COURT OF APPEAL FOR ONTARIO

DATE: 20000623

DOCKET: C29914

AUSTIN, MOLDAVER AND BORINS JJ.A.

B E T W E E N :

ROYAL TRUST CORPORATION OF
CANADA

Plaintiff

• and -

502759 ONTARIO LIMITED, ALISA
DAVIES, SUSAN MCDOWELL, 603674
ONTARIO LTD., DAIMLER
INVESTMENTS LIMITED, CAROLINE
JOSEPHINE FLIGHT, Executrix and
Trustee of the ESTATE OF MCGREGOR
CHARLES FLIGHT, Deceased, JAMES
KEITH WICKENS and JAMES RICHARD
REILLY

Defendants
(Appellants)

Duncan M. MacFarlane, Q.C.
C. Gualtieri
for the appellants

A. Irvin Schein
Stephen C. Nadler
for the respondent

Heard: May 17 and 18, 2000

On appeal from the judgment of Ground J. dated May 6, 1998 and
amended July 17, 1998.

AUSTIN J.A. (dissenting in part):

[1] The appellants, 603674 Ontario Ltd. (“603”) and Daimler
Investments Limited, Caroline Josephine Flight, Executrix and
Trustee of the Estate of McGregor Charles Flight, and James
Richard Reilly (“the guarantors”) were respectively the mortgagor
and some of the original guarantors of a mortgage in the sum of
$500,000 granted to the respondent, Royal Trust Corporation of
Canada (“Royal”) for a term of five years.

[2] Briefly stated, the facts are that 603 granted the mortgage
to Royal in March 1989, the guarantors guaranteed performance by
603, 603 sold the property to Angelo Benakopoulos
(“Benakopoulos”) and others in November of the same year and
Benakopoulos sold to 502759 Ontario Limited (“502”) in December
1993. At the time of the sale to 502, terms of the mortgage were
amended by an agreement between Royal and 502 and two other
individuals who were added as guarantors. The mortgage went into
default in 1994 and Royal took possession of the mortgaged
property in November of that year. The property was sold under
power of sale in 1996 for $250,000. Royal sued all concerned for
the deficiency.

[3] The guarantors took the position at trial that the transfer
to Benakopoulos and the agreement between Royal and 502 relieved
them of responsibility for the mortgage payments. The trial
judge disagreed, but by reason of the inactivity of Royal on the
sale, he reduced the liability of the mortgagor and guarantors by
$75,000. He awarded Royal party and party costs notwithstanding
Royal’s contractual entitlement to solicitor and client costs and
notwithstanding an offer to settle which would have entitled
Royal to solicitor and client costs under rule 49.10. The
mortgagor and guarantors appeal and Royal cross-appeals.

[4] The appellants raised four issues which they described in
their factum as follows:

(a) the applicability of Section 9 of the Land Registration
Reform Act and the interpretation of conflicting provisions in
the Standard Charge Terms (SCT) and the Guarantor Clause;
(b) the distinction between a corporate “successor” and
“assign”, and the applicability of Montreal Trust v. Birmingham
and Manulife v. Conlin;
(c) the issue of extension or renewal of the mortgage and the
identity of the “Chargor” at material times;
(d) novation.

(A) Applicability of Section 9

[5] The Land Registration Reform Act, R.S.O. 1990, c.L.4 (“the
Act”), s. 9 reads as follows:

9.(1) A charge shall be deemed to include a set
of standard charge terms filed under subsection
8(1) if the set is referred to in the charge by
its filing number.
(2) A term deemed to be included in a charge by
subsection (1) may, in a schedule to the charge,
be expressly excluded or may be varied by setting
out the term, appropriately amended.
(3) Where a charge refers to more than one set
of standard charge terms by their filing numbers,
the charge shall be deemed to include only the
set that was filed last.
(4) Where there is a conflict between an express
term in a charge and a term deemed to be included
in the charge by subsection (1), the express term
prevails. 1984, c. 32, s. 9.

[6] The appellants took the position that where the liability
imposed by the guarantor clause in the SCT was wider than that of
the guarantor clause in the mortgage, that constituted a
“conflict” within the meaning of s. 9(4) of the Act and by virtue
of that subsection the clause in the mortgage would prevail over
the clause in the SCT.

[7] The trial judge disagreed. He pointed out that the mortgage
itself expressly contemplated that the parties would be bound by
the SCT. The mortgage contained the following provision:

Standard Charge Terms – The parties agree to be bound
by the provisions in Standard Charge Terms filed as
number 8547 and the Chargor(s) hereby acknowledge(s)
receipt of a copy of these terms.

