The Mortgage Insurance Company of Canada v. Grant et al., Estate of Trustees of the Estate of Grant, et al. [Indexed as: Mortgage Insurance Co. of Canada v. Grant Estate]
99 O.R. (3d) 535
Court of Appeal for Ontario,
Feldman, Gillese and Rouleau JJ.A.
September 16, 2009
Limitations -- Actions upon specialty -- Defendants entering into Indemnity Agreement under seal with plaintiff in which they agreed to indemnify plaintiff in event it was called upon to pay under Surety Guarantee Bond -- Indemnity Agreement being specialty within meaning of s. 45(1)(b) and (g) of former Limitations Act -- Plaintiff not having to have made payment under Surety Guarantee Bond when Indemnity Agreement was executed in order for Indemnity Agreement to be specialty -- Limitations Act, R.S.O. 1990, c. L.15, s. 45(1)(b), (g).
Limitations -- Mortgages -- Defendants entering into Indemnity Agreement under seal with plaintiff in which they agreed to indemnify plaintiff in event it was called upon to pay under Surety Guarantee Bond -- Defendants also giving plaintiff three demand mortgages as collateral security to Indemnity Agreement -- Ten-year limitation period for action to enforce mortgages beginning to run when moneys were advanced by plaintiff under Surety Guarantee Bond and became due and owing under Indemnity Agreement.
Mortgages -- Collateral mortgage -- Defendants entering into Indemnity Agreement under seal with plaintiff in which they agreed to indemnify plaintiff in event it was called upon to pay under Surety Guarantee Bond -- Defendants also giving plaintiff three demand mortgages as collateral security to Indemnity Agreement -- Trial judge erring by granting judgment on mortgage covenants for amount in excess of indemnity debt.
In May 1989, the defendant R Inc. (as principal), the plaintiff (as surety) and the Bank (as obligee) entered into a Surety Guarantee Bond in respect of a credit facility granted by the bank to R Inc. Under the Bond, the plaintiff agreed to pay the Bank if R Inc. defaulted. In June 1989, the defendants entered into an Indemnity Agreement under seal with the plaintiff, agreeing to indemnify the plaintiff in the event it was called upon to pay under the Bond. The defendants also gave the plaintiff three demand mortgages with interest at 18 per cent per annum, which were stated to be collateral security to the Indemnity Agreement. In October 1992, the Bank made demand on the plaintiff under the Bond based on R Inc.'s default. In April 1993, the plaintiff paid the Bank. It took no action against the defendants until June 2002, when Power of Sale Notices were issued on the mortgages. In April 2003, the plaintiff commenced an action against the defendants to recover under the Indemnity Agreement. Judgment was granted for the plaintiff. The defendants appealed.
Held, the appeal should be allowed in part.
The Indemnity Agreement was a specialty within the meaning of s. 45(1)(b) and (g) of the Limitations Act, so the 20-year limitation period in s. 45(1)(b) applied. Money does not have to be advanced at the time of execution for a bond, mortgage or other debt obligation to qualify as a specialty, when made under seal with the intent to create a specialty. The action was commenced within the [page536] ten-year limitation period for the enforcement of mortgages. Once the moneys were advanced by the plaintiff to the Bank, the indemnitors were indebted to the plaintiff and immediately owed the money under the indemnity. Because the mortgages were collateral security given by the indemnitors in support of their indemnity obligations, the mortgages became enforceable at the same time. The limitation period began to run when moneys were advanced and became due and owing under the Indemnity Agreement.
The trial judge erred by granting judgment on the mortgage covenants for an amount in excess of the indemnity debt.
