Supreme Court of Canada
Bauer v. The Bank of Montreal, [1980] 2 S.C.R. 102
Gerald G. Bauer (Defendant) Appellant;
and
The Bank of Montreal (Plaintiff) Respondent.
1980: February 14; 1980: April 22.
Present: Ritchie, Dickson, Estey, McIntyre and Chouinard JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.
Guarantee—Liability of guarantor to creditor when creditor fails to preserve security—Exemption clauses—Rules of construction—Misrepresentation—Collateral oral agreement contradicting written guarantee.
The appellant, the guarantor, was the principal officer and major shareholder of a company, a customer of the respondent bank. The bank advanced an operating credit to the company upon receiving an assignment of the company’s book accounts and the guarantee of indebtedness by the appellant. The appellant eventually sold his interest in the company but was not released from his liability by the bank. When the company went into bankruptcy, it was found that the bank had registered the said assignment in the wrong county and the assignment was held to be void against the trustee. The assigned accounts became available to general creditors and were of little if any value to the guarantor in reducing his obligation under the guarantee. The bank brought this action against the appellant upon the guarantee and the action was dismissed by the Supreme Court of Ontario on the basis that the guarantor was entitled to be relieved, wholly or partially, from his liability depending on the extent of the injury suffered, for the reason that the bank by its failure to safeguard the security for the guarantee had rendered itself incapable of returning the security to the guarantor on payment of the debt. The Court of Appeal, while agreeing with the trial judge upon his disposition of the case as it was presented to him, allowed the appeal on a new point not raised or argued at trial, i.e., under the guarantee it was expressly said that the bank could “abstain from perfecting securities”, and these words were held by the Court to relieve the bank in this case from the consequences of non-registration of the assignment.
Held: The appeal should be dismissed.
The creditor, in the absence of agreement to the contrary with the debtor or the surety, must protect and preserve the security and be in a position, unless excused
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by other agreement, to return or reassign the security to the debtor or surety on repayment of the debt. The Court rejected the appellant’s contention that the clause in the guarantee relied upon by the Court of Appeal is an exception clause and subject to any special rules of construction. The bank was under a duty not to damage the position of the guarantor beyond the terms of the agreement but the clause is clear in that it provides that a failure to perfect security or to register will not impair the bank’s position. The clause is not onerous or unreasonable. The contract created no unusual or onerous burden in ordinary commercial terms. The Court also rejected the appellant’s contention that the execution of the guarantee was procured by misrepresentation of its full nature and effect by the bank. There was no evidence which would support any finding of misrepresentation against the bank. Finally, the Court rejected the appellant’s contention that the bank could not rely on the clause because it was an express condition of the giving of the guarantee that the accounts be preserved for the benefit of the guarantor and reassigned to him on payment of the company’s indebtedness. It is difficult, in this case, to discover any very clear support for the existence of any such collateral or qualifying agreement, and a collateral agreement cannot be established where it is inconsistent with or contradicts the written agreement.
Re Grey Electronic Supply Limited (1974), 1974 625 (ON SC), 6 O.R. (2d) 308; Traders Finance Corporation Limited v. Halverson (1968), 1968 649 (BC CA), 2 D.L.R. (3d) 666; Household Finance Corporation Limited v. Foster Limited et al., 1949 77 (ON CA), [1949] O.R. 123; Jamesway v. Krug (1932), 41 O.W.N. 146; Bryans v. Peterson (1920), 1920 438 (ON CA), 47 O.L.R. 298; Rose v. Aftenberger, 1969 317 (ON CA), [1970] 1 O.R. 547; Perry v. National Provincial Bank of England, 1 Ch. 464 [1910]; Canadian Indemnity Company v. Okanagan Main Line Real Estate Board et al., 1970 152 (SCC), [1971] S.C.R. 493; Jacques v. Lloyd D. George and Partners Limited, [1968] 1 W.L.R. 625; Firestone Tire and Rubber Company Limited v. Vokins and Co. Ltd., [1951] 1 Lloyds L.R. 32; Mendelsohn v. Norman Ltd., [1970] 1 Q.B. 177, referred to; Hawrish v. Bank of Montreal, 1969 2 (SCC), [1969] S.C.R. 515, followed.
