Royal Bank of Canada v. Samson Management & Solutions Ltd. et al.

[Indexed as: Royal Bank of Canada v. Samson Management & Solutions Ltd.]

Ontario Reports

Court of Appeal for Ontario,

MacPherson, Cronk and Lauwers JJ.A.

May 13, 2013

115 O.R. (3d) 380 | 2013 ONCA 313

Case Summary

Debtor and creditor — Guarantee — Guarantee being "continuing all account" guarantee and clearly providing that creditor could increase amount of its loan to debtor and guarantor would remain liable under her guarantee — Guarantor receiving independent legal advice before signing guarantee — Amount covered by loan agreement increased twice — Creditor having no contact with guarantor on either occasion and not obtaining new guarantee from her — Subsequent advances by creditor to debtor being material alterations to principal loan contract but those alterations having been contemplated by parties and guarantor having contracted out of common law protections.

C provided a personal guarantee in the amount of $250,000 for a loan by RBC to her husband B's company Samson. B also gave a personal guarantee. The guarantee was a "continuing all accounts" guarantee. C obtained independent legal advice before signing the guarantee. On two subsequent occasions, the amount covered by the loan agreement was increased. RBC had no contact with C on either occasion and did not request a new guarantee from her, but did obtain new personal guarantees from B. B's business failed, and RBC made demands on B and C under their guarantees. The motion judge granted summary judgment to RBC against Samson and B, but refused to grant RBC summary judgment against C, and instead granted C summary judgment on her cross-motion to dismiss RBC's action against her. RBC appealed.

Held, the appeal should be allowed.

The two subsequent increases in the amount of the loan were material alterations to the loan arrangement which at common law would have resulted in [page381] C's discharge from liability under the guarantee, absent either her consent or clear language in the guarantee permitting RBC and Samson to make the alterations without her consent. The guarantee clearly provided that RBC could increase the amount of its loan and that C would remain liable under her guarantee. C had contracted out of the common law protections available to her. Thus, despite the material alterations in the underlying loan arrangements, C's personal guarantee remained enforceable.

Manulife Bank of Canada v. Conlin (1996), 1996 CanLII 182 (SCC), 30 O.R. (3d) 577, [1996] 3 S.C.R. 415, [1996] S.C.J. No. 101, 139 D.L.R. (4th) 426, 203 N.R. 81, 94 O.A.C. 161, 30 B.L.R. (2d) 1, 6 R.P.R. (3d) 1, 66 A.C.W.S. (3d) 555; Royal Bank of Canada v. Bruce Industrial Sales Ltd. (1998), 1998 CanLII 3050 (ON CA), 40 O.R. (3d) 307, [1998] O.J. No. 2665, 110 O.A.C. 317, 81 A.C.W.S. (3d) 119 (C.A.), distd

Granata Family Trust v. Royal Bank, [2000] O.J. No. 4239, [2000] O.T.C. 789, 40 R.P.R. (3d) 6, 101 A.C.W.S. (3d) 354 (S.C.J.); Royal Bank of Canada v. Adecon Transport Inc., [2004] O.J. No. 6249 (S.C.J.), consd

Other cases referred to

Bank of Montreal v. Negin (1996), 1996 CanLII 1548 (ON CA), 31 O.R. (3d) 321, [1996] O.J. No. 4194, 95 O.A.C. 230, 67 A.C.W.S. (3d) 382 (C.A.); British Columbia (Attorney General) v. Malik, [2009] B.C.J. No. 916, 2009 BCCA 202, [2009] 7 W.W.R. 85, 91 B.C.L.R. (4th) 87, 53 C.B.R. (5th) 25, 79 R.P.R. (4th) 1, 270 B.C.A.C. 199; C.I.B.C. v. Trapp, 1987 CanLII 2715 (BC CA), [1987] B.C.J. No. 280, 12 B.C.L.R. (2d) 35, 37 B.L.R. 55, 3 A.C.W.S. (3d) 202 (C.A.); Toronto-Dominion Bank v. Schrage, 2009 CanLII 45444 (ON SC), [2009] O.J. No. 3636, 64 B.L.R. (4th) 277, 15 P.P.S.A.C. (3d) 202, 180 A.C.W.S. (3d) 107 (S.C.J.)

APPEAL from the judgment of Glass J., [2012] O.J. No. 3149, 2012 ONSC 3612 (S.C.J.) dismissing an action against a guarantor.

Catherine Francis, for appellant.

