Royal Bank of Canada v. El-Bris Limited. et al.

[Indexed as: Royal Bank of Canada v. El-Bris Ltd.]

92 O.R. (3d) 779

Court of Appeal for Ontario,

Laskin, R.P. Armstrong and MacFarland JJ.A.

September 3, 2008

Remedies -- Rectification -- Defendant personally guaranteeing extension of his company's operating line of credit to $700,000 and giving bank $700,000 collateral mortgage -- Defendant subsequently paying bank $700,000 -- Bank giving defendant discharge of collateral mortgage but demanding additional $700,000 under personal guarantee -- Trial judge finding that this was a case of common mistake and that both parties intended collateral mortgage to be security for defendant's guarantee -- Trial judge's finding of common mistake reasonably supported by evidence -- Rectification appropriate remedy.

E was the president and sole shareholder of E Ltd. In 2002, the bank agreed to extend E Ltd.'s line of credit to $700,000. E personally guaranteed the loan and also pledged to the bank a $700,000 collateral mortgage on property that he owned. E Ltd.' s borrowing from the bank increased to over $3 million. The company became insolvent, and the bank called the loan and claimed against E under its security. E paid the bank $700,000. The bank gave E a discharge of the collateral mortgage but demanded an additional $700,000 under his guarantee. When E refused to pay, the bank sued E and E Ltd. The trial judge gave judgment against E Ltd. but dismissed the action against E. He accepted that ordinarily the terms of the mortgage and the guarantee on their face would have bound E to pay E Ltd.'s entire debt to the monetary limit of each instrument, but concluded that both the documentary and oral evidence showed the parties' common intention that the collateral mortgage stand as security for E's guarantee, and granted a declaration that E's guarantee obligation was extinguished by the payment of $700,000. The bank appealed.

Held, the appeal should be dismissed.

The four prerequisites to the remedy of rectification set out by the Supreme Court of Canada in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club apply in the case of unilateral mistake, not in cases of common or mutual mistake. The trial judge's finding that this was a case of common mistake and that the parties intended the collateral mortgage to be security for E's guarantee was reasonably supported by the evidence. As E had paid off the collateral mortgage, he was entitled to a discharge of his obligation under the guarantee. The trial judge's decision did not "open the floodgates". To permit the bank to collect $1,400,000 on its security for a $700,000 loan would amount to unfair dealing and would unjustly enrich the bank at E's expense.

APPEAL from the judgment of Ducharme J., [2007] O.J. No. 1461, 156 A.C.W.S. (3d) 1139 (S.C.J.) dismissing an action against the defendant.

Cases referred to Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., [2002] 1 S.C.R. 678, [2002] S.C.J. No. 20, 2002 SCC 19, 209 D.L.R. (4th) 318, 283 N.R. 233, [2002] 5 W.W.R. 193, J.E. 2002-448, 98 Alta. L.R. (3d) 1, 299 A.R. 201, 20 B.L.R. (3d) 1, 50 R.P.R. (3d) 212, 111 A.C.W.S. (3d) 733, consd Other cases referred to Bercovici v. Palmer (1966), 1966 333 (SK CA), 59 D.L.R. (2d) 513 (Sask. C.A.), affg (1966), 59 D.L.R. (2d) 513 (Q.B.); Chant v. Infinitum Growth Fund Inc. (1986), 1986 2740 (ON CA), 55 O.R. (2d) 366, [1986] O.J. No. 584, 28 D.L.R. (4th) 577, 15 O.A.C. 393, 38 A.C.W.S. (2d) 131 (C.A.); [page780] Downtown King West Developments Corp. v. Massey Ferguson Industries Ltd. (1996), 1996 1232 (ON CA), 28 O.R. (3d) 327, [1996] O.J. No. 926, 133 D.L.R. (4th) 550, 89 O.A.C. 373, 1 R.P.R. (3d) 1, 62 A.C.W.S. (3d) 60 (C.A.) [Leave to appeal to S.C.C. refused [1996] S.C.C.A. No. 258]; H.F. Clarke Ltd. v. Thermidaire Corp. Ltd., 1974 30 (SCC), [1976] 1 S.C.R. 319, 54 D.L.R. (3d) 385, 3 N.R. 133, 17 C.P.R. (2d) 1, revg 1973 41 (ON CA), [1973] 2 O.R. 57, [1973] O.J. No. 1870, 33 D.L.R. (3d) 13, 9 C.P.R. (2d) 203 (C.A.); Wasauking First Nation v. Wasausink Lands Inc., 2004 15484 (ON CA), [2004] O.J. No. 810, 184 O.A.C. 84, 43 B.L.R. (3d) 244, [2004] 2 C.N.L.R. 355, 129 A.C.W.S. (3d) 2 (C.A.) Statutes referred to Construction Lien Act, R.S.O. 1990, c. C.30 Planning Act, R.S.O. 990, c. P.13 Authorities referred to McCamus, John D., The Law of Contracts (Toronto: Irwin Law, 2005)

Duncan M. MacFarlane, Q.C., and J. Ross Macfarlane, for appellant. Myron W. Shulgan, Q.C., for respondent.

