Understanding the Importance of Limitation Periods in Business: Why Business Owners Must Act Swiftly on Unpaid Invoices
Running a business is no small feat. Business owners juggle countless responsibilities on a daily, weekly, and monthly basis — from marketing and customer service to logistics, human resources, accounting, and compliance. Among the most critical challenges faced by any business owner, regardless of industry, is ensuring a steady flow of revenue. This typically comes down to one essential activity: getting customers in the door and making sure they pay for the goods or services provided.
In many industries, especially service-based ones, it is common practice to deliver services or provide products with the understanding that the customer will pay at a later date. This is often done through invoicing — a process where a business extends credit to the customer by allowing payment terms such as Net 30, Net 60, or Net 90. These terms specify the number of days the customer has to pay after receiving the invoice.
While this system works well in most cases, it is not without its risks. Unfortunately, some customers — whether intentionally or due to oversight or financial hardship — may fail to pay their invoices. When this happens, the business owner is put in a difficult position. They have already provided the product or service and are now out of pocket for any associated costs, such as materials, labor, subcontractor expenses, or time spent.
The Emotional and Operational Toll of Unpaid Invoices
When invoices go unpaid, it places a significant burden on the business owner. It’s not just about the money owed — it’s about the disruption to cash flow, the uncertainty it creates, and the frustration that builds over time. Many small and medium-sized business owners operate on tight margins and don’t have the luxury of absorbing bad debts without serious consequences. These unpaid invoices can jeopardize payroll, inventory purchases, vendor payments, and more.
Despite the seriousness of the issue, many business owners hesitate to aggressively pursue delinquent customers. They worry that pushing too hard will damage the business relationship or lead to negative reviews. In some cases, they may be too overwhelmed by other operational concerns to follow up diligently. As a result, they might only send a few sporadic reminder emails or account statements, hoping the client will eventually pay.
Unfortunately, this kind of passive approach often leads to even longer delays, and in some cases, the business may never recover the money owed. Time passes, frustration builds, and eventually the business owner may feel they have no choice but to escalate the matter to a formal legal proceeding. However, by the time they reach this decision, valuable time may have already been lost — and with it, their legal right to pursue the claim in court.
Why Time Matters: The Limitation Act, 2002
In Ontario, the Limitation Act, 2002 governs the time period within which legal claims must be initiated. This law is designed to create fairness and finality in legal relationships by encouraging parties to bring disputes forward while evidence is still fresh and parties’ memories are intact.
Under the Act, the basic limitation period to bring a civil claim — such as suing a customer for unpaid invoices — is two years. This means that if a business wants to sue a client for non-payment, it generally has two years from the date the claim arose to start legal proceedings.
There is also a longer, “ultimate” limitation period of 15 years, which acts as a final cutoff for all claims, regardless of when the issue was discovered. However, most disputes will fall within the much shorter two-year window, which is why business owners must be vigilant.
When Does the Clock Start Ticking?
This is one of the most important — and often misunderstood — aspects of the law. Determining when the two-year limitation period begins can be complicated. It is not always the date when the service was performed or when the product was delivered.
According to Sections 4 and 5 of the Limitation Act, the two-year limitation period starts on the earlier of:
- The day the loss occurred, or
- The day the claimant knew or ought reasonably to have known that a loss occurred and that a legal proceeding would be an appropriate means to seek a remedy.
In the context of unpaid invoices, the date the service was rendered is not necessarily the date the clock starts. Instead, the limitation period typically begins once the payment is due and the client fails to make payment.
Example 1: With Specific Payment Terms
If the invoice contains clear payment terms — such as Net 30 (payment due 30 days after invoicing) — the limitation clock would begin on the 31st day, assuming no payment is received. From that point, the business has two years to file a legal claim.
Example 2: Without Specific Payment Terms
When there is no written agreement or defined payment terms, things get murkier. In such cases, the court applies a reasonable person standard — that is, when would a reasonable business owner have known that they weren’t going to get paid?
Typically, this would be the date the first invoice is sent, or shortly after a reasonable grace period has passed with no payment or communication from the customer.
The Danger of Waiting Too Long
One of the common traps business owners fall into is delaying legal action because they hope the customer will eventually pay. They may think that continuing to send reminders and A/R statements is enough to keep the possibility of payment alive. While it’s wise to maintain communication and try to settle disputes amicably, these actions do not stop the limitation clock.
If the two-year period expires without a claim being filed, the business owner loses their legal right to sue — permanently. Courts strictly enforce limitation periods, and once the deadline passes, the case will almost certainly be dismissed, regardless of the merits.
Exceptions and Ways to Extend or Reset the Limitation Period
While the two-year limitation period is the general rule, there are a few important exceptions and nuances to be aware of:
1. Demand Letters and Section 5(3)
Under Section 5(3), if a debtor is required to perform an obligation only upon demand (such as payment upon receiving an invoice or a formal demand letter), then the limitation period starts from the date of that demand. However, this does not mean that sending a demand letter resets the limitation clock indefinitely. It only delays the start if no demand was made before. Once two years pass, a new demand will not revive a stale claim.
2. Acknowledgment of Debt – Section 13
Section 13 of the Act provides a powerful tool for extending the limitation period. If a debtor acknowledges the debt in writing or makes a partial payment, the limitation period resets and starts from the date of acknowledgment.
Key conditions include:
- The acknowledgment must be made before the two-year period expires.
- It must be signed by the debtor (or an authorized agent).
- Partial payments also qualify under Section 13(5).
This means that even a small payment toward the outstanding balance can give the business owner another two years to pursue the full amount — provided it’s properly documented.
3. Minors and Incapable Persons
For individuals who are minors, the limitation period does not begin until they reach the age of majority (18 in Ontario). Similarly, for individuals who are mentally incapable of managing their affairs, the limitation clock is paused until they are no longer incapable or are represented by a litigation guardian.
4. Mediation and Arbitration
If both parties agree to resolve the dispute through mediation or arbitration, the limitation period is suspended while those processes are ongoing. If mediation fails, the clock resumes where it left off.
5. Timeless Claims – Sections 16 and 17
Certain types of claims are exempt from limitation periods altogether. These are limited and include things like claims for sexual assault, or debts owed to the Crown (government). While they may not apply to typical commercial disputes, they are worth noting.
What Business Owners Should Do
The bottom line is clear: don’t wait.
If a client is not responding or paying their invoice, continue to send reminders and statements — but don’t rely on that alone. The earlier you seek professional legal guidance, the better your chances of recovering what you’re owed. A licensed paralegal or lawyer can:
- Assess whether your limitation period has started or expired
- Send a formal demand letter
- Determine if there is an opportunity to reset the clock via acknowledgment
- Help you file a claim in Small Claims Court or Superior Court, if appropriate
- Negotiate settlements or participate in mediation on your behalf
Even if you do go to court, the vast majority of cases settle before trial. Filing a claim is not about escalating the conflict — it’s about protecting your legal rights and putting pressure on the other party to resolve the matter seriously.
Conclusion
Dealing with unpaid invoices is a frustrating reality of doing business. But frustration alone isn’t a legal remedy. The law in Ontario provides a clear but limited window of opportunity to pursue your rights — usually just two years from when you knew or should have known that you weren’t getting paid.
Understanding the Limitation Act, 2002 and acting within its bounds is crucial to protecting your business’s financial health. If you wait too long, even the most well-documented and justified claims can become legally unenforceable.
So don’t wait. Monitor your accounts receivable closely. Follow up consistently. And when needed, get professional legal advice without delay. Your rights — and your bottom line — depend on it.