H. Richard Bennett, for respondent.

The judgment of the court was delivered by

[1] LAUWERS J.A.: — This appeal concerns the enforceability of a standard form bank guarantee. The motion judge granted summary judgment to the Royal Bank of Canada ("RBC" or the "Bank") against the debtor Samson Management and Solutions Ltd. ("Samson"), and against its principal, Jason Brasseur, on his personal guarantee. He refused to grant RBC summary judgment against the respondent Cheryl Cusack on her personal guarantee; instead, he granted her summary judgment on her cross-motion to dismiss RBC's action against her.

[2] RBC appeals. For the reasons set out below, I would allow the appeal and grant RBC summary judgment against Ms. Cusack for $250,000, plus interest as determined under the guarantee, and costs. [page382]

The Facts

[3] Ms. Cusack is Mr. Brasseur's spouse. In 2005, she signed a continuing guarantee for the indebtedness of Mr. Brasseur's business, Samson, to RBC for $150,000. At the time, the loan agreement between RBC and Samson was for a credit facility in the amount of $150,000, secured by a general security agreement granting the Bank a first-ranking security interest in Samson's assets, and Mr. Brasseur's personal continuing guarantee in the amount of $150,000. By their terms, the personal guarantees covered present and future liabilities of Samson, and were not tied to any specific loan between RBC and Samson. Ms. Cusack received independent legal advice before signing the guarantee.

[4] In 2006, RBC agreed to increase Samson's operating line of credit to $250,000. Ms. Cusack and Mr. Brasseur each gave fresh personal guarantees, for $250,000, to RBC that covered Samson's present and future liabilities. These were also continuing guarantees and were not tied to any specific loan between RBC and Samson.

[5] Ms. Cusack acknowledged that she received independent legal advice before signing the fresh guarantee. The letter of independent legal advice signed by her lawyer provided:

I have been consulted by CHERYL CUSACK (the "Obligant") as to the liability which the Obligant would incur by taking the following action, vis., signing or endorsing the following.

FORM 812, GUARANTEE AND POSTPONEMENT OF CLAIM IN THE AMOUNT OF $250,000.00 SIGNED BY CHERYL CUSACK.

for the purpose of securing the liabilities, whether past, present or future, of SAMSON MANAGEMENT SOLUTIONS LTD. (the "Customer") to the Bank.

I have advised the Obligant fully as to the effect of that action and the liability which the Obligant would incur by taking it, and the manner in which that liability could be enforced. The Obligant understands the nature and effect of and the liability which would arise from the taking by the Obligant of that action. I have given this advice to the Obligant as Solicitor for and in the Obligant's interest only, and without regard to or consideration for the interests of the Customer or of the Bank. I have not given any legal advice either to the Customer or to the Bank in connection with this matter.

(Emphasis in original)

[6] Ms. Cusack signed the following acknowledgement on the letter of independent legal advice: "I hereby acknowledge that all the statements made in the foregoing letter are true and correct." In her cross-examination, Ms. Cusack's counsel "confirmed" on her behalf that this acknowledgment was true. She [page383] also testified that she was guaranteeing "a loan limit", not a specific loan.

[7] In 2008, the amount covered by the loan agreement between RBC and Samson was increased to $500,000. RBC did not request a new guarantee from Ms. Cusack but did obtain a new personal guarantee from Mr. Brasseur in the amount of $500,000. The 2008 loan document stated that the new loan agreement "supersedes and cancels" the 2006 agreement, and also stated that "Security for the Borrowings and all other obligations of the Borrower to the Bank" included Mr. Brasseur's 2008 guarantee for $500,000 and Ms. Cusack's 2006 guarantee in the amount of $250,000. The 2008 loan agreement changed some loan terms: it set a term that funds advanced could be up to 75 per cent of Samson's accounts receivable and also imposed compulsory reporting conditions on Samson.

[8] In 2009, the loan amount between RBC and Samson was again increased to $750,000. Mr. Brasseur signed a new personal guarantee for $750,000. As in 2008, RBC did not request a new guarantee from Ms. Cusack but left in place her 2006 guarantee for $250,000.

[9] RBC did not have any contact with Ms. Cusack at any time. She never saw any of the loan agreements between RBC and Samson. RBC provided the guarantee forms to Mr. Brasseur, who gave them to Ms. Cusack along with the form for independent legal advice. As I have said, she consulted a lawyer for independent legal advice before signing each of the guarantees and the acknowledgement that she received the advice.

[10] The business failed in or about 2011. RBC made demands on Mr. Brasseur and Ms. Cusack under their guarantees -- his 2009 guarantee and her 2006 guarantee -- before bringing this action. At issue on this appeal is the enforceability of Ms. Cusack's 2006 guarantee.