APPEAL by the defendants from the judgment of Borkovic J., [2008] O.J. No. 551, 2008 CanLII 5590 (S.C.J.) for the plaintiff in an action on an indemnity agreement and collateral mortgages. [page537]
Cases referred to Alter v. Csontos, [2006] O.J. No. 797, 146 A.C.W.S. (3d) 362, 2006 CanLII 6191 (C.A.), affg [2004] O.J. No. 1590, [2004] O.T.C. 337, 26 R.P.R. (4th) 103, 130 A.C.W.S. (3d) 609 (S.C.J.); Camrost York Development Corp. v. Copthorne Holding Ltd., [2002] O.J. No. 663, 14 C.L.R. (3d) 210, 112 A.C.W.S. (3d) 38 (S.C.J.); Saved by Technology Rentals Inc. v. Thomas (2004), 2004 CanLII 32194 (ON CA), 71 O.R. (3d) 721, [2004] O.J. No. 2636, 188 O.A.C. 292, 132 A.C.W.S. (3d) 158 (C.A.), consd Other cases referred to 872899 Ontario Inc. v. Iacovoni (1998), 1998 CanLII 7129 (ON CA), 40 O.R. (3d) 715, [1998] O.J. No. 2797, 163 D.L.R. (4th) 263, 112 O.A.C. 280, 20 C.P.C. (4th) 1, 19 R.P.R. (3d) 8, 80 A.C.W.S. (3d) 995 (C.A.); Brown's Estate (Re), [1893] 2 Ch. 300 (Ch. Div.); Friedmann Equity Developments Inc. v. Final Note Ltd., [2000] 1 S.C.R. 842, [2000] S.C.J. No. 37, 2000 SCC 34, 188 D.L.R. (4th) 269, 255 N.R. 80, J.E. 2000-1445, 134 O.A.C. 280, 7 B.L.R. (3d) 153, 34 R.P.R. (3d) 159, 98 A.C.W.S. (3d) 85; Hare v. Hare (2006), 2006 CanLII 41650 (ON CA), 83 O.R. (3d) 766, [2006] O.J. No. 4955, 277 D.L.R. (4th) 236, 218 O.A.C. 164, 24 B.L.R. (4th) 230, 153 A.C.W.S. (3d) 1243 (C.A.); Kenmont Management Inc. v. Saint John Port Authority, [2002] N.B.J. No. 32, 2002 NBCA 11, 210 D.L.R. (4th) 676, 248 N.B.R. (2d) 1, 112 A.C.W.S. (3d) 153; Royal Bank v. H. Handys Services Ltd., 1985 CanLII 3837 (MB QB), [1985] M.J. No. 478, 38 Man. R. (2d) 57, 36 A.C.W.S. (2d) 475 (Q.B.); South-West Oxford (Township) v. Bailak (1990), 1990 CanLII 6929 (ON SC), 75 O.R. (2d) 360, [1990] O.J. No. 3307, 73 D.L.R. (4th) 411, 22 A.C.W.S. (3d) 1091 (Gen. Div.); Suburban Construction Ltd. v. Newfoundland & Labrador Housing Corp., 1987 CanLII 198 (NL CA), [1987] N.J. No. 173, 38 D.L.R. (4th) 150, 66 Nfld. & P.E.I.R. 347, 19 C.P.C. (2d) 43, 4 A.C.W.S. (3d) 432 (C.A.); Wiggins Ltd., Ex parte Robertson (Re), [1932] O.J. No. 106, 41 O.W.N. 194, 13 C.B.R. 443 (S.C. (C.A.)), varg 1931 CanLII 444 (ON CA), [1931] O.R. 337, [1931] O.J. No. 423, [1931] 3 D.L.R. 383, 39 O.W.N. 269, 40 O.W.N. 125, 12 C.B.R. 192 (S.C. (A.D.)) Statutes referred to Limitations Act, R.S.O. 1990, c. L.15, s. 45(1)(b), (g) Limitations Act, 2002, S.O. 2002, c. 24, Sch. B, s. 26 Mortgages Act, R.S.O. 1990, c. M.40, s. 31(1) Real Property Limitations Act, R.S.O. 1990, c. L.15 Authorities referred to McGuinness, Kevin Patrick, The Law of Guarantee: A Treatise on Guarantee, Indemnity and the Standby Letter of Credit, 2nd ed. (Toronto: Carswell, 1996) Moss, Gabriel S., and David G.M. Marks, Rowlatt on Principal and Surety, 5th ed. (London: Sweet & Maxwell, 1999) Ogilvie, M. H., Canadian Banking Law, 2nd ed. (Scarborough: Carswell, 1998)
David P. Preger, for appellants. Howard W. Reininger, for respondent.
The judgment of the court was delivered by
1FELDMAN J.A.: -- The respondent recovered judgment against the appellants on an Indemnity Agreement and the collateral mortgages securing the indemnity. The issues at trial and on appeal relate to (1) the date when the causes of action on the indemnity and the mortgages arose for the purpose of determining whether the claims are statute-barred; (2) whether the indemnity is a "specialty" within the meaning of s. 45(1)(b) of the former Limitations Act, R.S.O. 1990, c. L.15, and therefore subject to a 20-year limitation; and (3) if the claims are not barred, the applicable rate of interest on the claims. The appellant also raises the issue as to whether the reasons of the trial judge are sufficient for appellate review. Facts
Facts
2In May 1989, Rebanta Holdings Inc. as principal, the Mortgage Insurance Company of Canada ("MICC") as surety, and the Toronto-Dominion Bank ("TD Bank") as obligee, entered into a Surety Guarantee Bond for two years in respect of a $4 million credit facility granted by the TD Bank to Rebanta. Under this Bond, MICC agreed to pay the TD Bank if Rebanta defaulted on its loan. The Bond was later extended beyond the two years.
3In June 1989, the appellants entered into an Indemnity Agreement under seal with MICC, agreeing to indemnify MICC in the event it was called upon to pay under the Bond. The appellants also gave MICC three demand mortgages on certain Muskoka properties, each in the amount of $825,000 with interest at 18 per cent per annum. These mortgages were stated to be collateral security to the Indemnity Agreement.
