Hold on a Moment – Relief for Lenders?
The Ontario Court of Appeal’s Consideration of Continuing Guarantees and Material Changes
Lenders across the country can now breathe a sigh of relief as the Ontario Court of Appeal has overturned the lower court’s decision in Royal Bank v Samson Management & Solutions Ltd., 2012 ONSC 3612 “Samson”. The common law normally protects guarantors by voiding a guarantee if alterations are made to the underlying obligations to which the guarantee relates, without the consent of the guarantor. However, with its decision released May 13, 2013, the Court of Appeal held that these common law protections in favour of the guarantor could be removed by clearly drafted language within the guarantee. The contractual language in the Samson guarantee described the guaranteed obligations as “all debts and liabilities, present or future, direct or indirect, absolute or contingent, mature or not, at any time owing by [the primary debtor].” This was determined to be sufficient to waive the normal protections, and allow for material alterations to the guarantee.
As reported in Wickwire Holm’s April 2013 Business Law Newsletter, Samson involved a dispute over a standard form ‘continuing guarantee,’ which guaranteed all present and future indebtedness of the company to the lender, Royal Bank of Canada “RBC”. The Defendant, Cheryl Cusack (“Cusack”), who was the spouse guarantor of the principal of the defendant company Samson, successfully argued in the Superior Court that the guarantee was unenforceable due to ‘material’ changes made by RBC. The Superior Court held that RBC’s authorization of a series of subsequent increases to Samson’s operating line of credit, made without any fresh guarantee obtained from Cusack, constituted a material change.
The common law rule is that significant changes or ‘material’ alterations to a guarantee may void the obligations of the guarantor. However, the Supreme Court of Canada has long held that it is possible to contract out of these protections through the terms of the guarantee itself. In this case, the Court of Appeal determined that Cusack had in fact contracted out of these protections, and was therefore liable.
In determining the validity of the guarantee, the Court of Appeal conducted a two-step analysis. First, it considered whether the changes to the underlying loan were ‘material’ alterations. The actions of RBC, including the subsequent increases to the company’s operating line of credit, were found to have met this standard.
Secondly, the Court of Appeal considered whether the specific language of the guarantee permitted such changes to be made. The court determined that the subsequent increases to the company’s operating line of credit had been clearly contemplated by the parties when the guarantee was signed, and were therefore permitted by the clear language of the guarantee.
To sum up, despite finding that there were significant alterations to the underlying loan arrangements, the personal guarantee of Cusack remained enforceable. Relevant circumstances considered by the court included the understanding between the parties when the guarantee was signed and the clear and unambiguous language of the guarantee.
The Take away
Lenders should be aware that material changes in the underlying loan agreement have the potential to void a guarantee. Although Samson leads us to conclude that Courts will most likely uphold a guarantee if warranted by the circumstances, the language of the contract and the parties’ intentions, it is best to avoid litigation altogether. It is therefore important to include language in continuing guarantees which clearly describes and anticipates changes in the guarantor’s risk exposure, as would be expected in such a guarantee.
It is worth noting that it is not enough to simply include a ‘blanket provision’ authorizing a lender to make alterations. “Vague, imprecise and general” language does not give lenders the right to make material alterations; only clear and unambiguous language will satisfy the court that the lender has the authority under the guarantee to make material changes which substantially increase a guarantor’s risk.
We stand by the recommendation from our earlier newsletter; as it is difficult to predict what a particular court will consider a “substantial increase” in risk, it is best if lenders obtain a fresh guarantee for all new loans.
On a Related Note
A recent decision from the British Columbia Supreme Court also touches on the issue of material changes. In Coast Mountain Aviation Inc. v. M. Brooks Enterprises Ltd (2012) BCSC 1440, “Mountain Aviation” due to the lender’s breach of condition, the Court held that a guarantor was released from liability under the guarantee.
Of particular interest is the discussion surrounding variations or breaches of a principal contract or a guarantee. As noted by Justice Fenlon, certain types of sureties may be invalidated for changes made to the contractual terms, depending on the significance of the change. Some, such as compensated sureties, will not be easily dismissed even for significant changes.
The decision from the British Columbia Supreme Court is not binding on Nova Scotia lenders; however, this case serves as a reminder to lenders to carefully consider and strictly abide by the conditions set out in the guarantee. As demonstrated by the Mountain Aviation case, it is possible that failing to comply with such conditions could open the door for a guarantor to be released from the guarantee.
This newsletter is produced by Wickwire Holm to keep our clients and friends informed of developments in the law and immerging issues. It is intended for general information purposes only. In preparing and circulating this newsletter, Wickwire Holm is not providing legal or other professional advice. Readers are urged to consult their professional advisers before taking any action on the bases of information contained in this newsletter.
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