[11] I accept the motion judge's finding that there is no genuine issue requiring a trial and there are no material facts in dispute.

The Decision under Appeal

[12] The motion judge found on the evidence that Ms. Cusack provided the guarantees to RBC in 2005 and 2006 as an accommodation surety to assist her husband in obtaining the loan for his business. Ms. Cusack stated in her affidavit that, "While I did receive money from Samson from approximately 2004 to 2011, these payments were not wages and were solely for the purpose of income splitting and reducing Jason's taxable income." [page384]

[13] The motion judge dismissed RBC's motion for summary judgment against Ms. Cusack and granted her summary judgment dismissing RBC's action against her on the following basis, at paras. 35 and 40:

I conclude that Ms. Cusack did not waive her rights in equity or in common law as a principal debtor or as a guarantor[.]

The guarantee of Ms. Cusack is unenforceable. There were material changes without her being given notice or consenting to them. There was an obligation on Royal to apprise Ms. Cusack of changes to the loan liability so that she would be aware of a change to her risk or prejudice.

[14] The motion judge relied on the decision of the Supreme Court of Canada in Manulife Bank of Canada v. Conlin (1996), 1996 CanLII 182 (SCC), 30 O.R. (3d) 577, [1996] 3 S.C.R. 415, [1996] S.C.J. No. 101. The core of his reasoning is found in two propositions. First, he held that the material alteration rule in Conlin applied to Ms. Cusack's guarantee, largely because of the principal debtor clause (at paras. 31-35). Second, he held that there were material alterations in the underlying loan arrangements that Ms. Cusack did not know about or accept (at paras. 26-27, 36-37). The motion judge did not analyze the language of the RBC guarantee in his reasons.

The Issues

[15] There is a single issue in this case, although it raises the ancillary issues discussed below: Did Ms. Cusack contract out of the protection provided to a guarantor by the common law and equity?

Analysis

[16] The parties agree that the basic governing law is set out in Conlin, although they disagree on the implications for the result in this case. Cory J. expressed the material alteration rule, at para. 2 of Conlin:

It has long been clear that a guarantor will be released from liability on the guarantee in circumstances where the creditor and the principal debtor agree to a material alteration of the terms of the contract of debt without the consent of the guarantor. The principle was enunciated by Cotton L.J. in Holme v. Brunskill (1878), 3 Q.B.D. 495 (C.A.), at pp. 505-6, in this way:

The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not [page385] self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court . . . will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.

[17] That said, Cory J. noted, at para. 4 of Conlin, that a guarantor can contract out of the protection provided by the common law:

Generally, it is open to parties to make their own arrangements. It follows that a surety can contract out of the protection provided to a guarantor by the common law or equity. See for example Bauer v. Bank of Montreal, 1980 CanLII 12 (SCC), [1980] 2 S.C.R. 102, at p. 107. The Ontario Court of Appeal, correctly in my view, added that any contracting out of the equitable principle must be clear. See First City Capital Ltd. v. Hall (1993), 1993 CanLII 8595 (ON CA), 11 O.R. (3d) 792 (C.A.), at p. 796.

See, also, Bank of Montreal v. Negin (1996), 1996 CanLII 1548 (ON CA), 31 O.R. (3d) 321, [1996] O.J. No. 4194 (C.A.).

[18] Cory J. added, at para. 6, of Conlin: "The issue as to whether a surety remains liable will be determined by interpreting the contract between the parties and determining the intention of the parties as demonstrated by the words of the contract and the events and circumstances surrounding the transaction as a whole."

[19] I agree with the motion judge that the alterations in the loan arrangements made between RBC and Samson over time increased the risk to which Ms. Cusack was exposed by her guarantee, even though her financial exposure was capped at $250,000. At common law, these alterations in the loan arrangements would have resulted in her discharge from liability under the guarantee in the absence either of her consent, or of clear language in the guarantee permitting RBC and Samson to make the alterations without her consent.

[20] Because Ms. Cusack was never approached by RBC for her consent to the alterations, the case falls to be determined by the language of the guarantee in the context of the transaction as a whole.

[21] Did Ms. Cusack contract out of the protection provided to a guarantor by the common law and equity?

[22] In my view, the application of the language in the guarantee in the context leads to the conclusion that Ms. Cusack contracted out of the protection provided by the common law, and is therefore liable under her guarantee.

The Language of the Guarantee and its Context

[23] The language of the guarantee is very broad and is plainly designed to ensure that the guarantor does contract out [page386] of the ordinary protections of the common law as Conlin acknowledged was permissible.