APPEAL from a judgment of the Court of Appeal for Ontario allowing an appeal from a judgment of the Supreme Court of Ontario. Appeal dismissed.
B.P. Bellmore, for the defendant, appellant.
J.L. McDougall, for the plaintiff, respondent.
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The judgment of the Court was delivered by
Introduction and Background
MCINTYRE J.—This appeal raises the question of the effect upon the liability of a guarantor to the creditor when the creditor, by reason of its dealing with security for the debt, has rendered it impossible to deliver the security to the guarantor upon the guarantor paying the debt.
Bauer, defendant at trial and appellant in this Court, hereinafter referred to as the guarantor, was in March of 1971 the principal officer and major shareholder of a company known as Grey Electronics Supply Limited, hereinafter referred to as the company. The company was a customer of the respondent bank. The bank was prepared to advance or to continue to allow the company an operating credit of up to $50,000 upon receiving an assignment of the company’s book accounts and the guarantee of the indebtedness by the guarantor. The guarantee was signed on the bank’s standard form on March 29, 1971, and the assignment of book accounts was executed later on April 7, 1971. Despite the difference in date, it is common ground that the two dispositions formed part of the same transaction. In December of 1971, the guarantor sold his interest in the company to one David Walling. The bank would not, however, release him from his liability under the guarantee and it remained in effect. The company ran into serious difficulty and in August of 1974 it went into bankruptcy. The amount then owing by the company to the bank came to $36,165.73. In the bankruptcy proceedings, the bank claimed preference relying upon its assignment of book accounts. The trustee, however, contested this claim successfully (see Re Grey Electronic Supply Limited1) on the basis that the assignment had not been registered by the bank. The bank had attempted to register and in fact had done so but in the wrong county. The result of this failure, which was entirely the responsibility of the bank, was that the assignment was held to be void against the trustee. The assigned accounts, for whatever value they possessed, became available to general creditors and were of little if any value to the guarantor in
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reducing his obligation or recouping his loss under the guarantee. At trial before Galligan J. the bank’s action was dismissed. The trial judge held that a creditor was under an obligation to “safeguard securities given to him in the same condition as when the guarantee was given and if registration is necessary to make the security valid and effective, then the creditor must properly register the securities”. He went on to hold that where a creditor fails to preserve the security, and it therefore became unavailable for delivery to the guarantor upon payment of the debt, the guarantor would be relieved wholly or partially from his liability depending on the extent of the injury suffered. He held as well that since the bank had not met the onus of showing to what extent the guarantor was prejudiced by the loss of the accounts, the guarantor was entitled to be fully discharged. On appeal by the bank, the Court of Appeal per Arnup J.A. agreed with the trial judge upon his disposition of the case as it was presented to him but allowed the appeal on a new point not raised or argued at trial.
As has been stated earlier, the guarantee was on the bank’s standard form which is used regularly for this purpose. It provided for a continuing guarantee by the guarantor of all indebtedness of the company to the bank from time to time owing up to $50,000 and provided as well:
It is further agreed that said bank, without exonerating in whole or in part the undersigned, or any of them (if more than one), may grant time, renewals, extensions, indulgences, releases and discharges to, may take securities from and give the same and any or all existing securities up to, may abstain from taking securities from, or from perfecting securities of,… the customer.
The inclusion of this provision in the guarantee raised the only point considered of significance in the Court of Appeal and Arnup J.A. for the Court dealt with it in these words:
In the circumstances of this case, the words “perfecting securities” in the guarantee included registration of the assignment of book debts in the right place. The guarantee contains in express terms an agreement by the
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signatory with the bank that the bank may abstain from perfecting securities without exonerating in whole or in part the guarantor. In our view, this language precisely covers the situation that arose, and accordingly it was not open to the defendant to assert, by way of defence, the alleged negligent dealing with the securities by the bank.
