Commercial Litigation and Dispute Resolution Blog

Here’s a familiar scenario:  A service provider that has been invoicing its client for several years at some point discovers that it has been calculating its services incorrectly and has missed billing for an item. The mistake goes back a number of years. The service provider then sends a “corrective invoice” containing the previously missed charges to the client, several years after the fact.

Can the service provider in this scenario expect to now be paid?  

When does the limitation period start to run in relation to services for which no invoice was issued? Is it possible to effectively extend the limitation period by issuing a corrective invoice?

In the standard case, issuing a corrective invoice does not restart the clock

A recent Alberta Court of Queen’s Bench decision—Royal Well Servicing Ltd v Murphy Oil Company Ltd, 2018 ABQB 514 (Murphy Oil)—highlights a number of important points to be considered by anyone seeking to recover amounts that were not previously invoiced but should have been. In these circumstances, issuing a “corrective invoice” now for past invoice errors and waiting until the corrective invoice is refused by the recipient will not restart the limitation period. 

The decision in Murphy Oil clarifies what has been a murky area in limitations law, particularly in Alberta but also in other jurisdictions that have a modern limitation statute containing analogous provisions.

While the law is clear that knowledge of the exact quantum or extent of damages is not required in order to trigger the starting of the limitation period, the corrective invoice presents a situation where the limitations clock may be triggered (1) prior to any actual breach of contract occurring, and (2) prior to any actual economic damages being suffered (technically, there will have been no breach of contract or actual loss until the corrective invoice is issued and the recipient refuses to pay).

The facts of Murphy Oil

In Murphy Oil, the factual circumstances were along the lines of the scenario described above: a service provider (the Plaintiff, Royal Well Servicing Ltd., provided various services to the defendant, Murphy Oil Company Ltd. at various oil drilling sites in Alberta, pursuant to a long-term service agreement.

Throughout their relationship, Royal completed a daily work record that included checkboxes for the services provided on site. Royal would then invoice Murphy for each job, usually within a week of completing that job. The service agreement stipulated that Murphy was to pay the invoices issued by Royal within 45 days after receipt of the Royal invoice, which Murphy usually did.

At some point after the payment of the last invoice, Royal discovered a series of missed charges going back several years that had not been recorded on the daily work record and therefore had not been invoiced for.

Royal issued new, corrective invoices, to account for the amounts that were missed and not included in the original invoices and Murphy refused to pay these amounts.  Royal then issued a statement of claim seeking to recover the missing charges.

What the parties argued

Royal argued that the injury did not occur until (1) after the invoice was issued and (2) the defendant failed to pay it. It argued that both of those conditions must be satisfied to start the limitation clock ticking. It argued that the injury only occurs after there is an economic loss, which only occurs after the non-payment of the corrective invoice.

Murphy argued that the injury occurs when the work is complete and the recipient of those services does not pay for them (regardless of whether an invoice was issued or not).  It argued that the injury is the economic loss that the claimant suffers when this happens, not the non-payment of the invoice by the defendant (at para 26).                   

The decision (it will now be harder to recover those stale billings)

In her decision, Justice Yungwirth held that Royal ought to have known it had a claim, and that the limitation period for Royal began to run from “a reasonable time” after the services were first completed—not after the Murphy refused to pay the corrective invoice.

Note that a “reasonable time” is the time customarily allotted by the parties for payment of the invoice. In Royal’s case, that timeframe was 45 days. But if a service agreement specifies a different timeframe in which invoices must be paid, the court will apply that timeframe in addition to the two year limitation period. What is more, the limitation periods arose on a rolling basis – from invoice to invoice.

The key question in determining when the limitation period should start running was whether the claimant knew or ought to have known of the material facts underlying its injury. But “injury” here did not require actual economic injury—only the existence of services performed that had not been invoiced for. At paragraph 29, she held:

Royal was the party who, with due diligence, would have known at the time of sending its original invoices, that some of its services had not been billed and that Murphy had not paid for those services. Royal is relying on its own lack of diligence in failing to issue the correct invoices and in failing to issue further invoices within a reasonable period of time, to extend the limitation period. Issuing a correcting invoice in these circumstances should not delay or re-start the running of the limitation period.

The discoverability principle, as codified in section 3(1) of the Alberta Limitations Act, states that a defendant can rely on a limitations defence if a claimant does not seek a remedial order within 2 years after the date on which the claimant first knew, or in the circumstances ought to have known:

1. that the injury for which the claimant seeks a remedial order had occurred,
2. that the injury was attributable to conduct of the defendant, and
3. that the injury, assuming liability on the part of the defendant, warrants bringing a proceeding.

Applying the discoverability principle, Justice Yungwirth was satisfied that, at the time of providing the services plus a reasonable time for payment, Royal knew or ought to have known (1) the work it had done, and (2) the services it had invoiced for. Therefore, Royal could have discovered, or “ought to have known,” that some services had not yet been billed and it had a claim for unpaid services against Murphy. 

Is the corrective invoice dead?

The message from Murphy Oil is clear: be diligent in your invoicing. If a service provider makes an error that could have been discovered through reasonable diligence and then seeks to recover amounts that were not invoiced but should have been, it has only two years following the completion of that work (plus the amount of time routinely allotted for payment of invoices) to do so.

Murphy Oil clarifies application of the discoverability principle to the standard case of missed charges and after-the-fact invoicing but does this mean that issuing corrective invoices more than two years after the incorrect invoices were issued is futile?

In a straightforward case (in Alberta and other jurisdictions applying Murphy Oil reasoning)– maybe.  In the standard “I just realized I forgot to issue an invoice 4 years ago” stale invoice case that Murphy Oil addresses, the material facts are arguably the work that was done, and the work that was invoiced for. A party should know or ought to know that payment was owed, and it should invoice properly. Reasonable due diligence is required.

But in more complicated cases, it’s going to be less clear. Can the late biller show that it was not through any lack of reasonable diligence that the charges were missed in the original invoice? As is always the case in limitations law, where the claimant could not reasonably have discovered the material facts underlying its claim, that claimant may still be entitled to recover, even if more than 2 years after the fact.