barred by the applicable 2 year limitation period and dismissed the City’s claim on a summary basis. In so doing, the judge based the decision on the fact that the City’s cause of action was not pursued in terms of the failure of Metcalfe to pay on the ABCP when due but was formally asserted as a claim in negligent misrepresentation (that Metcalfe had misrepresented the risks and underlying assets behind the ABCP and the City had relied on these misrepresentations in purchasing the ABCP to its detriment). Consequently, it was held that the 2 year limitation period had expired by the time the City commenced its action in September of 2009.

On appeal to the Ontario Court of Appeal, the City argued that, regardless of when the cause of action arose, the City could not have discovered its action against Metcalfe until it learned of the extent of its loss, which was not realized until September 26, 2007 (when the ABCP became due but was not repaid). Ultimately, the appellate Court did not accept the City’s argument, holding that upon entering the Montreal Accord in August 2007, the City knew that it had suffered at least some loss and therefore knew that a cause of action in tort and equity had arisen (which started the “clock ticking” on the 2 year limitation period). The appellate Court also rejected the City’s argument that the standstill provision in the Montreal Accord constituted an agreement to temporarily suspend or “toll” the limitation period. On this point, the Court noted that there are three (3) ways by which a limitation period may be suspended by an agreement, as follows:

1. Under the common law, a tolling agreement may be enforceable in the typical creditor-debtor situation where consideration is provided by the debtor in exchange for the creditor’s promise to forbear from suing, the rationale being that the parties have in effect renegotiated the debt obligations to a later date;
    
2. Pursuant to Section 11 of the Limitations Act (the “Act”), which provides that the parties may enter into an agreement to suspend the limitation period while an independent third party attempts to resolve the claims; or
    
3. Pursuant to Section 22 of the Act, which provides that the parties may enter into a specific agreement to suspend the limitation period.

Beginning with the common law, the appellate Court found that there was no indication that Metcalfe had offered consideration in return for the City’s promise to forbear from suing during the standstill period. In addition, the Court suggested that the common law principles applicable to tolling a limitation period do not readily extend beyond the creditor-debtor scenario to claims in tort or equity.

The appellate Court also rejected the City’s argument that the standstill provision of the Montreal Accord constituted an agreement that complied with section 11 of the Act. While the Montreal Accord established a committee to oversee negotiations regarding the ABCP market restructuring, this committee did not constitute an “independent third party” with a specific mandate to resolve the City’s claims against Metcalfe. Indeed, the evidence established that the City had never believed itself to be engaged in such a process.

Similarly, the appellate Court also rejected the City’s argument that the standstill provision in the Montreal Accord constituted an agreement that complied with section 22 of the Act. The Court held that, in order for such an agreement to lawfully suspend a limitation period, the agreement must be bilateral between the plaintiff and defendant, provide some consideration for the promise to forbear from suing, and expressly and specifically suspend the limitation period for the potential claims in question. In this case, however, the appellate Court found that the standstill provision in the Montreal Accord was simply a vague promise to forebear from taking action that would cause a “default”, lacked consideration and did not preclude the City from commencing its actions in tort or equity.

This decision highlights a number of important points to be considered by anyone attempting to calculate the applicable limitation period or contemplating the execution of a tolling agreement to suspend a limitation period. In this regard, it should be noted that: 

1. The applicable limitation period begins as soon as the cause of action is discoverable and it is foreseeable that damages will accrue, whether or not the full extent of the damages is known or is fully realized.
    
2. The pleading of the particular cause of action will dictate when the “clock starts ticking” on the applicable limitation period. As such, a party must be careful to consider the applicable limitation period of all possible causes of action and not just any one cause of action.
    
3. If a party is entering into an agreement to temporarily suspend the limitation period, the agreement must be bilateral, provide for an exchange of consideration and be clear in its intent to suspend the limitation period with respect to the particular claims in question.

For further information regarding this matter, please contact Robert Cohen, Geoff Breen or any other member of our Securities Litigation Group.