[24] The first paragraph on the first page of the guarantee is critical. It provides that Ms. Cusack will pay on demand to RBC "all debts and liabilities, present or future, direct or indirect, absolute or contingent, mature or not, at any time owing by . . ." Samson to RBC, "or remaining unpaid by the customer to the Bank, heretofore or hereafter incurred or arising and . . . incurred by or arising from agreement or dealings between the Bank and the customer . . .". This clause makes it clear that RBC could increase the amount of its loan to Samson and Ms. Cusack would remain liable under the guarantee. The letter of independent legal advice, acknowledged by Ms. Cusack, reinforced this fact by stating that the guarantee was "for the purpose of securing the liabilities, whether past, present or future, of SAMSON". The continuing obligation was also clearly expressed in clause (2), which provides:

(2) This guarantee shall be a continuing guarantee and shall cover all the liabilities, and it shall apply to and secure any ultimate balance due or remaining unpaid to the Bank.

[25] Various numbered clauses in the guarantee expressly permit RBC to take actions that might or would otherwise be material alterations affecting the enforceability of the guarantee at common law and equity, such as giving more time for payment, renewing the loan arrangements, increasing the interest rate, changing the maturity date of any loan, and introducing new terms and conditions in respect of the borrowing. Clause (1) provides:

(1) The Bank may grant time, renewals, extensions, indulgences, releases and discharges to, take securities (which word as used herein includes securities taken by the Bank from the Customer and others, monies which the customer has on deposit with the Bank, other assets of the Customer held by the Bank in safekeeping or otherwise, and other guarantees) from and give the same and any or all existing securities up to, abstain from taking securities from, or perfecting securities of, cease or refrain from giving credit or making loans or advances to, or change any term or condition applicable to the liabilities, including without limitation, the rate of interest or maturity date, if any, or introduce new terms and conditions with regard to the liabilities, or accept compositions from and otherwise deal with, the customer and others and with all securities as the Bank may see fit, and may apply all moneys at any time received from the customer or others or from securities upon such part of the liabilities as the Bank deems best and change any such application in whole or in part from time to time as the Bank may see fit, the whole without in any way limiting or lessening the liability of the undersigned under this guarantee, and no loss of or in respect of any securities received by the Bank from the customer or others, whether occasioned by the fault of the Bank or otherwise, shall in any way limit or lessen the liability of the undersigned under this guarantee. [page387]

[26] The range of Samson's liabilities to which the guarantee applies is very broad. As noted, the first paragraph of the guarantee defines liabilities to include "all debts and liabilities, present or future, direct or indirect, absolute or contingent, mature or not, at any time owing by . . ." Samson to RBC, "or remaining unpaid by the customer to the Bank, heretofore or hereafter incurred or arising and . . . incurred by or arising from agreement or dealings between the Bank and the customer . . .".

[27] This comprehensive understanding of the term, "liabilities", is reinforced by clause (8):

(8) All monies, advances, renewals, credits and credit facilities in fact borrowed or obtained from the Bank shall be deemed to form part of the liabilities, notwithstanding any lack or limitation of status or of power, incapacity or disability of the customer or of the directors, partners or agents of the customer, or that the customer may not be a legal or suable entity, or any irregularity, defect or informality in the borrowing or obtaining of such monies, advances, renewals, credits or credit facilities, or any other reason, similar or not, the whole whether known to the Bank or not[.]

[28] The guarantee is what is known as a "continuing all accounts" guarantee. This is an important contextual consideration. The difference between a specific guarantee and a "continuing" or "all accounts" guarantee is suggested by the terms themselves, and was explained by Swinton J. in Granata Family Trust v. Royal Bank, [2000] O.J. No. 4239, [2000] O.T.C. 789 (S.C.J.), at para. 9 and following. At para. 12, she distinguished Conlin in the context of such a guarantee:

Turning to the documents in issue in this case, one finds a very different fact situation from Conlin. The language of the guarantee indicates that it was to be an all accounts guarantee. It was meant to be a continuing one for debts of Robertson Foods already incurred, or those which would be incurred subsequently. Specifically, the guarantor agrees to guarantee "all debts and liabilities, present or future . . . at any time owing" by Robertson Foods Inc. "heretofore or hereafter incurred or arising". Moreover, the guarantee "shall be a continuing guarantee and shall cover all the liabilities" due to the bank. As well, the guarantee provides that all monies borrowed from the bank shall be deemed to form part of the liabilities, notwithstanding certain circumstances, including any irregularity, defect or informality in the borrowing. Nevertheless, the liability of the guarantor is limited to $1.5 million, which was less than the amount available to the borrower under the original Credit Agreement.