The Duty of a Creditor
The duty of a creditor holding security for the performance of the obligations of a debtor or a surety is clearly established. The creditor, in the absence of agreement to the contrary with the debtor or the surety, must protect and preserve the security and be in a position, unless excused by other agreement, to return or reassign the security to the debtor or surety on repayment of the debt. The principle was aptly stated in Traders Finance Corporation Limited v. Halverson2 by Bull J.A., at p. 672, where he collected various authorities on the point. As well Robertson C.J.O. in Household Finance Corporation Limited v. Foster Limited et al.3 reviewed several authorities on the point at pp. 132 and 133, after having said at p. 131, regarding the position of an endorser of a note who had no contract with the payee:
There was no contractual relationship between them with respect to the mortgage security given the appellant by the Fosters, the principal debtors. Such right or interest as the respondents had in that security rested, not upon contract, but on the rule of equity by which, upon payment of the debt, the surety is entitled to benefit of every security held by the creditor, even though neither contracted for by the surety, nor known to him, and even though not existing until after the surety became bound.
There are other authorities and writings to the same effect. See Jamesway v. Krug4, Bryans v. Peterson5, as well as Halsbury’s Laws of England, 4th ed., vol. 20, p. 152, para. 280 et seq., and Snell’s Principles of Equity, 27th ed., p. 462 and p. 463. It was upon a recognition of this principle, and without having the clause above quoted referred to him, that Galligan J. exonerated the guarantor at trial.
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Despite this rule, it is open to the parties to make their own arrangements, and a surety is competent to contract himself out of the protection of the equitable rule requiring preservation of his security. If authority is needed for such a proposition, it may be found in Rose v. Aftenberger et al.6, where Laskin J.A., as he then was, speaking for the Ontario Court of Appeal, said:
The law is that sureties are entitled to the benefits of any security taken by a creditor who has their promise to pay the debt of the principal obligor, unless the sureties have contracted themselves out of this right or are estopped from asserting it. In this connection it is immaterial when the security was taken or whether the guarantor knew of it at the time.
See as well Holden, Security for Banker’s Advances, 2nd ed., pp. 197 et seq., where the question is discussed and reference is made to Perry v. National Provincial Bank of England7. It was upon this basis that the Court of Appeal allowed the appeal and imposed liability on the guarantor.
The Appellant's Arguments
In this Court, the appellant argued several points. In summary, his argument embraced four principal propositions. He contended in the first place that the clause in the guarantee relied upon by the Court of Appeal was an exemption or exclusion clause, and as such it should be construed contra proferentem, that is, against the bank whose standard printed form embodied the guarantee. He then contended that the bank could not rely on the clause because it was unusual, onerous, and unreasonable. Further, it was said that the execution of the guarantee was procured by a misrepresentation of its nature and effect by the bank and it should be set aside. Finally it was argued that it had been specifically agreed in a collateral agreement that the assigned accounts would be preserved for reassignment to the guarantor upon payment of the debt.
Exemption Clause
I turn now to the exemption clause argument. It was argued that the provision giving the bank wide freedom in its dealing with security furnished by
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the company fell into the classification of an exclusion clause and it was therefore subject to special rules of construction. There have been various attempts to define and to categorize exemption clauses which generally have the effect of excluding or limiting the liability of one party to a contract and which generally, but not always, appear in standard form contracts widely used in commercial matters. While they have been variously described, I find that the categorization in Chitty on Contracts, 24th ed., vol. 1, at p. 362, particularly helpful where it is said:
Exemption clauses may broadly be divided into three categories. First, there are clauses which purport to exempt one party from a substantive obligation to which he would otherwise be subject under the contract, for example, by excluding express or implied terms, by limiting liability to cases of wilful neglect or default, or by binding a buyer of land or goods to accept the property sold subject to “faults”, “defects” or “errors of description”. Secondly, there are clauses which purport to relieve a party in default from the sanctions which would otherwise attach to his breach of contract, such as the liability to be sued for breach or to be liable in damages, or which take away from the other party the right to repudiate or rescind the agreement. Thirdly, there are clauses which purport to qualify the duty of the party in default to indemnify the other party, for example, by limiting the amount of damages recoverable against him, or by providing a time-limit within which claims must be made.
