GMAC Leaseco Corporation v. Jaroszynski Jaroszynski v. GMAC Leaseco Corporation et al.
[Indexed as: GMAC Leaseco Corp. v. Jaroszynski]
Ontario Reports
Court of Appeal for Ontario,
MacPherson, Gillese and Hourigan JJ.A.
December 19, 2013
118 O.R. (3d) 264 | 2013 ONCA 765
Case Summary
Leases — Material alteration — Truck lease providing that terms could not be changed without consent of both lessee and co-lessee — Lessor and lessee entering into two extension agreements without co-lessee's knowledge or consent — Lessee not returning truck at end of lease term — Co-lessee not liable for truck's residual value — Co-lessee being principal debtor under terms of lease — Principal debtor released from liability under contract where there has been material alteration to contract without his or her consent — Extension agreements amounting to material alterations to lease.
The defendant agreed to co-sign a lease for a truck as a favour to relatives of his then girlfriend. The lease provided that its terms could not be changed without the written consent of both the lessee and the defendant as co-lessee. The defendant made payments under the lease but never had possession or control of the truck. Without his knowledge or consent, the plaintiff lessor and the lessee entered into two extension agreements for a total of four months. The lessee did not return the truck at the end of the lease term, claiming that it was stolen. The plaintiff sued the defendant for the truck's residual value. The defendant counterclaimed for the amount of the lease payments made during the extension periods. The action was dismissed and the counterclaim was allowed. The Divisional Court reversed those outcomes. The defendant appealed.
Held, the appeal should be allowed. [page265]
A principal debtor will be released from liability under a contract where there has been a material alteration to the contract without his or her consent, provided that the principal debtor has not contracted out of that protection. Under the terms of the lease, the defendant had the same obligations as the lessee. Therefore, he was a principal debtor. He did not contract out of his legally afforded protection. The extension agreements amounted to material alterations to the lease as they were not plainly unsubstantial and not beneficial to the defendant. The agreements increased his financial burden and the length of his contractual obligations to the plaintiff by four months, and also had the effect of giving the lessee the right to possession of the truck for an additional four months, thus exposing the defendant to an extra four months of risk that the truck might be damaged or stolen. As the defendant had not consented to the extensions, he was relieved of liability under the lease.
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, apld
Other cases referred to
Blest v. Brown (1862), 4 De G.F. & J. 367; Citadel General Assurance Co. v. Iaboni (2004), 2004 CanLII 1525 (ON CA), 71 O.R. (3d) 817, [2004] O.J. No. 2912, 241 D.L.R. (4th) 128, 188 O.A.C. 175, 21 R.P.R. (4th) 164, 132 A.C.W.S. (3d) 575 (C.A.); 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.)
Authorities referred to
McGuinness, K.P., The Law of Guarantee: A Treatise on Guarantee, Indemnity and the Standby Letter of Credit, 2nd ed. (Scarborough, Ont.: Carswell, 1996)
APPEAL from the judgment of the Divisional Court (Kiteley, Swinton and Lederer JJ.), [2012] O.J. No. 6255, 2012 ONSC 7059 (Div. Ct.), revg the judgment of J.P. Moore J., [2012] O.J. No. 660, 2012 ONSC 1005 (S.C.J.) dismissing an action and allowing a counterclaim.
Adam Grant, for appellant.
Edward M. Hyer, for respondent.
The judgment of the court was delivered by
GILLESE J.A.: —
Overview
[1] Dr. Jaroszynski agreed to co-sign a lease for a truck. He never had possession or control of the truck but he did make all of the lease payments.
[2] The lease stipulated that its terms could not be changed without the written consent of both the lessee and Dr. Jaroszynski, as co-lessee. [page266]
[3] When the lease term expired, the truck was not returned. Instead, the lessor entered into two lease extension agreements with the lessee. The truck was not returned when the extension periods expired. Apparently, it had been stolen.