[29] The guarantee language in this case is virtually identical.

[30] In Royal Bank of Canada v. Adecon Transport Inc., [2004] O.J. No. 6249 (S.C.J.), Echlin J. considered the RBC form of guarantee. He found, at para. 12, that the defendants had provided personal "continuing all accounts guarantees". Echlin J. found, at para. 14, that RBC had no duty to inform the guarantor about future credit facilities, and that the onus was on the [page388] guarantor to inquire about the state of accounts. He found, at para. 15, that the subsequent loan obligations were not material alterations to the principal contract but were contemplated by the parties.

[31] In this case, the motion judge sought to distinguish Adecon, at para. 30: "With respect to Ms. Cusack, one might distinguish the facts from those in the Adecon Transport case (supra) because the 2008 loan agreement cancelled and superseded the 2006 loan agreement." Adecon, the motion judge noted, at para. 29, "was dealing with a development contemplated by the parties in the guarantee", being "additional loan facilities which could be considered to be future liabilities as set out in the guarantee".

[32] In my view, with respect, there is no difference in substance between the facts in Adecon and the facts in this case. The purpose of a continuing all accounts guarantee is to allow the customer and the lender to alter their business arrangements without having to involve the guarantor.

[33] I turn now to consider more closely the motion judge's reasoning.

The Principal Debtor Clause and the Material Alteration Rule

[34] The motion judge invoked the reasoning of the Supreme Court of Canada in Conlin. In that case, Manulife Bank of Canada entered into a mortgage with Dina Conlin for $275,000 for three years, bearing interest at 11.5 per cent. The mortgage was guaranteed by John Conlin, the mortgagor's husband, and his company Conlin Engineering and Planning Limited. The Conlins' marriage ended, and just before the mortgage was to mature, Dina Conlin entered into a "renewal agreement" that renewed the mortgage for a further three-year term at a yearly interest rate of 13 per cent. The form provided a signature line for a guarantor but only Dina Conlin signed it and the guarantors did not receive notice of the renewal. In March 1992, she defaulted and eventually the bank pursued the guarantors.

[35] The motion judge relied particularly on para. 19 of Conlin, which provided:

In Canadian Imperial Bank of Commerce v. Patel (1990), 1990 CanLII 6732 (ON SC), 72 O.R. (2d) 109 (H.C.), at p. 119, it was held that a principal debtor clause converts a guarantor into a full-fledged principal debtor. I agree with this conclusion. If the guarantor is to be treated as a principal debtor and not as a guarantor, then the failure of the bank to notify the respondent of the renewal agreement and the new terms of the contract must release him from his obligations since he is not a party to the renewal. This conclusion does not require recourse to equitable rules regarding material variation of contracts of surety. It is simply apparent from the contract that a principal debtor must [page389] have notice of material changes and consent to them. Of course, a guarantor who, by virtue of a principal debtor clause, has a right to notice of material changes, may, by the terms of the contract, waive these rights. However, in the absence of a clear waiver of these rights, such a guarantor must be given notice of the material changes and, if he is to be bound, consent to them.

(Emphasis added)

[36] The majority in Conlin concluded that although the guarantee permitted the bank to provide an extension of time to the mortgagor, the provision was not broad enough to permit the bank to enter into a renewal agreement without involving the guarantor (at para. 23).

[37] In this case, the motion judge noted, at paras. 33 and 34:

At paragraph 19 of [Conlin], the Supreme Court also took into account that a principal debtor clause will convert a guarantor into a full-fledged principal debtor. Should that development occur, then failing to notify the guarantor of new terms in a contract will release the person from the obligations because the individual will not be a party to the new terms.

With the 2006 guarantee signed by Ms. Cusack, paragraph 8 makes provision for her to become a principal debtor should Royal not be able to recover any sum of money on the guarantee. The natural inference with Ms. Cusack is that she could be a principal debtor and she had not been given any notice of material changes.

[38] I would, with respect, distinguish Conlin on four bases. First, the last two sentences of para. 19 of Conlin which the motion judge cited, set out above, lead the court back to the central issue in this case, which is whether Ms. Cusack contracted out of the common law protections for a guarantor. Paragraph 19 of Conlin therefore adds little to the analysis, but in fact begs the question before this court.

[39] Second, in Conlin the context of the loan was quite different; the guarantee in Conlin applied to a single mortgage transaction for a house purchase, rather than to a continuing all accounts guarantee. By contrast, Ms. Cusack acknowledged her understanding that the guarantee was meant to capture ongoing business financing in which money would be advanced by the Bank and paid back by the borrower from time to time. This is the basis on which Swinton J. distinguished Conlin in Granata Family Trust and her logic applies equally to this case.