Contracts falling within these categories are said to be subject to special rules of construction. In construing such a clause, the court will see that the clause is expressed clearly and that it is limited in its effect to the narrow meaning of the words employed and it must clearly cover the exact circumstances which have arisen in order to afford protection to the party claiming benefit. It is generally to be construed against the party benefiting from the exemption and this is particularly true where the clause is found in a standard printed form of contract, frequently termed a contract of adhesion, which is presented by one party to the other as the basis of their transaction. No argument was raised by the bank against the general
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propositions advanced above, but it was contended that this clause was not an exemption clause and did not become subject to any special rules of construction. I accept the basic argument of the bank on this point. The clause in question is not an exemption clause in my opinion. It is no more than a provision which varies the ordinary terms of a guarantee and which gives the bank the right to deal with security provided by the debtor with greater freedom than would be otherwise permissible. This is a provision by which the guarantor has contracted himself out of the equitable right he would have possessed in the absence of this term and he has, as a term of the contract between the bank and himself, given the bank affirmative rights in this regard. That a guarantor in this situation is fully competent to so dispose of his affairs is beyond question (see the words of Laskin J.A., as he then was, in Rose v. Aftenberger, supra, quoted above and Perry v. National Provincial Bank of England, supra, particularly the words of Couzens-Hardy, M.R., at p. 471). The clause in question here is just such a provision as that referred to in the Perry case. It must be construed according to the general rules of construction and the appellant may not, in my view, call in aid any special rules applicable in an approach to an exemption clause.
When the whole guarantee is examined, it becomes clear at once that the consideration for the guarantee was the bank’s continuation of the line of credit it had advanced to the company. As part of the transaction, the company had agreed to give and had given the assignment of book debts. The clause in question gave the bank powers which it could exercise or not as it chose in dealing with that security. The principal bone of contention here turned on the words permitting the bank to abstain from perfecting or registering securities. “Abstain” meant, it was said, to voluntarily or knowingly refrain from registration. The bank had then not abstained from registration for it had tried unsuccessfully to do so and had negligently failed. Therefore, it was said that upon a strict construction of the clause in question it had not brought itself within its terms and the guarantee should be void. I am not able to accept this argument. I do not consider that the reason or
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motive for the bank’s non-registration alters the case. The bank was under a duty not to damage the position of the guarantor or act to his prejudice beyond the terms of the agreement but the clause is clear in that it provides that a failure to perfect security or to register will not impair the bank’s position. This ground of appeal must fail.
Onerous and Unreasonable Terms
To the argument that the clause was onerous and unreasonable and that the bank could not rely upon it, various arguments were advanced. It was stressed that the guarantee was on a standard bank form, that it was drawn by a party seeking to rely upon the clause, that there was inequality between the parties, and that the clause was unusual in nature. I can find no merit in this position. While it is, of course, true that the guarantee was on the bank’s standard form, it is difficult to say that the clause was unusual. It was the one the bank always used and the guarantor, an experienced business man, admitted that he had signed three previous guarantees to the bank on the same form and that he knew the general scope and purpose of the guarantee and what it would require of him. The guarantor was a customer of the bank, he had been for some years. While I suppose it could be said that there is always a degree of inequality between borrower and lender, banker and guarantor, there was no such inequality here that would void the arrangements. Nor, in my opinion, can it be said that there was any unreasonableness in the arrangement. This contract concluded between the bank and the guarantor was an ordinary commercial transaction carried out between the bank and an experienced business man in the same manner and upon the same terms as are employed daily in such matters. The contract created no unusual or onerous burden in ordinary commercial terms. I can find no merit in this argument.