[4] Dr. Jaroszynski was unaware of the extension agreements and did not consent to them. He was not aware that the truck had not been returned at the end of the lease term.
[5] Is Dr. Jaroszynski liable for the truck's residual value? The court below held that he was.
[6] With leave, Dr. Jaroszynski appeals to this court. For the reasons that follow, I would allow the appeal.
Background
[7] Grzegorz Jaroszynski is an orthopaedic surgeon ("Dr. Jaroszynski" or the "appellant"). In 2004, he was in a relationship with Rose Micieli. Rose's father and brother, Gaetano and Massimo Micieli, needed to lease a truck for use in their landscaping and snow ploughing business, Micieli Contracting. They asked Dr. Jaroszynski for assistance in leasing the truck because they did not have sufficient creditworthiness to obtain a lease on their own. Dr. Jaroszynski agreed.
[8] On November 22, 2004, Dr. Jaroszynski, Gaetano Micieli and Massimo Micieli visited a car dealership in Caledonia, Ontario. Dr. Jaroszynski and Gaetano Micieli signed a 36-month standard form lease agreement (the "Lease") for a 2005 Chevrolet Silverado truck. The Lease was scheduled to end on November 22, 2007.
[9] The Lease identified the dealership as the lessor, Micieli Contracting as the lessee and Dr. Jaroszynski as the co-lessee. Micieli Contracting is not a company; it is a sole proprietorship.
[10] Under the terms of the Lease, both Micieli Contracting and Dr. Jaroszynski were principal debtors, bearing the same responsibilities and obligations.
[11] The dealership assigned the Lease to GMAC Leaseco Corporation ("GMAC").
[12] Dr. Jaroszynski made all the required Lease payments. Each month, the Lease payment was withdrawn directly from his bank account, pursuant to a pre-authorized payment plan provision in the Lease.
[13] Dr. Jaroszynski never drove the truck or had control over its use. He expected the Micielis to repay him for the Lease payments when income from their business permitted, but they never did.
[14] Dr. Jaroszynski's relationship with Rose Micieli ended around May or June of 2005. He did not see her or the other Micielis between that time and the trial. [page267]
[15] Dr. Jaroszynski testified that GMAC contacted him once during the Lease term, after his relationship with Rose Micieli ended. Someone from GMAC phoned him, asking about proof of insurance on the truck. He told GMAC at that time that if Massimo Micieli had not placed proper insurance on the truck and it were to be impounded by GMAC, he would be happy because that would end his obligation to make the monthly Lease payments.
[16] The Lease term expired on November 22, 2007. Although the Lease required that the truck be returned to GMAC at that time, it was not returned. Instead, unbeknownst to Dr. Jaroszynski, GMAC and Gaetano Micieli, on behalf of Micieli Contracting, entered into a lease extension agreement, which extended the Lease term to January 21, 2008. The truck was not returned when the extension period expired.
[17] Once again, GMAC entered into a lease extension agreement with Gaetano Micieli on behalf of Micieli Contracting, without Dr. Jaroszynski's knowledge. This second extension agreement expired on March 21, 2008.
[18] Both extensions were granted so that Micieli Contracting could arrange financing to buy the truck. The extension agreements extended the maturity date of the Lease but otherwise incorporated the terms of the Lease.
[19] GMAC followed its usual practice when entering into the two extension agreements. After receiving a request for an extension, it faxed a standard form lease extension agreement to someone at Micieli Contracting. At some point, the completed extension agreements were faxed back to GMAC. Both extension agreements had the signature of "G. Micieli" for Micieli Contracting and a signature purporting to be that of Dr. Jaroszynski.
[20] The payments required during the extensions continued to be taken from Dr. Jaroszynski's bank account.
[21] The truck was not returned on March 21, 2008, as required by the second extension agreement.
[22] Massimo Micieli testified at trial that the truck had been stolen before March 21, 2008, the expiration of the second extension period. However, there was no evidence as to when the alleged theft took place.