[40] Third, the Conlin case turned on whether the terms of the guarantee allowed the bank and the mortgagor to enter into a renewal agreement. The majority concluded that it did not, so the guarantee was unenforceable because the renewal agreement was a material alteration. The language at issue in the guarantee in this case permitted RBC to advance more money to Samson. [page390]

[41] Fourth, the language of the principal debtor clause in Conlin is quite different from the language in clause (8) of the guarantee in this case. In Conlin, the guarantors were identified as principal debtors from the outset. In this case, the clause provided for the conversion of the guarantor into a principal debtor only for enforcement purposes if the borrower defaulted and the guarantee for some other reason became unenforceable against the guarantor as a guarantee.

Royal Bank v. Bruce Industrial Sales Ltd.

[42] Ms. Cusack seeks to reinforce the motion judge's reasoning about the proper application of the material alteration rule in Conlin by invoking the decision of this court in Royal Bank of Canada v. Bruce Industrial Sales Ltd. (1998), 1998 CanLII 3050 (ON CA), 40 O.R. (3d) 307, [1998] O.J. No. 2665 (C.A.). In that case, the appellants were former employees and shareholders of Bruce. They gave guarantees in the principal amount of $128,000 with interest at Royal Bank's prime rate plus 1.5 per cent. The guarantees applied to a revolving operating loan for $125,000 and a fixed term loan for $100,000.

[43] Bruce terminated the guarantors' employment with the company on March 6, 1991, and on March 26, 1991 they notified the bank in writing that they were "determining their liability as guarantors under paragraph 4 of the guarantee" (para. 7). Moldaver J.A. noted, at para. 18, that the ordinary effect of giving a notice of determination is that

. . . the appellants would not be responsible for post-determination advances made to the company . . . [A]fter receiving the notice of determination, it was entirely for the bank to decide whether it was willing to take the risk of advancing additional funds to the company, albeit without the protection afforded by the appellants' guarantees.

[44] But Moldaver J.A. noted, at para. 9 of Bruce, that upon receiving the notice of determination, the bank immediately converted the revolving loan into a fixed loan, with this catastrophic effect on the guarantors: "[B]y converting the revolving operating loan into a fixed loan, the bank effectively nullified that term of the principal loan agreement which required the bank to apply credit balances in the company's current account, rounded to the nearest $10,000, in repayment of the operating loan" (para. 15). Had the bank continued to apply credit balances in the company's current account in repayment of the operating loan, the amount outstanding on that loan would have declined to $5,000, reducing the exposure on the guarantees by $90,000 (para. 16). [page391]

[45] Moldaver J.A. put the issue, at para. 19: "The real question is whether it was open to the bank to convert the operating loan from revolving to fixed without losing its right to look to the appellants on their guarantees, at least in so far as they related to the $95,000.00 owing on that loan as of March 27, 1991."

[46] In converting the revolving loan into a fixed loan in Bruce, the bank relied on language in clause (1) of the guarantee that is somewhat similar to the language of clause (1) of the guarantee at issue in this case quoted above [at para. 30]:

(1) The Bank may grant time, renewals, extensions, indulgences, releases and discharges to, take securities (which word as used herein includes other guarantees) from and give the same and any or all existing securities up to, abstain from taking securities from or from perfecting securities of, cease or refrain from giving credit or making loans or advances to, accept compositions from and otherwise deal with, the customer and others and with all securities as the Bank may see fit[.]

(Emphasis by Moldaver J.A.)

[47] Moldaver J.A. found that the underlined wording, which he called the "blanket provision", did not authorize the Bank to change the revolving loan into a fixed loan. He gave three reasons for this holding, at paras. 39-41:

First, the language used in the so-called "blanket" provision is vague, imprecise and general. It can scarcely be described as the "very clear wording" to which Professor McGuiness refers [in The Law of Guarantee, 2nd Edition (Scarborough, Ontario: Carswell, 1996) at 546-47] . . . . Surely, if clause (1) of the guarantee agreement was meant to provide the bank with the unqualified right to make material changes to the principal loan agreement, it could have been drafted in simple and precise terms to reflect this. The fact that it was not weighs against the bank.