The judgment of the court was delivered by

LASKIN J.A.: --

A. Overview

[1] The respondent, James Ellis, was the president and sole shareholder of El-Bris Limited. His company had developed land and built homes for many years. The appellant, Royal Bank of Canada ("RBC"), was the company's banker. In late 1992, RBC agreed to increase its loan to El-Bris from $200,000 to $700,000. Ellis gave security for this loan increase to his company. He personally guaranteed the loan. He also pledged to the bank a $700,000 collateral mortgage on property that he owned.

[2] Over the ensuing decade, the company's borrowing from RBC increased to about $3.5 million. By 2003, however, El-Bris had become insolvent. RBC called the loan and claimed against Ellis under its security. Ellis paid RBC $700,000 and asked for a discharge of the collateral mortgage and a release of his guarantee. RBC gave Ellis a discharge of the mortgage but demanded an additional $700,000 under his guarantee. When Ellis refused to pay this additional amount, RBC sued both him and El-Bris. RBC claimed that Ellis's obligation under the collateral mortgage was separate from his obligation under his guarantee. Ellis defended by asserting that he gave the collateral mortgage as [page781] support for or security for his guarantee, and that the discharge of the one discharged his obligation under the other. He sought rectification of both the mortgage and the guarantee to give effect to his position.

[3] The trial judge, E. Ducharme J., granted judgment against the insolvent company, El-Bris. However, he dismissed RBC's action against Ellis. He accepted that ordinarily the terms of the "mortgage and the guarantee on their face would have bound Mr. Ellis to pay El-Bris's entire debt to the monetary limit of each security instrument". Nonetheless, he concluded that both the documentary and oral evidence showed the parties' common intention that the collateral mortgage stand as security for Ellis's guarantee. Or, as the trial judge persuasively put it: "I find that in offering to advance El-Bris's line of credit by $700,000.00, neither the bank nor Mr. Ellis intended to create a personal obligation on the part of Mr. Ellis in the amount of $1,400,000.00". He granted a declaration that Ellis's guarantee obligation was extinguished by the payment of $700,000 to RBC in 2003.

[4] RBC's principal submission on appeal is that the trial judge erred by failing to give effect to the words of the documents, each of which expressed a separate payment obligation. RBC contends that an experienced businessman such as Ellis should not be able to use the remedy of rectification to avoid an obligation clearly spelled out in the documents he signed. Moreover, RBC says that Ellis has failed to satisfy the four prerequisites to rectification set out by the Supreme Court of Canada in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678, [2002] S.C.J. No. 20.

[5] Ellis submits that the declaratory relief extinguishing his obligation under the guarantee was grounded in the trial judge's factual findings and that RBC has not shown any basis to interfere with these findings. Alternatively, Ellis submits that his obligation under the guarantee was discharged because RBC materially varied the terms of its loan to El-Bris without Ellis's consent.

[6] The trial judge did not deal with Ellis's alternative submission, and I do not need to do so either. I would not give effect to RBC's submission and would therefore dismiss its appeal. Although the trial judge did not use the word "rectification" in his reasons, his findings of fact convincingly supported Ellis's claim for rectification. These findings of fact are, as Ellis contends, reasonably supported by the evidence and I would therefore defer to them. Indeed, on this record, accepting RBC's position would produce an inequitable and unfair result. [page782]

B. Discussion

1. Background

[7] Ellis lived in Windsor, Ontario. In the early 1980s, his company began banking with RBC at its Windsor branch office. Ellis dealt with the bank's account manager, Robert Langley, who is now retired. At the end of 1992, Ellis and Langley negotiated an increase in El-Bris's operating line of credit to $700,000. [See Note 1 below]