[8] The trial judge held that where the conditions of the two
documents could live together, then the parties were bound by
both. He found that the only “conflict” between the two
documents was that the SCT imposed joint and several liability on
the guarantors whereas the mortgage expressly provided that the
guarantors would only be liable for certain specified and
differing percentages of the mortgage debt. In this instance, s.
9(4) of the Act would apply and the mortgage provision would
govern. I agree with the conclusion.

[9] A decision to this effect was not required of the trial
judge. Earlier in his reasons he noted that the parties were
agreed as to the amounts in issue and as to the differing
percentages owed by the individual guarantors.

(B) Distinction Between a Corporate “Successor and “Assign”

[10] In view of the conclusions reached by the trial judge on
issue (A), the issue raised with respect to the difference
between a “successor” and “assign” becomes irrelevant. In its
“no prejudice” provisions, the mortgage referred to “successors
and assigns” on one occasion, but only to “successors” on
another. This would be relevant to the sale from 603 to
Benakopoulos. As Benakopoulos was an “assign” and not a
“successor”, the omission of the word “assign” would appear to
serve to terminate the liability of the guarantors. The SCT
however did not use the same language. Instead, they referred to
“the Chargor or any other person liable for the payment of the
money secured by the Charge”. That language would include the
guarantors so that the omission of the word “assigns” in the
mortgage document was of no significance in the final analysis.

(C) The Issue of Extension or Renewal

[11] The language of both the mortgage and the SCT expressly
permitted Royal to grant extensions of the mortgage and to
otherwise vary its terms without obtaining any further consent
from either the original mortgagor (603) or the guarantors. An
agreement was entered into between Royal and 502 to extend the
term of the mortgage by ten months and to reduce the interest
payable on the mortgage. The original mortgage was dated March
4, 1989. Its term was five years. The agreement between Royal
and 502 was registered December 2, 1993. That is well within the
original term of the mortgage. The parties to the agreement
described it as an “extension agreement” and the document so
described itself.

[12] There can be no doubt that the document entered into between
Royal and 502 was an extension agreement as expressly
contemplated by the mortgage (with respect “to the mortgagor or
any successor”), and by the SCT (with respect to “the Chargor or
any other person liable for the payment of the money secured by
the Charge”). There could be no doubt that 603 and the
guarantors had consented in advance to the extension agreement
entered into by Royal and 502, with the result that the extension
agreement did not extinguish the liability of the guarantors.

(D) Novation

[13] The appellants argued that the arrangement between Royal and
502 constituted a novation, i.e. that by that agreement 603 and
the original guarantors were released from any obligation under
the mortgage. The trial judge found that “the Extension
Agreement contains no language indicating an intention to enter
into a new agreement or a novation but, on the contrary,
specifically provides that the terms and conditions of the
original mortgage continue in full force and effect…” He added:
“[T]here is no evidence in the case at bar that RTC [Royal]
intended to release the original Mortgagor or Guarantors; in fact
the delivery of the notices of sale is evidence to the contrary.”
In our view, no other conclusion was available to the trial
judge.

[14] As a result, I see no merit in any aspect of the appeal and
I would dismiss it.

The Cross-appeal

[15] We are all of a different view with respect to both issues
raised by the cross-appeal. An offer was made by another
company, 10936654 Ontario Limited (109), to the then owner, 502,
and the two entered into an agreement which was conditional upon
the purchaser being approved by Royal for the assumption of an
“existing” first mortgage by January 25, 1995. The mortgage had,
in fact, matured in December 1994, prior to the making of the
offer. The trial judge reduced the damages awarded to Royal by
$75,000. because he held the view that it had acted
improvidently with respect to this offer.

[16] The buyer’s bank was not enthusiastic about lending the
money and Royal was given two days to approve the assumption of
its mortgage. By the time it got the buyer’s net worth
statement, the offer had expired. The buyer refused to produce
any further information and there the matter sat.

[17] In deciding as he did, the trial judge said:

It would seem to me to have made business sense
to have signed the offer back with a longer period
for RTC approval of the assumption of the first
mortgage and inserting a condition that RTC would
have to receive financial statements and be
satisfied as to the financial viability of 109 and
receive a statement of net worth and personal
guarantee from Mr. Cumming. It would appear from
the evidence that the transaction might have
been salvageable on this basis and RTC would have
realized at least $75,000 to be applied toward the
amount outstanding on the mortgage…

[18] What this statement reveals is that the trial judge
overlooked the fact that it was not Royal which was the vendor,
but 502. Accordingly, it was not within Royal’s power to sign
the offer back, nor was Royal in a position to impose conditions
extending the period it had for approval of the proposed
purchaser’s assumption of the mortgage or its production of
financial information. As the trial judge’s reduction of Royal’s
recovery was based squarely on this “failure of RTC to take
reasonable steps to follow up this offer or sign it back on some
basis and attempt to salvage the transaction”, the reduction
should be reversed and recovery given for the full amount of the
claim.