[23] Dr. Jaroszynski was unaware of the extension agreements. Neither Massimo Micieli nor GMAC contacted him about them. He was not a party to the negotiations and he did not consent to the extensions. However, his purported signature was on the extension agreements that were faxed to GMAC.
[24] At no point did GMAC contact Dr. Jaroszynski to inquire about the whereabouts of the truck or tell him that it had [page268] not been returned. Nor did it tell him that the Lease had twice been extended.
[25] Dr. Jaroszynski first found out about the extension agreements when GMAC sued him for the truck's residual value. Dr. Jaroszynski responded by counterclaiming for the amount of the lease payments paid during the extension periods.
[26] At trial, GMAC lost on its claim and Dr. Jaroszynski succeeded on his counterclaim.
[27] On appeal to the Divisional Court, those outcomes were reversed -- judgment was granted in favour of GMAC for the truck's residual value and Dr. Jaroszynski's counterclaim was dismissed.
Clause 21 of the Lease
[28] As will be seen, clause 21(b) of the Lease plays a significant role in this case. Clause 21(b) is an "entire agreement" provision, which stipulates that any changes to the Lease terms must be in writing and signed by both lessee and co-lessee. The relevant parts of the preamble to the Lease and clause 21 read as follows:
This is an agreement to lease the vehicle described above with any attachments or accessories (the "Vehicle"). This is not a purchase agreement and You do not own the Vehicle and do not have title to it. "You" and "Your" refer to Lessee and any Co-Lessee, jointly and severally with the Lessee. "We", "Us and "Our", refer to the Lessor named above, and after assignment, refer to GMAC Leaseco Corporation (GMAC) or any other assignee, which may include General Motors of Canada Limited ("GM"). "Lease" refers to this Lease Agreement.
- GENERAL
You agree that (a) The Lease shall be governed by the laws of the province or territory in which it is signed by You. (b) It is the entire agreement between You and Us relating to the lease of the Vehicle. Any change to the terms of this Lease must be in writing and signed by You and any Assignee[.]
(Emphasis added)
A Brief Summary of the Decisions Below
The trial decision
[29] The trial judge found that Dr. Jaroszynski did not know about the negotiations leading to the extension agreements, much less agree to them. He found that the signature on the extension agreements purporting to be that of Dr. Jaroszynski was not his. Further, he accepted Dr. Jaroszynski's evidence that he was not aware that the truck had not been returned to [page269] GMAC when the Lease matured in November 2007, and, had he been aware of this, he would have contacted Massimo Micieli and asked him to return the vehicle.
[30] The trial judge found that Dr. Jaroszynski was a surety, rather than a co-lessee. In his view, the extension agreements constituted a material variation of the Lease which, without Dr. Jaroszynski's consent, resulted in the discharge of his obligations under the Lease. The trial judge found that the extension agreements increased Dr. Jaroszynski's financial burden and the length of his contractual liability to GMAC, thus constituting a change that Dr. Jaroszynski had the right to consider and choose to approve of in writing, or reject.
[31] Consequently, by judgment dated February 10, 2012 (the "judgment"), he dismissed GMAC's action and ordered it to pay Dr. Jaroszynski the amount he had paid in lease payments during the extension periods, plus interest and costs.
The decision under appeal
[32] The Divisional Court held that Dr. Jaroszyski was a co-lessee, not a surety, and that the trial judge had erred in applying the law pertaining to sureties.
[33] It considered whether the appellant was relieved of his obligations under the Lease because it had been extended without his consent. In respect of the additional lease payments made during the extension periods, the Divisional Court referred to clause 21(b) of the Lease, which requires that any change to the Lease terms be in writing and signed by both the lessee and the co-lessee. It held that the appellant was not liable for the additional lease payments because he had had no involvement in, or knowledge of, the extension agreements.