[8] RBC asked for and obtained security for its loan both from El-Bris and Ellis. El-Bris pledged to the bank a $750,000 floating debenture, the company's common shares registered in Ellis's name and money due under a mortgage it held on a 30- unit apartment building in Windsor. El-Bris also assigned to RBC a $500,000 term insurance policy on Ellis's life. Ellis gave the bank the two pieces of security that are the subject of this litigation: a $700,000 collateral second mortgage on property he owned in Windsor and his personal guarantee for $700,000. Ellis signed both documents on the same day, February 12, 1993. [See Note 2 below]

[9] The collateral mortgage did not contain a term stating that Ellis was giving the mortgage in support of his guarantee. Instead, it contained the standard charge terms, which included a covenant to pay and a provision, clause 30, that the charge was in addition to any other security held by RBC:

30. Other Security -- The Charge is in addition to and not in substitution for any other security held by the Chargee including any promissory note or notes for all or any part of the monies secured hereunder, and it is understood and agreed that the Chargee may pursue its remedies thereunder or hereunder concurrently or successively at its option. Any judgment or recovery hereunder of under any other security held by the Chargee for the monies secured by the Charge shall not affect the right of the Chargee to realize upon this or any other security.

[10] Similarly, the guarantee Ellis signed -- which appears to be a standard bank guarantee -- did not refer to the collateral mortgage. Instead, it simply required Ellis to pay on demand El-Bris's liability to RBC up to $700,000 plus interest.

[11] Thus, by their terms, and as RBC claims, the collateral mortgage and guarantee imposed on Ellis separate and [page783] independent obligations to pay the bank $700,000 plus interest on El-Bris's default. The trial judge recognized that, under ordinary circumstances, this would have been so. However, the trial judge did not consider this case to be the "ordinary or usual case". He rejected the bank's claim "that the mortgage and the guarantee are or were ever intended to be discrete, independent documents" (para. 38).

[12] The trial judge concluded that the documents did not accurately reflect the agreement Ellis and RBC had made. In substance, he rectified these documents to reflect their agreement that the collateral mortgage was security for Ellis's guarantee. That is why the trial judge declared that, as Ellis had paid RBC $700,000 to discharge the collateral mortgage, he had no further obligation under his guarantee.

2. The remedy of rectification

[13] Rectification is an equitable remedy designed to ensure that one party is not unjustly enriched at the expense of another. A court will rectify an inaccurately drawn written agreement so that it conforms to the agreement the parties intended to make. In Downtown King West Development Corp. v. Massey Ferguson Industries Ltd. (1996), 1996 1232 (ON CA), 28 O.R. (3d) 327, [1996] O.J. No. 926 (C.A.), at p. 336 O.R., Robins J.A. explained the remedy's underlying rationale, while acknowledging that rectification cannot be used to correct every mistake:

The remedy of rectification is available only in certain defined circumstances and cannot be invoked to correct every mistake. In principle, rectification is permitted, not for the purpose of altering the terms of an agreement, but to correct a contract which has been mistakenly drawn so as to carry out the common intention of the parties and have the contract reflect their true agreement. The remedy is normally granted only where the mistake is mutual or common to the contracting parties.

[14] RBC, however, argues that to obtain an order for rectification, Ellis must show more than a common intention. He must also satisfy Sylvan's four prerequisites to rectification. I do not agree.

[15] Sylvan was a case of unilateral mistake. The party seeking rectification, because of his own negligence, had mistakenly signed an inaccurately drawn document. Binnie J., writing for court, set out four prerequisites for parties seeking rectification for unilateral mistake: (i) a previous oral agreement inconsistent with the written document; (ii) the other party knew or ought to have known of the mistake and permitting that party to take advantage of the mistake would amount to unfair dealing; (iii) the document can be precisely rewritten to express the parties' [page784] intention; and (iv) each of the first three prerequisites must be demonstrated by convincing proof.

[16] The case before us is not a case of unilateral mistake. On the trial judge's reasonable view of the record, it is a case of common mistake: when entering into the written agreement, neither party intended to create two independent $700,000 obligations. Both thought the obligations were connected.

[17] The prerequisites in Sylvan do not apply to cases of common or mutual mistake. The following statement by Binnie J. [at] para. 31 of Sylvan clarifies the scope of the application of the prerequisites: "The traditional rule was to permit rectification only for mutual mistake, but rectification is now available for unilateral mistake (as here), provided certain demanding preconditions are met." Sylvan, in effect, broadened the circumstances in which courts could rectify a unilateral mistake, allowing rectification subject to the "demanding preconditions" outlined above. It left untouched the circumstances, under the "traditional rule", in which courts could rectify a mutual or common mistake. See, also, John D. McCamus, The Law of Contracts (Toronto: Irwin Law, 2005), at 555-62; Wasauking First Nation v. Wasausink Lands Inc., 2004 15484 (ON CA), [2004] O.J. No. 810, 184 O.A.C. 84 (C.A.), at paras. 76-85 (discussing Sylvan but not applying the Sylvan preconditions to a case of mutual mistake).

