Freeway Properties Inc. v. Genco Resources Ltd: Financial Statements and Confirmation of Causes of Action Under the Limitation Act
June 25, 2012
In the recent case of Freeway Properties Inc. v. Genco Resources Ltd., 2012 BCCA 258 (“Freeway”), the British Columbia Court of Appeal Court held that a company’s financial statements are capable of confirming a creditor’s cause of action against the company and extending the creditor’s time for commencing an action under the Limitation Act, R.S.B.C. 1996, c. 266 (the “Act”).
The decision concerned appeals from summary trial dismissals of two debt actions. The trial courts held that the actions were statute barred by s. 3(5) of the Act because they were brought after the expiration of six years after the right to bring the actions arose. The Court of Appeal heard the appeals together since they involved common issues of law and fact, related plaintiffs, and a common defendant.
The focus of the appeal was whether the defendant, a public company, had confirmed the plaintiffs’ causes of action by mailing to its shareholders, including the plaintiffs, a copy of the defendant’s financial statements. The financial statements, which were approved and signed by two of the defendant’s directors, contained a balance sheet with an entry of $73,402 described as a current liability “[d]ue to related parties”. The entry made no specific reference to the plaintiffs. The financial statements were also broadly addressed to the defendant’s shareholders rather than addressed specifically to the plaintiffs.
The law of confirmation is governed by s. 5 of the Act. Section 5(1) of the Act provides that if a confirmation takes place before the expiration of a limitation period, the time during which the limitation period runs before the date of confirmation does not count in the reckoning of the limitation period. In other words, when a confirmation occurs before a limitation period expires, the limitation period starts afresh.
In order for a person to have the benefit of a confirmation under the Act, three elements must be established:
- the cause of action must be confirmed, which requires either an acknowledgement of the cause of action, right, or title of another (s. 5(2)(a)(i), Act) or payment in respect of a cause of action, right, or title of another (s. 5(2)(a)(ii), Act);
- the confirmation must be in writing and signed by the maker (s. 5(5), Act); and
- the confirmation must be made to the person or to a person through whom the person claims (s. 5(6)(a), Act).
The first issue on appeal was whether the defendant’s financial statements contained an acknowledgement of the plaintiffs’ causes of action in accordance with s. 5(2) and (5) of the Act. The Court relied on a line of English authorities to conclude that a company’s financial statements are capable of containing an acknowledgement of a cause of action. In the Court’s view, “what must be decided objectively is whether the ‘maker’ of the alleged acknowledgement intended by it to admit liability.” The Court held that the defendant had clearly intended to admit liability to the “related parties” mentioned in the balance sheet, and that the plaintiffs had proven by extrinsic evidence that they were the “related parties”.
The second issue was whether the confirmation was made to the plaintiffs in accordance with s. 5(6)(a) of the Act. The Court held that it was sufficient that the financial statements were sent to the plaintiffs, observing that “nothing in the Act requires that the acknowledgment be ‘specifically written to the plaintiff, or that the communication be addressed to the plaintiff’”. Although not necessary for the determination of the issue, the Court went on to add that “an acknowledgement actually received by the creditor would be effective … whether or not the ‘maker’ of the acknowledgment intended that the creditor should receive it, and it is not necessary to imply such an intention.”
The final issue was whether the effective date of the confirmation was the date of the year end to which the balance sheet related or, rather, the date that the plaintiffs received the financial statements. The Court relied on English and Australian authorities to conclude that the effective date of confirmation was the date of the balance sheet.
Based on that conclusion, the Court dismissed the plaintiffs’ actions as statute barred under s. 3(5) of the Act because the actions had been commenced after the expiration of six years after the date of the confirmation.
The reasoning in Freeway will likely to apply to the new Limitation Act once it has been brought into force: Bill 34 – 2012 Limitation Act (the “New Act”). Like s. 5(1) of the Act, s. 24(1) of the New Act provides that a person may extend a limitation period before it expires if “[b]efore the expiry of [the applicable limitation period] … a person acknowledges liability in respect of the claim”. Similarly, s. 24(6) of the New Act provides, like s. 5(5) and (6) of the Act, that an acknowledgement must be in writing, signed, made by the person making the acknowledgement, and made to the person with the claim.