Limitation Periods of Loans

While not strictly a family law consideration, this article considers limitation periods applicable to different types of loans. The limitation period in this context is the time in which a party must commence an action following a payment default. If an action is not pursued within the limitation period it may be statutorily barred from proceeding, and the loss of such legal rights can have material impacts on a matrimonial estate.

General Limitations Rules

In Alberta, there is a general rule that a person has two years to pursue a claim in court against another person. Beyond the two-year period, the defendant would have immunity from any liability associated with the act. The Alberta Limitations Act provides that the two-year limitation period begins when a claimant knew or should have known, that:

1. the injury occurred, 
2. the injury was attributable to the conduct of the defendant, and 
3. the injury warrants bringing a proceeding.

This means that a claimant must determine when they knew of an injury, or should have known of an injury, that was attributable to a certain defendant. This will “start the clock” for the two-year period in which the claimant must commence legal action.

Many people do not realize that they may lose the ability to pursue repayment of a loan or debt if the debtor fails to make payment and the creditor does not commence a claim within two years.

However, the two-year limitation period may be reset if, before the expiration of the period, the debtor acknowledges the debt or makes a partial payment towards it. The limitation period would begin again at the time of the debtor’s acknowledgment or partial payment. Acknowledgment occurs when the debtor admits and acknowledges that the sum claimed is due and unpaid. It is best if the potential claimant obtains such acknowledgment in writing.

Commencement of Limitation Period

There are two classes of loans that each involve different considerations of when the limitation period may have begun, and specifically when the injury should have been known to have occurred. These are called term loans and demand loans.

Term Loan

A term loan is a loan with a defined term and pre-determined payment plan. A breach of a repayment term within a loan agreement (i.e., a missed payment) starts the clock for the limitation period (if subsequent payments are made pursuant to the terms of the loan agreement). However, default of a single payment only commences the limitation period for that single payment.

Depending on the terms of the term loan, each payment may independently incur its own limitation period beginning on the date that the payment was missed. This situation could allow for partial recovery of a loan if a claim is commenced after the expiration of the limitation period of the first payment, but before the expiration of the limitation period for the final payment. A debtor’s acknowledgement of the missed payments or their part payment towards the missed payments would restart the limitation period for these payments.

The terms of the loan agreement may also work against the lender. Some loan agreements consist of an acceleration clause which makes the entire balance of the loan payable upon default. While this may be beneficial to the lender as a way to recover the entire amount of the loan if the debtor defaults, it also impacts the limitation period. Because the entire loan becomes payable on the date of the first missed payment, the limitation period for the full portion of the loan will start on the date of that single default.

Demand Loan

Unlike term loans that have a pre-determined payment schedule, a demand loan becomes payable upon the demand of the lender. There are no automatic obligations on the debtor to pay. This means that there are no automatic default events upon which a limitations period would begin.

A breach of a demand loan occurs when a lender demands payment, and a debtor fails to make the payment. Until this event occurs, the lender has no knowledge that the debtor would not repay the loan, and therefore there is no knowledge of an injury. Unless the loan agreement provides an expiry date, the loan could extend indefinitely until the lender demands payment.

A demand loan would provide the lender with better control of when payment becomes due and therefore greater certainty of the date that the limitations period begins. There would be no contractual terms that the lender would have to continuously be mindful of in order to protect their interests.

If you require assistance recovering amounts owing to you, reach out to SVR Family Lawyers to ensure you take the necessary steps to protect your interests before the expiry of the applicable limitation period.