4By letter dated October 16, 1992, the TD Bank made demand on MICC under the Bond for the amount of $2,806,182.34, based on the default of Rebanta. However, in subsequent correspondence dated December 8, 1992, MICC delivered $3 million in T-bills to its lawyers to hold until April 30, 1993. The T-bills were to be delivered to the TD Bank on that date, to the extent that Rebanta had not yet paid what it owed to the TD Bank by that time. This arrangement was agreed to by the TD Bank.
5On April 30, 1993, MICC paid the TD Bank by cheque the sum of $2,637,220.01, the amount outstanding on that date, and obtained release of its T-bills. MICC received $488,714.50 on May 7, 1993, from or on behalf of Rebanta, but nothing further [page538] after that. For reasons not explained in the record, no action was taken by MICC to recover under the Indemnity Agreement or to enforce the collateral mortgages until June 2002, when Power of Sale Notices were issued on the mortgages. On April 25, 2003, MICC issued the Statement of Claim in this proceeding.
6Following a two-day trial in Hamilton in November 2007, in brief reasons dated February 19, 2008, the trial judge awarded judgment to the respondent on the Indemnity Agreement with interest at 4 per cent from January 1, 1994. He also awarded judgment on the covenants in the mortgages with interest at 18 per cent, [See Note 1 below] and made an order for possession of the mortgaged properties. He found that the Indemnity Agreement was a specialty under the former Limitations Act and therefore the 20-year limitation period in s. 45(1)(b) applied. He further found that a letter dated May 10, 2002, sent from MICC's solicitors in the matter to Mr. Jordan Grant, constituted a demand on the demand mortgages and, on the basis of the decision of this court in Saved by Technology Rentals Inc. v. Thomas (2004), 2004 CanLII 32194 (ON CA), 71 O.R. (3d) 721, [2004] O.J. No. 2636 (C.A.), the ten-year limitation period under the former Limitations Act began to run from that date, making the claim on the collateral mortgages fall well within the limitation period. Issues
Issues
7The appellants raise six alleged errors by the trial judge: (1) The reasons for judgment are inadequate for judicial review. (2) The trial judge erred in finding that the Indemnity Agreement is a specialty with a limitation period of 20 years. He should have found that the Indemnity Agreement is a simple contract subject to a limitation period of six years, and that the claims under the Indemnity Agreement were therefore statute-barred. (3) As mortgages "payable on demand", the applicable ten-year limitation period under the former Limitations Act [See Note 2 below] began to [page539] run from the date the mortgages were executed, and expired before the claim was issued. In the alternative, if a demand was required to trigger the running of the limitation period, the trial judge erred by finding that the letter of May 10, 2002 constituted a demand under the mortgages. Instead, the trial judge should have found that the mortgages became due and owing in October 1992, when the TD Bank made demand on MICC under the Bond. As the Statement of Claim was not issued until April 25, 2003, the claims under the mortgages are also statute-barred. (4) The trial judge erred by disallowing evidence of Mr. Biderman, the lawyer for MICC on the mortgages, to show that the 18 per cent interest rate contained in the mortgages should have been the same rate as in the Indemnity Agreement. (5) The Notices of Sale under mortgage, although issued within ten years, are void because they claim interest at 18 per cent. (6) By the terms of the Indemnity Agreement, interest only runs following demand. As there was no demand made under the Indemnity except by the Statement of Claim, no interest runs before that date. Analysis (1) Are the reasons for judgment inadequate for appellate review?
Analysis
8The appellants submit that the reasons for judgment in this case are brief and conclusory. It would have been helpful had the trial judge set out his analysis in more detail. However, the trial was a short one, the main issues were legal rather than factual and written argument was submitted on behalf of both parties. In those circumstances, the brevity of the reasons has not so significantly impaired appellate review on the issues raised that I find the reasons to be inadequate. (2) Is the Indemnity Agreement a specialty within the meaning of s. 45(1)(b) and (g) of the Limitations Act, R.S.O. 1990, c. L.15 (the former Limitations Act)?
(2) Is the Indemnity Agreement a specialty within the meaning of s. 45(1)(b) and (g) of the Limitations Act?
9Sections 45(1)(b) and (g) of the former Limitations Act provide:
45(1) The following actions shall be commenced within and not after the times respectively hereinafter mentioned, . . . . . [page540] (b) an action upon a bond, or other specialty, except upon a covenant contained in an indenture of mortgage made on or after the 1st day of July, 1894; . . . . .
within twenty years after the cause of action arose, (g) an action for trespass to goods or land, simple contract or debt grounded upon any lending or contract without specialty, debt for arrears of rent, detinue, replevin or upon the case other than for slander,
within six years after the cause of action arose.