Secondly, in attempting to discern the purpose and effect of the "blanket" provision, the provision must be considered in the overall context of clause (1). Significantly, because the provision finds its place at the tail-end of a series of specified permissible alterations, it ought not to be construed as authorizing radical changes to the principal contract. In this respect, the following passage from McGuiness, at p. 546, is apposite:

. . . As a working premise, the courts are reluctant to construe broad and general provisions of uncertain scope and obscure purpose as authorizing radical changes to the principal contract, especially where there are specific provisions authorizing particular types of changes that might fairly be said to be covered by the broader provision concerned. The basic principle of interpretation applied in such cases would seem to be one of expressio unius est exclusio alterius.

Thirdly, taking into account the facts and circumstances surrounding the loan transaction as a whole, there is nothing to suggest that in providing their guarantees, the appellants intended to confer upon the bank the unqualified right to materially alter the principal loan agreement. [page392]

[48] As a result, the court in Bruce concluded that the guarantee did not permit the bank to convert the loan from a revolving loan to a fixed loan (para. 43).

[49] Ms. Cusack argues that the effect of this court's decision in Bruce is that the doctrine of material alteration addressed by the Supreme Court of Canada in Conlin applies to a continuing all accounts guarantee. I would agree, but that is not the end of the analysis, it is the beginning. The court must, as the Supreme Court noted in Conlin, consider the words of the guarantee in context.

[50] In assessing the applicability of Bruce, the context is critical. Implicit in Moldaver J.A.'s analysis is the recognition that the bank's approach would have permitted the bank to completely defeat the purpose of limiting the guarantors' liability that was the function of the determination clause. Or, putting it differently, the general language of the blanket provision should not be permitted to overcome the guarantor-protective express language of the determination clause. No such issue is found in the words of the guarantee in this case, or in the context. The notice of determination was the critical contextual factor in Bruce. Ms. Cusack did not invoke the determination clause in this case, and RBC is not relying on the blanket provision in the current version of the guarantee.

The Alleged Material Alterations

[51] There is a lurking terminological conundrum in the cases on material alteration. Sometimes the court says that the challenged alteration is a material alteration that therefore triggers the Conlin rule and makes the guarantee unenforceable. Sometimes, as in Adecon, the court determines that, because the challenged alteration was authorized by the words of the guarantee, it is not a material alteration and the material alteration rule does not apply.

[52] Analytically, it seems to me that there are two distinct steps in the logical sequence that should be taken to preserve clarity. The first step is to consider whether the challenged alteration to the underlying loan arrangement is a material alteration as a matter of law quite apart from any possible authorizing language in the guarantee. The second step is to consider whether the language of the guarantee permits the material alteration.

[53] Bruce is instructive on how the court should approach the task set by Conlin of interpreting a guarantee. I observe that if RBC had renewed the principal loan agreement in Bruce (which was not possible on the language of the guarantee in Conlin), [page393] the guarantors would have had no valid objection. This follows from the statement of Moldaver J.A. in Bruce, at para. 59: "Clause (1) of the guarantee agreement entitled the bank to renew the principal loan agreement. It did not permit the bank to do so at an increased rate of interest." In Bruce, the court found that an increase in the interest rate from Royal Bank prime plus 2.25 per cent to Royal Bank prime plus 2.5 per cent was a material change to the principal contract that entitled the appellants to be discharged from liability for the term loan because it was not expressly authorized. (I note that a change in the interest rate is now expressly provided for in the RBC guarantee, perhaps as a result of Bruce.)

[54] In this case, the motion judge found that the increases in the amount of the debt guaranteed (paras. 27, 39) and in the "more stringent reporting against performance ratio requirements" (para. 27) were material alterations that triggered the rule in Conlin.

[55] The motion judge was troubled by the increase in Samson's indebtedness, pointing out, at para. 39, that "the Samson debt was three times what it was when Ms. Cusack provided the $250,000 guarantee". As noted, I agree with the motion judge that for Ms. Cusack the result was "a greater potential for her to have to pay" (para. 27).

[56] In support of his finding that the increase in Samson's borrowing was a material alteration, the motion judge noted that RBC's witness, Paul Keppen, acknowledged in cross-examination that when the loan agreement between Samson and RBC for $500,000 was created in 2008, the 2006 loan agreement for $250,000 was terminated; the 2008 loan agreement expressly superseded and cancelled the preceding one although the 2009 agreement did not expressly supersede and cancel the 2008 agreement. The motion judge was troubled that RBC did not seek a new guarantee each time the loan increased, noting, at para. 16, that the "usual practice of Royal was to obtain a new guarantee when terminating one loan agreement and creating a new one".