3. Application

[18] Although the trial judge did not use the word "rectification", his main finding clearly supports his use of what was in effect the remedy of rectification. At para. 39 of his reasons, the trial judge said:

I find that when Mr. Ellis and Mr. Langley consummated their agreement in February, 1993 their common intention was for the collateral mortgage on the Goyeau Street property he owned to stand as security for his guarantee in the event he defaulted on the latter. I make this finding without the slightest doubt or reservation. To put the matter another way, I find that in offering to advance El-Bris's line of credit by $700,000.00, neither the bank nor Mr. Ellis intended to create a personal obligation on the part of Mr. Ellis in the amount of $1,400,000.00.

[19] This paragraph echoes the rationale for rectification discussed in Downtown King West. As I noted earlier, in that case Robins J.A. said that rectification is permitted "to correct a contract which has been mistakenly drawn so as to carry out the common intention of the parties and have the contract reflect their true agreement". See, also, H.F. Clarke Ltd. v. Thermidaire Corp. Ltd., 1973 41 (ON CA), [1973] 2 O.R. 57, [1973] O.J. No. 1870 (C.A.), at pp. 64-65 O.R., revd on other grounds 1974 30 (SCC), [1976] 1 S.C.R. 319, 54 D.L.R. (3d) 385. [page785] In altering the agreement to reflect the parties' clear "common intention" that the collateral mortgage was to secure the guarantee, this is what the trial judge did.

[20] The only remaining question is: Was the trial judge's finding of common intention reasonable? In my view, the answer is yes. The finding of common intention is reasonably supported by the documents, the oral evidence of the parties and even by the parties' later conduct.

(a) The documentary evidence

[21] The following aspects of the documentary evidence support the trial judge's finding of common intention. -- Ellis signed the collateral mortgage and guarantee at the same time. -- He signed them in exchange for RBC's agreement to loan or give his company a line of credit of $700,000. -- The maximum amount of Ellis's obligation to RBC under the collateral mortgage and under the guarantee was the same and was identical to the amount of the bank's loan: $700,000. -- The collateral mortgage and the guarantee bore the same rate of interest: RBC prime plus 0.75 per cent. -- Both a letter of undertaking under the Construction Lien Act, R.S.O. 1990, c. C.30 and a Planning Act, R.S.O. 1990, c. P.13 certificate prepared by the bank and signed by Ellis in connection with the loan to El-Bris described the $700,000 collateral mortgage as "for James W. Ellis", not for the benefit of El-Bris. The wording suggests that the mortgage was to support an obligation of Ellis to the bank, and his only obligation to the bank was under his guarantee.

[22] At para. 40 of his reasons, the trial judge summarized the import of the documentary evidence:

I have read carefully both the mortgage and the guarantee. As I have earlier said, Mr. Ellis signed them on the same day and limited them in the same principal amounts and rates of interest. Moreover, they were part of and followed from his negotiation with the bank leading to the bank's offer to increase the company's line of credit by $700,000.00, precisely the amount specified in each security. In these circumstances, it is clear to me beyond all doubt that the documents were and were intended to be, in effect, mirror images of one another, complementary elements of a unitary undertaking or commitment, the purpose of which was to give the bank the comfort it [page786] needed in exchange for increasing El-Bris's operating line by $700,000.00. The preponderance of the oral evidence adduced at the trial merely reinforces this conclusion.

[23] I agree with this paragraph of the trial judge's reasons.

(b) The oral evidence

[24] Ordinarily, parol evidence at odds with the terms of a written agreement is inadmissible. Evidence relevant to claims for rectification is an exception to this rule. A court may admit parol evidence to determine whether to rectify the terms of a written agreement to conform to the real intention of the parties. See Chant v. Infinitum Growth Fund Inc. (1986), 1986 2740 (ON CA), 55 O.R. (2d) 366, [1986] O.J. No. 584, 28 D.L.R. (4th) 577 (C.A.), at p. 580 D.L.R., [per] Robins J.A.