10These sections state, for our purposes, that the limitation period under the former Limitations Act for an action on a "bond, or other specialty" is 20 years and for an action on a "simple contract or debt grounded upon any lending or contract without specialty" is six years. [See Note 3 below]
11The question of what is a specialty for limitations purposes was considered in 872899 Ontario Inc. v. Iacovoni (1998), 1998 CanLII 7129 (ON CA), 40 O.R. (3d) 715, [1998] O.J. No. 2797 (C.A.), where this court had to decide whether an agreement of purchase and sale executed under seal was a specialty. The case failed on the facts because the parties had not actually affixed their seals. However, the court stated that not every contract under seal is a specialty; the contract must also secure a debt obligation. Further, as later noted by the Supreme Court of Canada in Friedmann Equity Developments Inc. v. Final Note Ltd., 2000 SCC 34, [2000] 1 S.C.R. 842, [2000] S.C.J. No. 37, at common law, the creation of a specialty depends on whether the parties intended to create an instrument under seal.
12The New Brunswick Court of Appeal recently conducted an extensive examination of the issue of what is a specialty in Kenmont Management Inc. v. Saint John Port Authority, 2002 NBCA 11, [2002] N.B.J. No. 32, 210 D.L.R. (4th) 676 (C.A.). The majority decision found that for limitations purposes, a specialty is akin to a bond and means a specialty debt. The court examined the wording of the New Brunswick limitations statute which provides a 20-year limitation period for an action on a "recognizance, bond, or other specialty", as well as the former Ontario Limitations Act, which refers to a "bond, or other specialty, except upon a covenant contained in an indenture of mortgage". The court noted that a specialty is described as akin to a bond, a recognizance and a mortgage covenant, and agreed with recent case law which holds [page541] that a specialty is a specialty debt or a covenant that secures a debt (see South-West Oxford (Township) v. Bailak (1990), 1990 CanLII 6929 (ON SC), 75 O.R. (2d) 360, [1990] O.J. No. 3307 (Gen. Div.), at p. 369 O.R.; Suburban Construction Ltd. v. Newfoundland & Labrador Housing Corp., 1987 CanLII 198 (NL CA), [1987] N.J. No. 173, 38 D.L.R. (4th) 150 (C.A.), at p. 152 D.L.R.). Application to the Indemnity Agreement
Application to the Indemnity Agreement
13The appellants submit that the Indemnity Agreement is not a specialty because when it was executed there was no debt, as no money had been advanced by MICC to the TD Bank. This argument cannot succeed. The appellants rely on the following obiter statement made by Cumming J. in Camrost York Development Corp. v. Copthorne Holding Ltd., [2002] O.J. No. 663, 14 C.L.R. (3d) 210 (S.C.J.), at para. 28: "[i]t is arguable that to constitute a specialty, the obligation under seal pertains to a debt created through the advancement of money" (emphasis added). This statement does not imply, as argued by the appellants, that the money must be advanced at the time the documents are entered into. As Robertson J.A. stated in Kenmont Management, at para. 56, a typical bond that is a specialty evidences a present or future debt. The same is true for a mortgage, which often secures future advances. The money does not have to be advanced at the time of execution for a bon
14Furthermore, the sentence that follows in Camrost clarifies that the comparison being made by Cumming J. [at para. 28] is between a specialty and a simple contract: "[t]he mere non-performance of any contractual obligation giving rise to an action for breach of contract under seal [does] not suffice to result in an action upon a 'specialty'".
15There is also no error by the trial judge in concluding that the Indemnity Agreement was intended to be executed under seal. The personal indemnitor, Jack Grant, signed together with a personal seal, and the corporate parties with their corporate seals. There is a recital that the document is signed, sealed and delivered. It secures a potential future debt. There was no evidence to suggest that the intentions of the parties were other than can be discerned from the documents.
16The trial judge therefore made no error in concluding that the Indemnity Agreement was a specialty and that the 20- year limitation period under the former Limitations Act applied. [page542] (3) Was the action commenced within the ten-year limitation for the enforcement of mortgages?
(3) Was the action commenced within the ten-year limitation for the enforcement of mortgages?
17The three mortgages that are the subject of this action are each in the amount of $825,000, they are each payable "on demand" and bear an interest rate of 18 per cent per annum. Also in each case, Box 9(c), "Calculation Period", is left blank. The mortgages are stated to be collateral to the Indemnity Agreement and each provides:
THIS charge is given as collateral security for the carrying out of the Chargors obligations and liabilities pursuant to an Indemnity Agreement executed by, inter alia, the Chargor as Indemnitor in favour of the Chargee whereby the Chargor agreed to indemnify the Chargee with respect to obligations which the Chargee might incur pursuant to a surety Guarantee Bond issued by the Chargee in favour of the Toronto-Dominion Bank to secure a certain indebtedness in the amount of FOUR MILLION ($4,000,000.00) DOLLARS to the said Toronto-Dominion Bank, of Rebanta Holdings Inc.