[19] Royal also appeals from the trial judge’s award of the costs
of the proceedings to it on party and party scale. Royal’s
position is that there are two reasons why costs should have been
awarded on a solicitor and client basis The first is that under
the terms of the mortgage it was entitled to solicitor and client
costs. The second reason is that in its offer to settle of
August 14, 1997, it offered to accept the sum of $271,792.61 plus
interest, and the ultimate award exceeded this amount by
approximately $15,000, thus bringing Royal within the ambit of
rule 49.10.

[20] The trial judge’s refusal to award costs on a solicitor and
client scale was based solely upon his view of Royal’s
improvident approach respecting 109’s offer to 502. . Because he
was mistaken in this regard, and because there was no other basis
for not giving effect to the terms of the mortgage, Royal is
entitled to its costs on a solicitor and client basis.

[21] In summary, I would dismiss the appeal and allow the cross-
appeal. I would vary the judgment below by increasing 603’s
liability to $393,104.61, Daimler’s and Flight’s each to
$167,333.93 and Reilly’s to $71,223.20. I would further vary the
judgment below by replacing the words “party and party” in
paragraph 5 with the words “solicitor and client”. I would award
Royal its costs of the appeal and of the cross-appeal, both on a
solicitor and client basis.

Released: June 23, 2000

“Austin J.A.”

MOLDAVER J.A.:

[22] I have read the reasons of my colleague Austin J.A. and I
agree with his analysis and conclusions on all but one issue.
That issue relates to the liability of the appellant guarantors
and in particular, whether their liability was extinguished when
RTC entered into the December 2, 1993 agreement with 502
extending the original term of the mortgage from April 1, 1994 to
December 1, 1994. For reasons which follow, I am of the view
that as a result of that transaction, the guarantors no longer
remained liable to RTC.

FACTS

[23] My colleague has summarized the relevant facts and they need
not be repeated. At issue is the extension agreement entered
into between RTC and 502 on December 2, 1993 and its impact, if
any, on the liability of the guarantors.

[24] Upon executing the mortgage for which RTC seeks to hold them
responsible, the guarantors agreed to be bound by the terms of a
“Guarantor Clause” scheduled to the mortgage (Guarantee
Agreement), as well as RTC’s Standard Charge Terms (Standard
Terms).

[25] The relevant extension clause in the Guarantee Agreement
provides as follows:

GUARANTEE AGREEMENT

And it is hereby expressly declared … that no extension
or extensions granted by the mortgagee to the mortgagor
or any successor for payment of the moneys hereby
secured … shall in any way modify, alter, vary or in
any way prejudice the mortgagee or offset the liability
of the covenantor in any way under this covenant.
[Emphasis added.]

[26] The relevant extension clauses in the Standard Terms provide
as follows:

STANDARD CHARGE TERMS

Extensions
23. No extension of time given by the Chargee to
the Chargor or any one claiming under the Chargor
… shall in any way affect or prejudice the rights
of the Chargee against the Chargor or any other
person liable for the payment of the money secured
by the Charge … [Emphasis added.]

Guarantee

27. The guarantor, in consideration of the making
    by the Chargee to the Chargor of the loan secured
    by the Charge:
    (d) agrees that the Chargee may at any time and from
    time to time and without notice to, or any consent
    or concurrence by the guarantor, make any … extension
    … in the terms of the Charge … and that no such thing
    done by the Chargee … shall in any way release or
    diminish the liability of the guarantor under the
    Charge, so long as any moneys expressed by the Charge
    to be payable remain unpaid or the Chargee has not
    been reimbursed for all such losses, damages, costs,
    charges and expenses as aforesaid. [Emphasis added.]

[27] The difference between the extension clause in the Guarantee
Agreement and the extension clauses in the Standard Terms is self-
evident. Under the former, the guarantors agree to remain liable
in the case of extensions granted to 603 or its successors.
Under the latter, their liability for extensions is unlimited.

[28] The issue separating the parties is a narrow one. RTC
concedes that if the extension clause in the Guarantee Agreement
applies, then the guarantors are not liable because 502 is not a
successor of 603 (see Montreal Trust v. Birmingham Lodge (1995),
1995 438 (ON CA), 46 R.P.R. (2d) 153 (Ont. C.A.) at 162-164). The guarantors, on
the other hand, accept that if the extension clauses in the
Standard Terms apply, they remain liable.