[25] In determining that the words of the collateral mortgage and guarantee did not accord with the true intention of the parties, the trial judge relied on Ellis's testimony. Ellis testified that he and Langley intended to treat the mortgage as "support for the guarantee". The trial judge found Ellis to be an "honest, honourable and fair" witness. On the critical issue of the parties' intention, he accepted Ellis's evidence.

[26] Nonetheless, RBC argues that the trial judge erred in permitting Ellis to avoid his obligations "based solely on his own uncorroborated testimony". There are three answers to the bank's argument.

[27] First, a court may order rectification even if the testimony of the party seeking rectification is not corroborated by documentary evidence. See Sylvan, supra, at para. 43.

[28] Second, in this case Ellis's evidence was not uncorroborated. The documentary evidence that I have already outlined confirmed his evidence. Putting it the other way around, as the trial judge did, "the preponderance of the oral evidence adduced at trial merely reinforces this conclusion" -- that is the conclusion the trial judge drew from the documents themselves.

[29] Third, the evidence of Langley, the bank's account manager at the time, is consistent with Ellis's evidence. As the trial judge pointed out, the two people who could speak directly to what the parties intended were Ellis and Langley. Langley had virtually no recollection of his dealings with Ellis. But on cross-examination, after having looked at the documents, he conceded that "it would be fair to conclude" that the collateral mortgage was given to support the guarantee.

[30] Having reviewed the documents and oral evidence, the trial judge, at para. 43, repeated his finding that Ellis's obligation to RBC was limited to $700,000: [page787]

In summary, then, I have no hesitation in finding that the business arrangement struck by Mr. Langley and Mr. Ellis called for the bank to increase El-Bris's line of credit by $700,000.00, in exchange for which Mr. Ellis was required to provide a personal guarantee limited to the amount of $700,000.00, supported by a collateral second mortgage in the same amount. In other words, it was emphatically not the intention of the parties that in exchange for a $700,000.00 line of credit for El-Bris Mr. Ellis would create a personal guarantee in the amount of $1,400,000.

[31] I am not persuaded that the trial judge's finding is unreasonable.

(c) Later conduct

[32] Although unnecessary to the trial judge's finding of common intention, the trial judge concluded that the parties' later conduct was consistent with that finding. Evidence of later conduct consistent with a claim for rectification is relevant and admissible. See Bercovici v. Palmer (1966), 1966 333 (SK CA), 59 D.L.R. (2d) 513 (Sask. Q.B.), affd (1966), 59 D.L.R. (2d) 513 (C.A.).

[33] On March 18, 2003, Ellis's lawyer sent a letter to RBC's senior account manager in London, Ontario who now had responsibility for the El-Bris account. The letter stated Ellis's intent to pay out the collateral mortgage, which it described as a mortgage in support of Ellis's guarantee. In the letter Ellis's lawyer asked that on payment of the mortgage, the bank provide a discharge and release Ellis from his guarantee. Two days later, Ellis's lawyer sent RBC a cheque for $700,000. The bank immediately deposited the cheque but it did not tell Ellis or his lawyer that it did not intend to release the guarantee. Instead, RBC waited six months before it responded in writing that "it was never intended that the guarantee would be released upon the discharge of the mortgage".

[34] The terms of the letter from Ellis's lawyer, and RBC's depositing of the cheque and failing for some time to reply to the letter, are additional pieces of evidence that support the trial judge's finding.

[35] I end with this. Sylvan and other cases warn against the floodgates. They warn against permitting rectification to be granted too readily. They caution that parties, especially experienced and sophisticated parties, cannot routinely look to this remedy to correct mistakes in signed contracts.

[36] However, the trial judge's decision in this case does not open the floodgates. Rather, his decision turns narrowly on its facts. To return to the trial judge's central theme: to permit RBC to collect $1,400,000 on its security for a $700,000 loan amounts to unfair dealing. It would unjustly enrich the bank at Ellis's expense.

[37] I would dismiss the appeal. [page788]

C. Conclusion

[38] I would dismiss the bank's appeal. The trial judge's finding that the parties intended the collateral mortgage to be security for Ellis's guarantee was reasonably supported by the evidence. Therefore, as Ellis had paid off the collateral mortgage, he was entitled to a discharge of his obligation under the guarantee. Ellis is entitled to his costs of the appeal in the amount agreed on by the parties, $13,959 inclusive of disbursements and GST.

Appeal dismissed.

Notes

Note 1: RBC also loaned El-Bris $75,000 for the purchase of shares.

Note 2: Ellis signed the guarantee not in his personal capacity but as president of El-Bris. To correct this error Ellis re-executed his guarantee in January 1994. Nothing turns on this.