18The appellants argue that because the mortgages are demand mortgages, the respondent's cause of action on the mortgages arose on the date they were executed: June 1989. In the alternative, they argue that the cause of action arose in October 1992, when the TD Bank made demand on the respondent, MICC, for payment under the Bond, and expired ten years later. In either event, the ten-year limitation period would have expired prior to April 2003, when the Statement of Claim was issued.
19The law with respect to the date a right of action accrues on a demand mortgage is governed by the following principle: the cause of action accrues upon execution of the demand mortgage (Alter v. Csontos, [2004] O.J. No. 1590, 26 R.P.R. (4th) 103 (S.C.J.), at para. 34 (appeal dismissed as abandoned [2006] O.J. No. 797, 2006 CanLII 6191 (C.A.)). However, there are exceptions to this rule depending on the circumstances and the specific terms of the mortgage.
20An example of an exception where the cause of action did not accrue before demand was made was Saved by Technology, the case relied on by the trial judge. In that case, the mortgage provided for no payment of principal or interest for at least ten years. After ten years, the mortgagee was entitled to obtain an appraisal of the property, and depending on the value at that time, the principal became payable. The mortgage did not provide for the payment of any interest. After ten years, the mortgagee obtained the appraisal and demanded payment of the principal. The mortgagor, in response, commenced an action for extinguishment of the mortgage on the basis that enforcement was statute-barred by virtue of the ten-year limitation period under the former Limitations Act. The Court of Appeal upheld [page543] the decision of the trial judge that, in the circumstances, the cause of action did not accrue on execution because no moneys were owing at that time or within the following ten years . The court observed that it would be absurd to find that the limitation period had passed before the mortgagee had any right to enforce the mortgage. The court held that the cause of action accrued on default, which occurred when no payment was made after the mortgagee made demand following the appraisal.
21Another exception to the rule that the cause of action on a demand mortgage accrues from the date of execution arises where the mortgage is a collateral mortgage. The stated rule in the case of a collateral mortgage is that the cause of action accrues on demand. The rule arises from a decision of Chitty J., sitting in the Chancery Division in the case of Brown's Estate (Re), [1893] 2 Ch. 300 (Ch. Div.), where the court said, at pp. 304-305:
[I]t is plain that a distinction has been taken and maintained in law, the result of which is, that where there is a present debt and a promise to pay on demand, the demand is not considered to be a condition precedent to the bringing of the action. But it is otherwise on a promise to pay a collateral sum on request, for then the request ought to be made before action brought.
22Although the exception is broadly stated, from the facts of Brown's Estate, the exception applies where the collateral mortgage is given by a third party who is guaranteeing the primary debt of another. In Brown's Estate, the son, Alfred Brown, granted a mortgage to Stephen Perry on certain property in consideration of a loan of ú3,000. His father, John Brown, joined in the covenant on the mortgage which provided that Alfred Brown and John Brown would, "on demand, pay unto the said Stephen Perry . . . the sum of ú3,000". When John Brown died, the property was of sufficient value to cover the debt and no claim was made in the estate. However, some years later, the estate not having been distributed and the value of the mortgaged property having declined, Alfred was unable to repay the debt, and the mortgagee sought to claim against the estate. The issue was whether the action on the covenant of the mortgage was statute-barred. The court concluded that the action was not barred because the father was acting as a surety and demand was required in order to give the surety a reasonable amount of time to find the money to pay the debt. In those circumstances, the language of the covenant requiring a demand reflected the intentions of the parties.
23Therefore, where collateral security is provided by a surety and is stated to be payable "on demand", demand on the surety is required to trigger the obligation to perform and the resultant accrual of a cause of action against the surety. As [page544] explained by Gabriel Moss, Q.C. and David Marks in Rowlatt on Principal and Surety, 5th ed. (London: Sweet & Maxwell, 1999), at para. 4-108:
If a surety . . . covenants or promises to pay the principal debt "on demand," a demand must be made upon him before he can be sued. His obligation is to pay the collateral sum, and differs from a promise to pay on demand a present debt owing by the promisor. In the latter case an action can be brought at once without any other demand than the writ. (Footnotes omitted)
24The same rationale does not apply, however, where collateral security is provided by principal debtors to secure their own debt. In that case, the collateral security is provided as a source of payment by the principal debtors of their debt, and there is no special need for demand under the collateral security as the principal debtors have full knowledge of, and control over, the status of their debt. Their obligation under the collateral security is to pay the present debt that they owe. Therefore, no demand is required.