Position of the Guarantors

[29] The guarantors take the position that there is a conflict
between the express extension clause found in the Guarantee
Agreement and the extension clauses contained in the Standard
Terms. To resolve that conflict, they rely on s. 9(4) of the
Land Registration Reform Act, R.S.O. 1990, c. L.4 (“the Act”)
which reads as follows:

9. (4) Where there is a conflict between an
   express term in a charge and a term deemed to
   be included in the charge by subsection (1)
   [Standard Terms], the express term prevails.

In the alternative, the guarantors submit that if the relevant
extension clauses are not in conflict, they nonetheless give rise
to an ambiguity on the face of the mortgage which, as guarantors,
they are entitled to have resolved in their favour. (See ManuLife
Bank of Canada v. Conlin (1996), 1996 182 (SCC), 6 R.P.R. (3d) 1 (S.C.C.) per
Cory J. for the majority at pp. 10-14.)

The s. 9(4) Issue

[30] The trial judge rejected the s. 9(4) argument for the
following reasons:

I do not accept the submission of counsel for the
Guarantors that the wording of the Mortgage and of
the Standard Charge Terms is so inconsistent that
the provisions of section 9 of the LRRA must be
applied and that only the guarantor clause of the
Mortgage is applicable. It appears to me that the
only provisions which are in conflict are those
dealing with the liability of the Guarantors where
the guarantor clause in the Mortgage provides for
liability of the respective Guarantors only to
certain percentages of the mortgage debt, whereas
the Standard Charge Terms provide for joint and
several liability.1 In this situation, subsection
9(4) of the LRRA would be applicable and the
provisions of the Mortgage would govern. With that
exception, it seems to me that the provisions of
the two agreements can be read together and that
there is no conflict, although the provisions of
the Standard Charge Terms are somewhat more
extensive. [Emphasis added.]

[31] In other words, the trial judge refused to apply s. 9(4) of
the Act because in his view, the relevant extension clauses,
though presumably inconsistent, were not “so inconsistent” that
they gave rise to a conflict. Rather, he viewed the extension
provisions in the Standard Terms as simply being “more extensive”
than the provision in the Guarantee Agreement.

[32] With respect, I do not agree with the trial judge’s analysis
of this issue. In the passage quoted above, the trial judge
differentiated between the extension clauses in issue, which he
found not to be in conflict, and the apportionment of liability
clauses, which he found to be in conflict. For my part, I am
unable to see the logic of this distinction.

[33] The trial judge found that the extension clauses contained
in the Standard Terms were not in conflict with the express
extension clause in the Guarantee Agreement on the basis that
former were simply more extensive than the latter. If he is
correct in this, it seems to me that the same logic should apply
to the apportionment clauses. Applying the “more extensive” test
to the apportionment clauses, one could argue that “the joint and
several” liability clause in the Standard Terms was simply “more
extensive” than the limited liability clause in the Guarantee
Agreement. Surely, that cannot be right.

[34] Under the apportionment clause in the Guarantee Agreement,
the liability of the guarantors is limited to a certain
percentage of the debt; under the “joint and several” clause in
the Standard Terms, it is not. Likewise, under the Guarantee
Agreement, the liability of the guarantors is limited to
extensions granted to 603 or its successors; under the extension
clauses in the Standard Terms, it is not.

[35] In my view, the analogy is exact. In each case, the
respective clauses are in conflict and the guarantors are
entitled to have the conflict resolved in accordance with s. 9(4)
of the Act.

[36] Accordingly, I would give effect to the guarantors’ primary
argument.

The Ambiguity Issue

[37] Even if I am incorrect on the primary issue, I would give
effect to the guarantors’ alternative argument, namely, that the
relevant extension clauses give rise to an ambiguity on the face
of the mortgage, which, as guarantors, they are entitled to have
resolved in their favour. The trial judge did not address this
secondary argument. From this, I can only conclude that he was
of the view that the case for the guarantors stood or fell on
the s. 9(4) issue. With respect, I do not share that opinion.

[38] Section 9(4) is a provision of general application. It is a
statutory rule of interpretation that is triggered when a charge
contains an express term that conflicts with a standard term. To
the extent that the two terms are irreconcilable, s. 9(4)
dictates that the express term prevails.