[57] With respect, there is no support in the evidence for this finding. RBC's witness, Mr. Keppen, did not testify as to a usual Bank practice. Mr. Keppen acknowledged that while it might have been prudent for RBC to have had new guarantees from Ms. Cusack when the loan agreements for $500,000 and $750,000 were created, he asserted that doing so was not necessary. I would agree; it was open to the Bank to leave the 2006 guarantee, which capped Ms. Cusack's exposure at $250,000, in place. [page394]

[58] There is a parallel here to Adecon, where the defendants urged Echlin J. to take into account internal bank documentation that suggested a preferable manner of dealing with such guarantee matters as a bank practice. Echlin J. decided, however, that the internal documentation was not determinative of the interpretation of the language of the guarantee, which he found, at paras. 16, 17 and 21, to be clear and without ambiguity. I would apply the same logic here.

[59] As noted, I agree with the motion judge that the increases in the amount of the debt guaranteed and in the more stringent performance requirements were material alterations, but that is the first step of the analysis.

[60] The second step is to consider the language of the guarantee. It expressly permitted an increase in the amount loaned to Samson, and the prospect of an increase in future liabilities was expressly acknowledged by Ms. Cusack in her endorsement on the letter of independent legal advice. She knew and accepted that Samson's indebtedness to RBC could increase in the future even though her guarantee was limited. This is the advice that her lawyer confirmed that he gave Ms. Cusack in the letter of independent legal advice and that she acknowledged receiving.

[61] Parties are entitled to make their own arrangements, and a guarantor's decision to contract out of the protection provided by the common law or equity will usually be respected by the courts so long as the contracting-out language is clear and unambiguous: Conlin, at para. 4.

[62] In Toronto-Dominion Bank v. Schrage, 2009 CanLII 45444 (ON SC), [2009] O.J. No. 3636, 64 B.L.R. (4th) 277 (S.C.J.), at para. 15, Strathy J. cautioned that guarantees "are invariably drawn by the lender . . . typically on standard forms and afford no opportunity for negotiations by the guarantor. They usually result in broad surrender of the guarantor's legal and equitable rights." Courts will look for clear and unambiguous language, and may, when traditional defences to the enforcement of a guarantee, including those based on equitable principles such as unconscionability require, refuse to enforce such a provision. See, also, British Columbia (Attorney General) v. Malik, [2009] B.C.J. No. 916, 2009 BCCA 202, 91 B.C.L.R. (4th) 87, at para. 49. There is, however, no basis for invoking such equitable principles in this case.

[63] In my view, while the subsequent advances by RBC to Samson were material alterations to the principal loan contract, they were contemplated by the parties, permitted by the clear language of the guarantee, and inherent in a continuing all accounts guarantee that contemplates increases in the size of the underlying indebtedness. Further, clause (1) of the [page395] guarantee expressly permitted RBC to change the terms of the borrowing, which would include changes in performance standards.

[64] Thus, despite the material alterations in the underlying loan arrangements, Ms. Cusack's personal guarantee remains enforceable given the clear and unambiguous language of the guarantee and the factual context.

[65] At issue in this case was the enforceability of a plain-vanilla standard form bank guarantee in the context of a small business loan, of which there are undoubtedly many. The motion judge found, and I agree, that Ms. Cusack was an "accommodation surety", that is, someone who undertakes to be a surety for no consideration, whose obligations are to be strictly construed: see Conlin, at para. 12. Despite the finding that Ms. Cusack was an accommodation surety, in my view there was nothing in the language of the guarantee or in the factual context to justify the motion judge's decision not to enforce the RBC guarantee according to its terms but instead to dismiss RBC's action against Ms. Cusack. This is not a case where the context included, for example, an impermissible renewal in the circumstances of a matrimonial breakdown as in Conlin, a lender overreaching as in Bruce, or a lender's employee providing misleading advice, as was alleged but not proven in C.I.B.C. v. Trapp, 1987 CanLII 2715 (BC CA), [1987] B.C.J. No. 280, 12 B.C.L.R. (3d) 35 (C.A.), where the loan amount ballooned from $45,000 at its inception to $1 million. Nor is this a case like Bruce, where the alteration in the loan arrangements was both material and was not contemplated by the guarantee.

Disposition

[66] I would allow the appeal, set aside the motion judge's order dismissing RBC's motion for summary judgment against Ms. Cusack and dismissing RBC's action against her, and substitute an order for judgment in RBC's favour against Ms. Cusack for $250,000, plus interest as determined under the guarantee.

[67] The parties were able to agree on costs. I would therefore fix the costs of this appeal at $20,000, all inclusive, payable by Ms. Cusack to RBC. Ms. Cusack would also be responsible for the costs before the motion judge in the amount of $16,950, all inclusive.

Appeal allowed.

End of Document