[34] However, the Divisional Court held that the appellant was liable for the truck's residual value. It reasoned that the extension agreements did not amount to a new lease agreement because the "core" of the original Lease remained in place. Thus, Dr. Jaroszynski's obligations as a principal debtor under the Lease remained, despite the extension agreements. Because one of Dr. Jaroszynski's primary obligations under the Lease was to return the truck at the end of the Lease term and that had not been done, he was liable to pay the truck's residual value. The Divisional Court was of the view that the additional time which GMAC gave the lessees to return the truck, after the Lease expired, did not alter the lessees' obligation to return the truck.
[35] The Divisional Court explained, at para. 19 of its reasons:
In the case that is the subject of this appeal, there was no new agreement, only an extension . . . Whether it is a principal debtor or a surety who has [page270] not consented, it is not "any change however small" that serves to release a party from its obligations; it must be a "material change" to the surety's risk or a change that can prejudice the surety. To be material, the change must affect an important part of the instrument and the rights of the parties under it. In Manulife v. Conlin, the change was material. The mortgage, rather than being paid off, was renewed for a further term of three years with a higher rate of interest. It was a new and different agreement. In the present case, the core of the agreement remained in place. The extensions totalled four months and were put in place to allow the lessees to determine whether they could arrange to complete a purchase of the vehicle. This did not change the obligations of the [appellant] or materially affect the risk he had assumed. By the terms of the lease, he was always liable to pay the value of the vehicle at the end of the lease term if the vehicle was not returned (see: clauses 16 and 20). The time allowed after the maturity of the lease did not alter this risk.
[36] By order dated December 14, 2012 (the "order"), the Divisional Court set aside the judgment and ordered Dr. Jaroszynski to pay GMAC the truck's residual value, plus interest and costs of the trial and appeal.
The Issue
[37] The appellant raises three issues on appeal. However, in my view, they can be distilled into a single question: did the Divisional Court err in failing to find that Dr. Jaroszynski had been discharged from his obligations under the Lease, when its term was extended without his consent?
Analysis
[38] I agree with the Divisional Court that Dr. Jaroszynski was a lessee and not a surety, as the trial judge found. I also agree with the Divisional Court's reasons for arriving at that conclusion, which can be summarized as follows. The Lease is a comprehensive document. Under its terms, Dr. Jaroszynski is unambiguously defined as a co-lessee and given the same responsibilities as the lessee. The trial judge erred in law by failing to properly apply basic principles of contractual interpretation, including a failure to consider the words of the Lease itself. As the language of the Lease was unambiguous, it was an error to construe it based on the appellant's subjective intention and evidence extraneous to the Lease.
[39] I further agree with the Divisional Court that Dr. Jaroszynski was not liable for Lease payments in the period covered by the extension agreements. He did not sign the extensions agreements; thus, they were not binding on him.
[40] However, in my view, the Divisional Court erred in finding that Dr. Jaroszynski remained liable for the truck's return or its residual value after the extension agreements were entered [page271] into. In my view, 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 dictates that he be excused from that liability.
[41] To explain this conclusion, I will examine the Manulife decision, explain why it applies and then apply it to the present case.
Manulife examined
[42] Manulife's predecessor made a loan to Dina Conlin in 1987. The loan was for a term of three years and bore interest [at] an annual interest rate of 11.5 per cent. Ms. Conlin provided security in the form of a first mortgage against lands in Welland, Ontario. The loan required two guarantors: John Joseph Conlin, the mortgagor's husband, and Conlin Engineering and Planning Limited, an Ontario corporation. The two guarantors promised, "as principal debtors and not as sureties", to pay the money secured by the mortgage. They further agreed to be bound by all of the mortgage conditions and stipulations that were binding on the mortgagor.
[43] Dina Conlin and John Joseph Conlin separated in 1989.
[44] In 1990, shortly before the mortgage was to mature, Ms. Conlin and Manulife executed an agreement which renewed the mortgage for a further three-year term at the increased annual interest rate of 13 per cent. Although the renewal forms provided spaces for the signature of the "registered owner" and the "guarantor", only Ms. Conlin signed. Mr. Conlin had no notice or knowledge of the renewal.
