Two Years Means Two Years: Judicial Clarification On The Limitation Periods For Third Party Contribution And Indemnity Claims

Since the publication of this blog, a Notice of Appeal was filed on November 5, 2019 (Court of Appeal File no CA 46490).

The Limitation Act, S.B.C. 2012 c. 13 (the “Act”) has been in effect for over six years, but its application to third party contribution and indemnity claims has only just been clarified by the BC Supreme Court. Until recently, jurisprudence on this issue comprised of conflicting masters’ decisions, few of which included substantive discussion about whether the court retains discretion to grant leave to file a third party notice after the limitation period for the third party claim expired.

Master Elwood conducted a thorough statutory interpretation analysis in Dhanda v. Gill, 2019 BCSC 1500, and concluded that section 22(2) of the Act bars a third party notice claiming contribution or indemnity after the limitation period for the claim expired. One month after Dhanda was released, Mr. Justice Kent agreed and adopted Master Elwood’s analysis and conclusion in Sohal v. Lezama, 2019 BCSC 1709.

Dhanda and Sohal were determined in the context of motor vehicle accident claims. However, third party proceedings are commonplace in many practices. These decisions remind counsel to give early consideration to potential third party proceedings to ensure all potential claims are commenced within the applicable limitation period.

The Act

The Act establishes a basic two year limitation period for most claims. The two years start to run when a claim is discovered and section 16 of the Act sets out the discovery rules specific to contribution and indemnity claims. Section 21 provides a 15 year ultimate limitation period for contribution and indemnity claims, which starts to run when pleadings are served, regardless of discovery.

Section 22 of the Limitation Act provides:

22   (1) If a court proceeding has been commenced in relation to a claim within the basic limitation period and ultimate limitation period applicable to the claim and there is another claim (the “related claim”) relating to or connected with the first mentioned claim, the following may, in the court proceeding, be done with respect to the related claim even though a limitation period applicable to either or both of the claims has expired:

1. 1. proceedings by counterclaim may be brought, including the addition of a new party as a defendant by counterclaim;
   2. third party proceedings may be brought;
   3. claims by way of set off may be advanced;
   4. new parties may be added or substituted as plaintiffs or defendants.

(2) Nothing in subsection (1) gives a person a right to commence a court proceeding under subsection (1) (a) or (b) in relation to a claim for contribution or indemnity after the expiry of a limitation period applicable to that claim.

Section 22(2) of the Act prescribes a two year limitation period for contribution and indemnity claims brought by way of third party notices

The central issue raised in Dhanda and Sohal was whether section 22(2) barred contribution and indemnity claims brought by third party notices. Justice Kent and Master Elwood concluded that it did.

Citing a prior master’s decision, the applicants in Dhanda and Sohal argued that “court proceeding” in section 22(2) referred to an originating action for contribution and indemnity, as opposed to a third party notice in an existing action. This interpretation would mean that a party could commence third party claims for contribution and indemnity even though the limitation period for that claim expired, pursuant to section 22(1)(a) or (b), but not a new action.

Master Elwood found that “court proceeding” in section 22(2) could only refer to third party notices commenced within an existing action if it is to be read consistently with section 22(1) and the Act as a whole.

First, section 22(2) specifically refers to “court proceeding under subsection (1)(a) or (b)”. Subsections 1(a) and (b) refer to counterclaims and third party claims respectively. Neither can be started as a new action because the very nature of these claims is that they only exist within an existing action.

Master Elwood rejected the argument that section 22(2), interpreted to apply to third party proceedings for contribution and indemnity, is inconsistent with section 22(1). Section 22(1)(b) permits third party proceedings even though the limitation period for that claim has expired. Rule 3-5 outlines the circumstances in which third party proceedings may be commenced. These include claims for contribution and indemnity, in situations where the relief sought is related to or connected to the subject matter of the existing action, or where there is a question or issue involving the third party that is substantially the same or connected with the issues or relief in the exiting action. Thus, “third party proceedings” to which section 22(1)(b) applies are broader than those which section 22(2) bars. In other words, section 22(2) merely limits the scope of third party proceedings which may be commenced outside the applicable limitation period.

Secondly, if section 22(2) applied generally to originating claims for contribution and indemnity, it would be duplicative of sections 16 and 21 of the Act, which already provide that claims for contribution and indemnity “must not be commenced” after the expiry of the applicable limitation period. This would run contrary to principles of statutory interpretation, which assume Legislature avoids repeating itself. Master Elwood concluded that in order for section 22(2) to have any role that is not duplicative of other provisions in the Act, it must apply to third party notices, not originating actions.