25The exception applying to a collateral mortgage given by a surety is consistent with the basic law respecting a demand guarantee given by a third party guaranteeing the debt of another. That law provides that where a demand is stated to be a condition precedent to the enforcement of a guarantee, there is no crystallized liability until demand is made on the guarantor and the limitation period does not commence until that time (Kevin Patrick McGuinness, The Law of Guarantee: A Treatise on Guarantee, Indemnity and the Standby Letter of Credit, 2nd ed. (Toronto: Carswell, 1996) at para. 6.26).
26Relying on this court's decision in Saved by Technology, the trial judge found that the limitation period on a demand mortgage does not run from the date when the mortgage was executed, but from the date of default following demand. He further found that, in this case, demand was made by letter from the respondents' solicitors to Mr. Jordan Grant, of Seaton Development Ltd., on May 10, 2002, regarding MICC's intent to enforce the mortgages. Consequently, the action on the mortgage covenants, commenced on April 25, 2003, was brought within the limitation period.
27In my view, the trial judge was correct in concluding that the action to enforce the collateral mortgages was brought within the ten-year limitation period, but he erred in finding, based on Saved by Technology, that the cause of action on the collateral mortgages accrued when demand was made in May 2002. The mortgage in Saved by Technology was not a collateral mortgage given to secure a primary debt. It was a unique [page545] situation where, although money was advanced when the mortgage was executed, it was not payable until at least ten years later and only after an appraisal was obtained.
28Nor does the exception for collateral demand mortgages apply in this case, because the collateral mortgages are not given by sureties for the principal debtors, but by the principal debtors themselves as security for their own debt. Therefore, the normal rule for demand mortgages applies, subject to the circumstance of this case that no money was advanced on execution of the mortgages.
29In this case, unlike in Alter, where the money was advanced on the execution of the mortgage, which had a five- year maturity date, no money was advanced until April 1993, when MICC paid the TD Bank. This payment triggered the debt obligation under the Indemnity Agreement. Since the mortgages were given as collateral security in respect of the indemnity obligation, the advance of moneys triggering the indemnity obligation also triggered the commencement of the limitation period under the mortgages.
30The appellants argue in the alternative, that their obligation under the Indemnity Agreement (and therefore under the mortgages as well) accrued in October 1992, when the TD Bank made demand on MICC to pay under its Bond, more than ten years before the Statement of Claim was issued. However, the respondent submits, and I agree, that on the record, although the TD Bank made a demand in October 1992, it then agreed to give Rebanta the opportunity until April 30, 1993 to make good its obligation to pay the TD Bank before requiring MICC to advance under its Bond. That forbearance meant that the limitation period did not commence under the Indemnity Agreement until April 30, 1993, when MICC sustained a loss by paying moneys to the TD Bank under the Bond.
31In this case, once the moneys were advanced by MICC to the TD Bank, the indemnitors were indebted to MICC and immediately owed the money under the indemnity. Because the mortgages were collateral security given by the indemnitors in support of their indemnity obligations, the mortgages became enforceable at the same time.
32I conclude that the trial judge was correct in his finding that the action to enforce the mortgages, commenced on April 25, 2003, was brought within the ten-year limitation period. In my view, the limitation period began to run on April 30, 1993, when moneys were advanced and became due and owing under the primary security, the Indemnity Agreement. [page546] 4. Did the trial judge err in ruling that Mr. Biderman, the solicitor for MICC who prepared the mortgages, could not testify regarding the intent of the parties as to the 18 per cent interest rate?
4. Did the trial judge err in ruling that Mr. Biderman could not testify?
33The appellants called Mr. Ron Biderman to testify at the trial. He was the solicitor who acted for MICC in taking the collateral mortgage security from the appellants on the Muskoka properties. He prepared the mortgage documents. He was called to advise the court that it was he who decided to insert the 18 per cent interest figure in the mortgages and to explain what was intended by using the 18 per cent figure. Mr. Biderman's testimony was objected to and the trial judge disallowed his evidence on the basis of solicitor-client privilege and relevance. Although Mr. Biderman began to explain the circumstances, the objection prevented him from completing his explanation. The appellants suggest in their factum that one may infer that Mr. Biderman would have said that the 18 per cent was intended to be a ceiling for the rate of interest which was meant to coincide with the rate under the Indemnity Agreement.
34The appellants submit that the trial judge erred in disallowing this evidence. They say that where the mortgages are stated to be collateral security, securing the payment on the Indemnity Agreement, the interest rate on the mortgage should be the same as on the Indemnity Agreement. Because it was not in this case, the court required evidence to explain the discrepancy.