[45] When the mortgage went into default, Manulife brought proceedings against Ms. Conlin and the guarantors. It succeeded at first instance. However, a majority of this court set aside the judgment and dismissed the action as against Mr. Conlin.
[46] Manulife's appeal to the Supreme Court of Canada was dismissed.
[47] Justice Cory, writing for the majority, began by considering the law governing guarantors. He noted the long-standing principle that a guarantor will be released from liability under a contract where the principal debtor and the creditor agree to a material alteration of the terms of the contract without the guarantor's consent, so long as the guarantor has not contracted out of that protection (the "principle") (at paras. 2 and 4).
[48] At para. 3 of his reasons, Cory J. set out the rationale underlying the principle. Referring to K.P. McGuinness, The Law of Guarantee: A Treatise on Guarantee, Indemnity and the Standby Letter of Credit, 2nd ed. (Scarborough, Ont.: Carswell, 1996), Cory J. affirmed that if the contract is varied so as to [page272] change the nature or extent of the risks arising under it, then the effect of the variation is not so much to cancel the liability of the guarantor as it is to remove the creditor from the scope of the protection that the guarantee affords. It is not that the guarantor is no longer liable for the original contract but, rather, that the original contract for which the guarantor assumed liability has ceased to apply. In varying the contract without the guarantor's consent, the creditor "embarks on a frolic of his own, and if misfortune occurs it occurs at the sole risk of the creditor".
[49] While a guarantor can contract out of the protection provided by the common law or equity, clear language is required to displace that protection; whether a guarantor remains liable is a question of interpreting the contract (at paras. 4-6).
[50] Justice Cory then applied the interpretive principles to the guarantee and renewal provisions, respectively clauses 34 and 7 of the original guarantee agreement. In his view, the clauses "unambiguously" indicated that Mr. Conlin was not bound by the renewal agreement (at para. 18).
[51] As I explain below, the section of Cory J.'s reasons that follows bears a particular significance in this case. That section is entitled "The Effect of the 'Principal Debtor Obligation' Set out in Clause 34". It runs from paras. 19 to 22 of his reasons.
[52] At para. 19, Cory J. concluded that a principal debtor clause converts a guarantor into a full-fledged principal debtor. The bank's failure to notify Mr. Conlin, as a principal debtor, of the renewal agreements "must release him from his obligations since he is not a party to the renewal".
[53] At para. 21, Cory J. states that the mortgagor as a principal debtor had to be given notice of the renewal agreement. Because the principal debtor clause converted the guarantor into a full-fledged principal debtor, the guarantor was entitled to the same notice. At para. 21, he states:
If a lending institution wishes to have the guarantor obligated as a principal debtor, then the guarantor must be entitled to the same rights as the principal debtor which would include both notice and agreement as a party to a renewal.
[54] At para. 22, Cory J. concluded that regardless of whether Mr. Conlin was considered a guarantor or a principal debtor, the principle applied to determine his liability:
Even if it were thought that the principal debtor clause does not convert the guarantor into a principal debtor, the equitable or common law rules relieving the surety from liability where the contract has been materially altered by the creditor and the principal debtor without notice to the surety would apply, in the absence of an express agreement to the contrary. The question is whether in this case, either as principal debtor or as surety, [page273] the guarantor has expressly contracted out of the normal protections accorded to him.
(Emphasis added)
[55] Justice Cory then referred to two aspects of the renewal agreement itself which confirmed his conclusion that Mr. Conlin was not bound by it. First, the renewal agreement was on a standard form prepared and used by the bank and it called for the guarantor's signature. Second, the renewal agreement stated that the terms of the mortgage formed part of it. This indicated, in his view, that it was a new agreement rather than merely an extension of the existing mortgage.