[39] Manifestly, s. 9(4) is restricted to cases of conflict. It
does not speak to cases of ambiguity or uncertainty; nor does it
differentiate between the parties to a charge. In other words,
in cases of conflict, the “favoured creditor” status, normally
accorded to guarantors, has no application. An express term that
favours the chargee will prevail over a conflicting standard term
that favours the guarantor. In this sense, s. 9(4) supplants the
ordinary rules of construction that apply to guarantee
agreements. Section 9(4), however, does not speak to cases of
ambiguity or uncertainty. To the extent that the clauses in
issue give rise to an ambiguity, the ordinary rules of
interpretation, which treat guarantors as “favoured creditors”,
apply.

[40] Before going further, I wish to make it clear that when I
speak of “ambiguity”, I am not using the term in its ordinary
sense to connote a word or phrase that is capable of more than
one meaning. In that respect, I acknowledge that looked at
individually, the respective extension clauses are plainly worded
and unambiguous. Rather, I use the term to connote the
uncertainty surrounding the intention of the parties as it
relates to extensions in the face of differently worded clauses
in the same contract that do not have the same meaning or effect
and that are capable of producing very different results.2

[41] Based on the trial judge’s reasons, it is apparent that he
was satisfied that the extension clauses in issue, though
somewhat inconsistent, could nonetheless live together. While
that finding was admittedly an important one, it did not relieve
the trial judge from the responsibility of reviewing the contract
as a whole with a view to discerning the true intention of the
parties as it related to extensions.

[42] With respect, I am not at all certain that the trial judge
engaged in this analysis. Having determined that the clauses in
issue could live together, he seems to have ignored the extension
clause in the Guarantee Agreement altogether, as if it did not
exist, and focussed exclusively on the extension clauses
contained in the Standard Terms. Presumably, with the extension
clause in the Guarantee Agreement off the table, he concluded
that the wording in the Standard Term extension clauses was plain
and unambiguous and that it alone reflected the true intention of
the parties. In other words, he resolved “the intention issue”
by choosing to give effect to the extension clauses most
favourable to RTC.

[43] In my view, the trial judge erred in adopting this approach.
On its face, the mortgage contained two very different clauses
relating to the same subject matter. The record is silent as to
the negotiations between RTC and the guarantors that gave rise to
the Guarantee Agreement. It is common ground, however, that the
extension clause in the Guarantee Agreement is narrower and more
favourable to the guarantors than the comparable clauses in the
Standard Terms. This should have been obvious to RTC at the
time. If it was, absent evidence to the contrary, the only
reasonable inference to be drawn is that the parties negotiated
the narrower extension clause contained in the Guarantee
Agreement. The only other possibility, which I discount out of
hand, is that RTC unilaterally chose to confer a benefit on the
guarantors by limiting their liability to extensions involving
603 or its successors.

[44] On the other hand, it may be that RTC did not direct its
mind at all to the different wording and effect of the extension
clauses; or if it did, perhaps it mistakenly concluded that they
were the same.

[45] In my view, it was incumbent on the trial judge to consider
these scenarios in an attempt to discern the true intention of
the parties as it related to extensions. Had he done so, he may
well have concluded that the parties had in fact negotiated the
express extension clause in the Guarantee Agreement and that it
reflected the true intention of the parties. Failing this, in
the face of differently worded extension clauses that did not
have the same meaning or effect and that produced two very
different results, I am of the view that at a minimum, he should
have been left in a state of uncertainty about the intention of
the parties and that he should have resolved that uncertainty in
favour of the guarantors. To do otherwise would be to reward RTC
for its carelessness in either failing to direct its mind at all
to the differently worded extension clauses or in failing to
appreciate that they did not have the same meaning or effect.

CONCLUSION

[46] The extension agreement between RTC and 502 constituted a
material change in the loan agreement sufficient to discharge the
guarantors. (See K.P. McGuiness, The Law of Guarantee (2nd ed.
1996), at µµ10.23 and 10.51.) It follows, in my view, that the
liability of the guarantors was extinguished when, without their
knowledge or consent, RTC consummated the extension agreement
with 502. Accordingly, I would allow the guarantors’ appeal and
dismiss the claim against them. The guarantors are entitled to
their costs at trial and their costs on the appeal and cross-
appeal.

Released: June 23, 2000

“M. Moldaver J.A.”

“I agree S. Borins J.A.”

1 Under the Guarantee Agreement, the liability of the respective
guarantors is limited to a certain portion of the debt. Under
the Standard Terms, their liability is joint and several for the
entire debt.

2 See for e.g. Hillis Oil and Sales v. Wynn’s Canada, [1986] 1
S.C.R. 57 where the court compared the wording of two termination
clauses in a distributorship agreement and found that the
different wording gave rise to an ambiguity.