35This issue was discussed by Kennedy J. in Royal Bank v. H. Handys Services Ltd., 1985 CanLII 3837 (MB QB), [1985] M.J. No. 478, 38 Man. R. (2d) 57 (Q.B.) as follows, at paras. 6 and 7:
The plaintiff argues that the promissory note, and in particular the note dated August 24, 1978, did not represent the entire loan transaction, and as additional security it obtained a personal guarantee from the principals of the company. The guarantee introduced as evidence (Exhibit #5), and signed by Charles Handziuk, as was the note, refers to the principal sum of $95,600.00, with interest from the date of demand for payment at the rate of the bank's prime lending rate of interest, plus 2 1/2%. A definition of the words "prime lending rate" are found in clause 15 of the guarantee, and corresponds to the wording contained in the last promissory note signed by the defendant. The guarantee signed by Charles Handziuk on the same date that he signed the promissory note relating to the same transaction, gives rise to an ambiguity as to which rate of interest was being charged, permitting the admissibility of extrinsic or parole evidence. The complete terms of the agreement are not embodied in the promissory notes. The plaintiff obtained collateral security in the form of guarantees and chattel mortgages, which on their face conflict with the face of the promissory notes, hence it is imperative to determine whether the writing contained in the promissory note constituted complete expression of the contractual arrangements between the parties. The defendant, on the other hand, argues that it is quite possible for [page547] both documents to bear different rates because there may be different risks involved, (i.e. the corporate covenant versus the personal covenant of the principal). While this may be the case in some instances, the evidence here does not support such a contention, on the contrary, I am led to believe that the guarantee was security for the principal loan and it was intended that it bear interest at the same rate as the note.
The resolution of what interest rate was to be applied to the promissory note can only be properly ascertained by the introduction of extrinsic evidence.
36The Indemnity Agreement provides for interest in para. 19(d) as follows:
Any and all amounts which the Surety [MICC] is entitled to be paid under this Agreement shall bear interest, at the lowest annual rate of interest quoted by chartered banks to the most credit-worthy borrowers for prime business loans (as determined and published by the Bank of Canada) on the final Wednesday of the month preceding the month in which a demand for payment thereof is made calculated from the date such demand is made (or deemed to have been made) to the date of payment; the Surety's claim for such interest shall not merge in any judgment against any of the undersigned, and any such judgment shall bear interest at such rate until payment.
37The mortgages are stated to be collateral security "for the carrying out of the Chargors obligations and liabilities pursuant to an Indemnity Agreement . . .". Since the mortgages are stated to be collateral security to secure the obligations under the Indemnity Agreement, there is a possible ambiguity in the potentially conflicting interest rates provided in the two securities for the following reason.
38Because of the collateral nature of the mortgages, if the amount of principal and interest owing under the Indemnity Agreement were paid by the indemnitors to MICC, they would be entitled to receive discharges of their collateral mortgages: Wiggins Ltd. (Re), 1931 CanLII 444 (ON CA), [1931] O.R. 337, [1931] O.J. No. 423 (S.C. (A.D.)), at p. 342 O.R., vard, but not on this point in Wiggins Limited, Ex parte Robertson (Re), [1932] O.J. No. 106, 13 C.B.R. 443 (S.C. (C.A.)).
39The principle is described by M.H. Ogilvie, Canadian Banking Law, 2nd ed. (Scarborough: Carswell, 1998) at 318-19, in this way:
While the word "collateral" is frequently used to mean something of a secondary nature, in the context of banking law it is commonly used as an adjective with "security" meaning literally "situated at the side" or "parallel or additional" to the primary obligation. Collateral liability is an accessory liability as distinguished from the principal or original liability. The term has been said not to be a legal term, but rather a commercial term "of somewhat loose and vague import". Since a collateral security is one taken to secure the performance of an obligation, then upon the performance of the obligation the security should be surrendered or discharged. (Footnotes omitted) [page548]
40Consequently, the debt obligation by the indemnitors under the mortgages cannot exceed their obligation under the Indemnity Agreement, because by paying the amount owing under the indemnity, they would be entitled to a discharge of the mortgages.
41Because of the 18 per cent interest rate in the mortgages, there is the potential for the mortgage debts to grow to become greater than the indemnity debt. Because of this possible ambiguity, it would have been helpful had the trial judge allowed the appellants to lead the evidence of Mr. Biderman to explain the intended legal effect of the 18 per cent interest rate in the mortgages. As Kennedy J. stated in Royal Bank, there may be a reason for the 18 per cent rate, for example, in respect of enforcement of the mortgages vis-à-vis subsequent encumbrances.
42Although Mr. Biderman did not testify, this court must give effect in the judgment to the principle discussed alone. The appellants signed the mortgages. The trial judge was entitled to conclude that there was no basis to amend the 18 per cent interest rate in the collateral mortgages that were signed by the parties. His error was in using that rate to increase the debt owing under the Indemnity Agreement. In my view, the correct remedy is to recalculate the amounts owing by the appellants such that the amount of the judgment on the mortgages does not exceed the amount owing under the primary obligation, the Indemnity Agreement. (5) Were the Notices of Sale void because they claimed 18 per cent interest?
