When does a right of action accrue on a demand mortgage?

Today's Court of Appeal decision in The Mortgage Insurance Company of Canada v. Grant Estate, 2009 ONCA 655 deals with the issue in depth:

[19]         The 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), 26 R.P.R. (4th) 103 (Ont. S.C.), at para. 34, (appeal dismissed as abandoned 2006 CanLII 6191 (ON C.A.)) However, there are exceptions to this rule depending on the circumstances and the specific terms of the mortgage.

[20]         An 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 the decision of the trial judge that, in the circumstances, the cause of action did not accrue on execution because no monies 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.

[21]         Another 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 In re Brown's Estate, [1893] 2 Ch. 300, where the court said at 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.

[22]         Although 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 £3000. 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 £3000." 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.

[23]         Therefore, 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 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.]

[24]         The 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.
James Morton
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