Manulife applies
[56] GMAC contends that Manulife does not apply to the present case. It argues that Manulife applies (1) to guarantors, not lessees; and (2) to renewals, not extensions. I do not accept either argument.
[57] In my view, Manulife's scope is not limited to guarantors. It applies also to principal debtors, which would include a lessee.
[58] It will be recalled that in Manulife, under the terms of the mortgage, the guarantors agreed to be bound as principal debtors, and not as sureties. Whether Mr. Conlin was to be treated as guarantor or principal debtor, when determining his liability, was a live issue throughout the proceedings. This point can be clearly seen by considering both the dissenting reasons of Iacobucci J. (Gonthier J. concurring) and the majority reasons of Cory J.
[59] In Manulife, the decision under appeal was from this court. Justice Iacobucci referred to that decision, noting that Finlayson and Robins JJ.A. expressly found it unnecessary to decide whether Mr. Conlin's liability was founded on his status as guarantor or principal debtor, whereas Carthy J.A. dealt with liability on the basis of the law governing guarantors.
[60] Justice Iacobucci decided liability in Manulife on the basis of his status as a guarantor. He concluded that Mr. Conlin was liable to pay the amount secured by the original mortgage, but not the increased amount required by the renewal agreement.
[61] Justice Cory's reasons, however, show that he decided liability on both bases. As indicated above, although Cory J. began his analysis by considering the legal principle governing guarantors, he used that principle as the foundation for determining Mr. Conlin's liability as a principal debtor. In this regard, it will be recalled that Cory J. concluded that the principle applied regardless of whether Mr. Conlin's liability was based on his status as guarantor or principal debtor (para. 22). [page274]
[62] It is important to note that, in para. 22 of Manulife, Cory J. does not say that the principle applies because Mr. Conlin was a guarantor. He says it applies whether Mr. Conlin was considered "either as a principal debtor or as a surety". As a result, because the contract had been materially altered without his consent, Mr. Conlin was relieved from liability under the mortgage, unless he had contracted out of the normal protections accorded to him by law.
[63] See, also, Citadel General Assurance Co. v. Iaboni (2004), 2004 CanLII 1525 (ON CA), 71 O.R. (3d) 817, [2004] O.J. No. 2912 (C.A.), at para. 37, in which this court held -- albeit in the context of a mortgage, rather than a lease -- that Manulife stands for the proposition that lack of notice extinguishes the principal debtor's liability on the original covenant.
[64] Accordingly, I do not accept that Manulife applies only to guarantors. By its terms, Manulife applies also to principal debtors.
[65] Next, I must consider whether Manulife is inapplicable because it dealt with a renewal agreement, rather than an extension agreement. Does that distinction render its reasoning inapplicable to the present case? In my view, it does not.
[66] There is nothing in the language or analysis in the majority decision in Manulife to limit its applicability to renewal agreements. Rather, the language is general, referring to any document that is a "material alteration" of the terms of the contract: see, for example, paras. 2, 3 and 22.
[67] Factually, the difference between a renewal and an extension was relevant in Manulife because the original mortgage agreement contained a "no prejudice" clause, which expressly permitted the term of the mortgage to be extended without notice to the principal debtor. The "no prejudice" clause made no reference to renewals. However, nothing in the analysis in Manulife turns on the difference between renewals and extensions.
[68] Accordingly, in my view, the analytical framework established in Manulife applies to the present case.
Manulife applied
[69] Manulife, as we have seen, stands for the proposition that the principle applies to a principal debtor as well as a guarantor. Accordingly, a principal debtor will be released from liability under a contract where there has been a material alteration to the contract without his or her consent, provided that the principal debtor has not contracted out of that protection.
[70] The principle applies to this case as follows. [page275]
[71] Under the terms of the Lease, Dr. Jaroszynski is a co-lessee with the same obligations as the lessee. Therefore, he is a principal debtor. Dr. Jaroszynski did not consent to the extension agreements. Nor did Dr. Jaroszynski contract out of his legally afforded protection. On the contrary, clause 21(b) of the Lease expressly provides that any change to the terms of the Lease must be in writing and signed by both lessee and co-lessee.