(5) Were the Notices of Sale void because they claimed 18 per cent interest?
43The appellants submit that if the 18 per cent interest rate on the mortgages was in error, then the notices of sale that claimed interest at the rate of 18 per cent per annum did not comply with s. 31(1) of the Mortgages Act, R.S.O. 1990, c. M.40, and the form referred to therein, which requires that the amount owing under the mortgage including interest be stated. As I have found that the trial judge did not err in finding that the 18 per cent figure in the mortgages should be given effect in accordance with the terms of the mortgages subject to the rule in Wiggins Ltd. (Re), this submission must fail. (6) Did the trial judge err in awarding interest on the Indemnity Agreement and in failing to exercise his discretion to reduce the amount owing under the mortgages?
(6) Did the trial judge err in awarding interest on the Indemnity Agreement?
44The appellants submit that the trial judge erred by awarding interest on the indemnity claim when no demand was [page549] made under the Indemnity Agreement to trigger the fixing of the interest rate under para. 19(d). Again, para. 19(d) provides:
Any and all amounts which the Surety is entitled to be paid under this Agreement shall bear interest, at the lowest annual rate of interest quoted by chartered banks to the most credit-worthy borrowers for prime business loans (as determined and published by the Bank of Canada) on the final Wednesday of the month preceding the month in which a demand for payment thereof is made, calculated from the date such demand is made (or deemed to have been made) to the date of payment; the Surety's claim for such interest shall not merge in any judgment against any of the undersigned, and any such judgment shall bear interest at such rate until payment.
45I would not give effect to this submission. The appellants conceded that no demand was required under the Indemnity Agreement (as per para. 14). The trial judge awarded interest on the indemnity debt at 4 per cent, which was the lowest rate requested by the appellants at trial. Demand was deemed to be made when moneys were advanced. The trial judge accepted that interest would run from the date when moneys first became due and owing under the indemnity: April 30, 1993 (although the calculation of prejudgment interest prepared by MICC, and accepted by the trial judge, commenced from January 1, 1994). I see no error in his conclusion. I would not give effect to this ground of appeal.
46The appellants submit that the trial judge should have exercised his discretion to reduce the rate of interest under the mortgages in circumstances where the respondent did not seek to enforce its rights until shortly before the expiry of the ten-year limitation period.
47Based not on discretion, but on the principles discussed above regarding collateral security, the trial judge erred by granting judgment on the mortgage covenants for an amount in excess of the indemnity debt.
48For the purpose of awarding judgment on the Indemnity Agreement and on the mortgage covenants, the trial judge accepted the calculation by MICC, which divided the principal into two amounts: the amount owing under the indemnity minus $825,000, on which it ran interest at 4 per cent; and $825,000, the principal amount of the mortgage, on which it ran interest at 18 per cent. This was an error because it inflated the amount owing by the appellants on their indemnity. The latter calculation is relevant only with respect to enforcing the mortgage security by sale and determining how much of the proceeds of the sale can be applied to the primary indemnity debt. To the extent that there can be separate enforcement of the covenant in the mortgage, except for recovery of payments of taxes and other [page550] mortgage expenses, it must be limited to the amount of the primary debt including interest under the Indemnity Agreement. Conclusion
Conclusion
49The appellants also argue, as an overall submission, that this court should not enforce the claims on the Indemnity Agreement or the mortgages because they were brought after the passage of so much time, even if they were commenced within the applicable limitation periods. They argue that the court articulated its judicial approach to limitations in Hare v. Hare (2006), 2006 CanLII 41650 (ON CA), 83 O.R. (3d) 766, [2006] O.J. No. 4955 (C.A.) that lawsuits should be brought within a reasonable time.
50The purpose of limitation periods is to oblige parties to bring actions within the prescribed time limit. It follows that if an action is brought within the limitation period, the action is not barred and it is not for the court to disallow a claim simply because it is brought at the end of the limitation period. If the court perceives unfairness, it may address that issue in its award of costs. Result
Result
51The appeal is allowed in part. The amount of the judgments is to be recalculated in accordance with these reasons. Having been partially successful, the appellants are entitled to costs of the appeal reflecting partial success, fixed at $15,000, inclusive of disbursements and GST.
Appeal allowed in part.
Notes
Note 1: The calculation is contained in the written submissions of counsel to the trial judge, found in the respondent's compendium on the appeal. The details of the calculation will be referred to later in these reasons.
Note 2: The limitation provisions in Pat I of the former Limitations Act relating to real property are now referred to as the Real Property Limitations Act, R.S.O. 1990, c. L.15, as a result of the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B, s. 26 (effective January 1, 2004) and continue in effect.
Note 3: Under the new Limitations Act, 2002, no reference is made to specialties.