To this, Justice Kent added that it would make no practical sense to impose a limitation period for an originating action and remove that limitation for third party proceedings, when contribution and indemnity claims are traditionally brought by way of third party proceedings.

Both Justice Kent and Master Elwood concluded that it was the Legislature’s intention to treat third party claims for contribution and indemnity differently than other related claims. In so finding, they outline the development of the law around limitation periods for contribution and indemnity claims. They note that the old Limitation Act, RSBC 1996, c. 266, did not specifically address limitation periods for contribution and indemnity claims. Based on case law, the limitation for contribution and indemnity claims under the old Limitation Act did not start to run until the plaintiff obtained judgement in the underlying action. The effect was that third party claims for contribution and indemnity could be started years after the events giving rise to the claim.

In contrast, the new Act encourages litigants to commence contribution and indemnity claims earlier. Master Elwood referred to the White Paper on Limitation Act Reform, which was prepared by the British Columbia Ministry of Attorney General Justice Service Branch, in support of this position. The White Paper included a draft provision, which ultimately became section 22 of the Act. The commentary for this draft provision indicated that this section intended to remove the limitation period for related claims. It then explains that section 22(2) is intended to exclude the application section 22(1) to claims for contribution and indemnity, which were to be governed by the limitation periods set out in sections 6, 16, and 21 of the Act. On this basis, Master Elwood concludes that section 22(2) “represents a legislative choice to time limit claims for contribution or indemnity”. Justice Kent agreed and also noted that Hansard also supports Master Elwood’s conclusion, in which the then Attorney General of BC confirmed that contribution and indemnity claims were to be governed by section 16, not section 22(1), of the Act.

The court does not have discretion to permit a third party notice for contribution and indemnity if the limitation period has expired

Justice Kent considered whether the court had discretion to permit third party notices, notwithstanding section 22(2) of the Act. He concluded the court did not have such discretion.

Rule 3-5(4) provides that, if a party wishes to file a third party notice more than 42 days after being served with a notice of civil claim, that party must obtain leave of the court. Case law developed before the implementation of the Act outlined various factors for the court to consider whether it should grant leave in the circumstances. One of the factors was the expiry of the applicable limitation period for the third party claim, although this was not determinative. The ultimate question was whether the proposed third party would suffer prejudice if leave was granted.

Justice Kent concluded that the judicial discretion authorized by Rule 3-5(4) does not permit the court to extinguish a proposed third party’s substantive legal defence to a contribution and indemnity claim based on an expired limitation period. This is because the Supreme Court Civil Rules are delegated legislation, created by regulation, and therefore subordinate to statutes, like the Act. Procedural rules cannot extinguish a substantive cause of action or defence.

Although not addressed in Dhanda or Sohal, arguably, section 22(4) of the Act provides further statutory context for this interpretation. Section 22(4) provides that “

(4) Subsection (1) does not interfere with any judicial discretion to refuse relief on grounds unrelated to the expiry of a limitation period.

In other words, judicial discretion based on a prejudice analysis is permitted for the claims enumerated in section 22(1). However, there is no explicit permission for the third party claims for contribution or indemnity referenced in section 22(2). Arguably, then, the Legislature’s silence can be interpreted to mean that it did not intend to grant the same discretion for the court to consider factors unrelated to the limitation period for third party claims for contribution or indemnity.

New approach to determine whether to grant leave to file third party notices

Given his conclusion on the application of section 22(2) on third party claims for contribution and indemnity, Justice Kent outlined a new approach for courts to determine whether leave should be granted under Rule 3-5(4).

1. Has the limitation period for the contribution and indemnity claim expired?
   1. If so, leave should not be granted.
   2. If not, the court may exercise its discretion under Rule 3-5(4), by taking into account the well-established factors for this discretion.
2. If the parties disagree as to whether the limitation period has expired, and the court cannot determine this issue on the leave application, the court should:
   1. Consider the factors for the exercise of its discretion under Rule 3-5(4);
   2. After this consideration, if the court is inclined to grant leave, it should direct that the merits of the limitation defence be decided in the third party proceedings or a separate action.

Justice Kent’s decision in Sohal is an important reminder to defence counsel, as well as claims handlers, to give timely consideration to potential third party claims for contribution and indemnity in order to preserve a defendant’s right to make these claims. It is also a reminder to counsel that, if a defendant wishes to rely on a later date of discovery in an application for leave under Rule 3-5(4), it should clearly outline the date of discovery for the court’s consideration.

Since the publication of this blog, a Notice of Appeal was filed on November 5, 2019 (Court of Appeal File no CA 46490).