[72] Therefore, the only question is whether the extension agreements amount to a "material" alteration to the Lease because, if so, Dr. Jaroszynski will be released from liability under the Lease.
[73] There appears to be some uncertainty about the test to be used in answering that question.
[74] At para. 19 of its reasons, the Divisional Court states that to be material, the change effected by the extension agreements "must affect an important part of the instrument and the rights of the parties under it". Later in that same paragraph, the Divisional Court states that the extension agreements did not change Dr. Jaroszynski's obligations or materially affect the risk that he had assumed under the Lease. It would seem that either or both of these statements are its formulation of the test for what constitutes a "material" alteration.
[75] With respect, on my reading of Manulife, neither formulation is consistent with the test it established for determining whether a material change has been effected.
[76] In Manulife, at para. 10, Cory J. approves of Lord Westbury's formulation in Blest v. Brown (1862), 4 De G.F. & J. 367, at p. 376 De. G.F. & J.: apart from any express stipulation to the contrary, a surety will be discharged where the contract has been changed, without his or her consent, unless the change is in respect of a matter that cannot "plainly be seen without inquiry to be unsubstantial or necessarily beneficial to the surety".
[77] Or, as this court put it 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.), at p. 320 O.R., relying on Manulife, "alterations to the principal contract will be held to be material unless they are plainly unsubstantial or necessarily beneficial to the guarantor".
[78] As we have seen, in Manulife, Cory J. extended to principal debtors the protection historically given to guarantors. Therefore, in my view, the same test for what constitutes a material change applies to a principal debtor.
[79] On this test, it is plain that the changes effected by the extension agreements were material. The extension agreements increased Dr. Jaroszynski's financial burden and the length of his contractual obligations to GMAC by four months. This [page276] amounts to an increase of approximately 11 per cent (the four-month extension divided by the original 36-month term). Extending a person's financial exposure by an additional 11 per cent is not plainly "unsubstantial" and clearly is not "necessarily beneficial" to him. On the contrary, it was to Dr. Jaroszynski's detriment.
[80] Moreover and very importantly, the extension agreements had the effect of giving the lessee the right to possession of the truck for an additional four months, thus exposing Dr. Jaroszynski to an extra four months of risk that the truck might be damaged or stolen. Dr. Jaroszynski agreed to assume that risk for 36 months -- not 40 months. To paraphrase from para. 3 of Manulife, by varying the Lease without Dr. Jaroszynski's consent, GMAC went off on a frolic of its own and when misfortune occurred, it was at GMAC's sole risk. As a result, Dr. Jaroszynski is relieved of liability under the Lease. To again paraphrase, it is not so much a matter of saying that Dr. Jaroszynski is no longer liable on the Lease as, rather, that the Lease under which he assumed liability ceased to apply to him.
[81] I would add this comment. In Manulife, Cory J. observed that the requirement of the guarantor's signature on the bank's standard form renewal agreement led to the conclusion that without his consent he would not be bound. So too in the present case. GMAC's standard form extension agreement had a place for the co-lessee's signature, leading to the conclusion that the co-lessee would not be bound absent his or her consent.
[82] In conclusion, Dr. Jaroszynski did not consent to the extension agreements, which changed in a material way his obligations under the Lease. He did not waive the protection afforded a principal debtor. Indeed, the Lease affirmed that any changes would be in writing and signed by him. Manulife dictates that he be relieved of his obligations under the Lease.
Disposition
[83] Accordingly, I would allow the appeal, set aside the order and restore the judgment.
[84] The appellant is entitled to his costs of the appeal to the Divisional Court and to this court. I would fix those costs at $5,000 and $8,500, respectively; both sums are inclusive of disbursements and all applicable taxes.
Appeal allowed.
End of Document