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May 2018

Discoverability Dilemma: Limitation Periods for Contribution and Indemnity Claims

Case Study: Mega International Commercial Bank (Canada) v. Yung

Adam Grant
Adam Grant,
Partner

By Adam Grant

Introduction

In the recent decision of Mega International Commercial Bank (Canada) v. Yung (“Mega International”), the Ontario Court of Appeal provided an analysis of the contentious issue of whether the limitation period for a contribution and indemnity claim (under section 18 of the Limitations Act, 2002 (“the Act”)) is an absolute limitation period, or if it is subject to issues of discoverability.

Section 18 of the Act provides that, in respect of a claim for contribution and indemnity, the incident date for the purpose of the limitation period is deemed to occur on the date that the party is served with the claim seeking damages from them. Courts had previously been divided as to whether this meant that a party had a fixed two years from service of a claim to commence an action for contribution and indemnity, or if this could be extended due to issues of discoverability.

The Court ultimately allowed the appeal, finding that that the two year limitation period prescribed by sections 4, 5(2), and 18 for contribution and indemnity claims presumptively begins on the date of service of a claim in which contribution and indemnity is sought, but this presumptive date can be rebutted by the discoverability principles under section 5 of the Act.

Background

The Appellants, Mr. Yung and Ms. Lai, brought a third party claim against their former lawyer and law firm after Mega International Commercial Bank (“Mega International”) sued the Appellants on personal guarantees they provided. Ms. Lai was served with a Statement of Claim on January 6, 2011, as a guarantor of the Mortgage. On March 2, 2011, Ms. Lai filed a Statement of Defence and cross-claim against Mr. Yung, but made no third party claim.

The Appellants brought the third party claims in 2015, more than two years after Mega International had served Ms. Lai. The Appellants alleged that after being instructed to do so, the Respondents failed to obtain releases on the personal guarantees provided by them. As a result, the Respondents moved for summary judgment, seeking to dismiss the third party claims. Based on his findings, the motion judge ruled that the third party claims were statute-barred by the absolute limitation period under section 18 of the Act. He further held that there was no fraudulent concealment that would allow the Appellants to avoid the two-year limitation period.

Issues

The Appellants appealed the decision on the summary judgment motion.The issues on appeal were: (1) Does section 18 of the Act establish an absolute two-year limitation period or does it incorporate discoverability principles; and (2) if the discoverability principles under sections 4 and 5 of the Act do apply, whether the motion judge's findings regarding the fraudulent concealment determination be relied upon to resolve the discoverability issue.

Law and Analysis

On analysis, the Court found that the words of section 18, interpreted in their grammatical and ordinary sense, did not establish an absolute limitation period, nor did they displace the discoverability principles under sections 4 and 5. Rather, the Court held that sections 18 and 5(2) worked “hand in glove” in contribution or indemnity claims, together identifying the presumptive limitation period:

"s. 18 works with other provisions of the Limitations Act, 2002 to create a presumed start date for the running of the limitation period. That presumed limitation period start date will result in a claim for contribution or indemnity being statute-barred two years after the party seeking contribution or indemnity is served with a claim in the proceeding in which contribution or indemnity is sought, unless that party proves that the claim for contribution or indemnity was not discovered and was not capable of being discovered through the exercise of due diligence until some later date."

...there was no fraudulent concealment because the Appellants were aware of the essential facts...

In addition, the motion judge made a finding that there was no fraudulent concealment because the Appellants were aware of the essential facts giving rise to a claim against the Respondents. The Court held that the finding that the Appellants were aware of the essential facts giving rise to a claim against the Respondents was not a finding of discoverability. The motion judge's knowledge finding was not the same as a discoverability finding since the knowledge finding did not resolve the discoverability consideration with respect to whether the Appellants knew that bringing the claim was legally appropriate. The Court found that this was an important consideration in cases where a party is claiming to rely on the superior knowledge and expertise of the defendant in a professional relationship.

The Court held that although a motion judge's exercise of the summary judgment rules attracts deference, where a motion judge cannot make the necessary findings of fact or apply the legal principles to reach a just and fair determination, the decision is reviewable when the motion judge applies an incorrect principle of law or errs with respect to an extricable question of law. In this instance, the Court found that the motion judge committed an error of principle making it inappropriate for the Court to rely on his factual findings of the Appellants' knowledge of their third party claims as dispositive of the appeal. His misinterpretation of section 18 affected his understanding of the nature and complexity of the case. The motion judge assumed the primary issue was the application of the absolute limitation period when the key issue was discoverability.

Conclusion

Problems often arise in litigation when information as to potential third party claims comes to light only after certain evidence or information is provided, by which time there may be a limitation period issue. The courts have grappled with the question of whether the discoverability principle in section 5(2) of the Act applies to the running of a limitation period for third party claims of contribution and indemnity.

Over the past few years, the Ontario Superior Court's decisions reflected a split on the proper interpretation of section 18. The lack of appellate authority on the issue until the Court of Appeal's decision in Mega International Commercial Bank (Canada) v. Yung, caused counsel and litigants to proceed with caution on the basis that the limitation period was absolute and could not be extended by the discoverability principle.

As a result, this decision now permits the pursuit of Third Party Claims where the party is only discovered as having some potential liability during the course of litigation, or where more than two years have elapsed from service of the original claim. Ultimately, this will allow all potentially liable parties in an action to be brought into the litigation, without the imposition of fixed limitation periods that would operate without regard for discoverability.


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