Canada: Ontario Court Of Appeal Holds That Limitation Periods For Contribution And Indemnity Claims Are Subject To Discoverability

In a decision released May 7, 2018, the Court of Appeal settled the conflicting body of case law as to whether section 18 of the Limitations Act, 2002, SO 2002, c 24 (the "Act") sets out an absolute two-year limitation period for claims of contribution and indemnity. In Mega International Commercial Bank (Canada) v Yung, the Court of Appeal overturned a summary judgment dismissal of a third party claim for contribution and indemnity as statute barred, holding that – contrary to the motion judge's decision – section 18 of the Act does not displace the discoverability principles.

Background: Mr. Yung and Ms. Lai commenced a third party claim against their former lawyer and his firm (Sun) after Mega International Bank (Canada) ("Mega International") sued Yung and Lai on personal guarantees they provided to Mega International's predecessor. Yung and Lai had given the guarantees to secure financing for a Toronto development property (the "Mortgage") but allege that, in connection with a subsequent restructuring transaction, they advised their lawyer to secure the release of the guarantees.

Mega International commenced the underlying claim against Yung and Lai in December 2010. Lai was served in early 2011, and Yung was served in 2013. Yung and Lai did not institute the third party claim until September 1, 2015 – more than two years after each was served with the Statement of Claim in the underlying action. Yung and Lai say that they only learned that they had a potential cause of action against Sun after speaking to another lawyer with respect to Mega International's claim against them. The parties agree that at no time did Sun advise Yung that he might have a cause of action against him and there was no suggestion that Sun advised Lai of the same.

Sun brought a motion for summary judgment to dismiss the third party claims. According to the motion judge's decision, section 18 of the Act sets out an absolute two-year limitation period which began to run from the time Yung and Lai were served with the Statement of Claim by Mega International. As a result, and because the Third Party Claim was commenced more than two years from service of the Statement of Claim, the Third Party Claim was statute-barred. Yung and Lai appealed.

The Basic Principles of Discoverability under the Act: Subject to few exceptions, section 4 of the Act creates a "basic limitation period" of two years commencing on the date when the claim was discovered. Subsection 5(1) goes on to define when a claim was discovered, and subsection 5(2) creates a rebuttable presumption that claim was discovered on the day the act or omission on which the claim is based took place, unless the claimant proves otherwise.

This basic limitation period is subject to an ultimate fifteen-year limitation period set out in section 15 of the Act. The ultimate limitation period is not subject to principles of discoverability.

Contribution and Indemnity Claims Fall within this General Scheme: Section 18 of the Act provides that, with respect to claims for contribution and indemnity and "[f]or the purposes of subsection 5(2) and section 15 [...] the day on which the first alleged wrongdoer was served with the claim in respect of which contribution and indemnity is sought shall be deemed to be the day the act or omission on which that alleged wrongdoer's claim is based took place."

In Mega, the Court of Appeal held that, properly interpreted, section 18 does not create an absolute limitation period. Rather, section 18 works with other provisions of the Act to create a presumed start date for the running of the limitation period, unless the party seeking contribution and indemnity proves that the claim for contribution or indemnity was not discovered (or discoverable through the exercise of due diligence) until some later date.

As the Court of Appeal states:

The Court of Appeal also noted that this interpretation of section 18 is in keeping with the object of the Act: to create a clear and cohesive scheme for addressing limitations issues, one that balances the plaintiff's right to sue with the defendant's need for certainty and finality. That balance is generally achieved by adopting short limitations periods triggered by presumed knowledge of a claim but subject to rebuttal based on the discoverability principles. The Court of Appeal noted there is no reason why a similar balance would not have been intended by the legislature for contribution and indemnity claims.

Indeed, as the Court of Appeal observed, there is an element of injustice in using a limitation period to deny a claim that could not have been discovered with reasonable diligence. Even where the third party claimant was aware of the essential facts giving rise to a claim, as was the case for Yung and Lai, such knowledge does not resolve the discoverability consideration with respect to whether the party with the claim knew that bringing the claim was legally appropriate. This can be a particularly important consideration in claims brought by a client against his/her lawyer where reliance on the lawyer and the risk of abuse of power by the lawyer can make clients vulnerable to delaying legal action. Because of these considerations, and the often inherent complexities involved in discoverability analyses, the Court of Appeal indicated that summary judgment may not be appropriate for such cases (see our prior post on a previous Court of Appeal decision also indicating that claims of solicitor negligence are not appropriate for summary judgment).

The Takeaway: The Court of Appeal's decision in Mega resolves the discrepancy in the case law as to the proper interpretation of section 18. It is now clear that a person with a claim for contribution and indemnity shall be presumed to have discovered its claim on the day that person was served with the claim in respect of which contribution or indemnity is sought, unless the contrary is proved.

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