Misrepresentation
The third argument involves the assertion that the execution of the guarantee was procured by misrepresentation of its full nature and effect by the bank or, alternatively, that there was a failure to explain its nature and effect. The misrepresentation alleged is that the bank manager told the guarantor that upon his paying the amount
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secured under the guarantee, the book debts would be reassigned to him. This representation was false for the reason that it contradicted the bank’s own document. It was contended that the guarantee would not have been executed in its absence. Various authorities were cited for the proposition that a contract induced by misrepresentation or by an oral representation, inconsistent with the form of the written contract, would not stand and could not bind the party to whom the representation had been made. These authorities included Canadian Indemnity Company v. Okanagan Main Line Real Estate Board et al.8, per Judson J. at p. 500, Jacques v. Lloyd D. George and Partners Limited9, per Lord Denning at pp. 630-631, Firestone Tire and Rubber Company Limited v. Vokins and Co. Ltd.10, see Devlin J. at p. 39, and Mendelsohn v. Norman Ltd.11
No quarrel can be made with the general proposition advanced on this point by the appellant. To succeed, however, this argument must rest upon a finding of some misrepresentation by the bank, innocent or not, or on some oral representation inconsistent with the written document which caused a misimpression in the guarantor’s mind, or upon some omission on the part of the bank manager to explain the contents of the document which induced the guarantor to enter into the guarantee upon a misunderstanding as to its nature. For reasons which will appear later in that part of this judgment dealing with the collateral contract argument, I am of the view that there is no evidence which would support any such finding against the bank. The cases referred to above support the general proposition advanced but rest upon a factual basis providing support for the argument. In each case there is a clear finding of a specific misrepresentation which led to the formation of the contract in question, a circumstance not to be found here. This argument must fail as well.
Collateral Agreement
Finally, it was the contention of the guarantor that the bank could not rely on the above‑quoted provision in the facts of this case because it was an
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express condition or the giving or the guarantee that the accounts be preserved for the benefit of the guarantor and reassigned to him on payment of the company’s indebtedness. The bank was, therefore, in breach of its undertaking in this regard and was not entitled to take advantage of the provision. The argument had not been raised at trial presumably because no reliance had been placed upon the relieving provision above quoted.
I have examined the evidence with care and find it difficult to discover any very clear support for the existence of any such collateral or qualifying agreement. However, Galligan J. considered there was such an agreement for he said:
Not only is it the law that a surety upon payment of the debt is entitled to the benefit of the security held by the creditor, (see Household Finance Corporation v. Foster (C.A.), 1949 77 (ON CA), [1949], O.R. 123), in this case I am satisfied that it was understood between the plaintiff’s branch manager and the defendant that if the defendant paid the indebtedness of Grey Electronic to the plaintiff, the plaintiff would deliver to him the book debts of Grey Electronic, the assignment of which was held by it.
To make such a finding, he would necessarily have had to rely on evidence. The only evidence I can find in the record of such an arrangement is a statement by the bank manager that the bank would have reassigned the accounts on payment by the guarantor as normal practice, and the assertion by the guarantor that he had been told by the bank manager that if he made good on his guarantee the accounts would be reassigned to him. He said as well that he would not have given his guarantee otherwise. There was then some evidence for the finding of the trial judge and its sufficiency is not for this Court to judge. However, it seems clear to me that this evidence would go towards imposing a limit on the bank’s rights with respect to the security given by the debtor. This would clearly contradict the terms of the guarantee which, as has been pointed out, gave the bank the right to abstain from registration and perfection of security. On this basis, it would be inadmissible under the parole evidence rule and any collateral agreement founded upon it could not stand. I can see no
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distinction between the case at bar and that or Hawrish v. Bank of Montreal12, where in almost identical circumstances, Judson J., speaking for this Court, said at p. 520:
Bearing in mind these remarks to the effect that there must be a clear intention to create a binding agreement, I am not convinced that the evidence in this case indicates clearly the existence of such intention. Indeed, I am disposed to agree with what the Court of Appeal said on this point. However, this is not in issue in this appeal. My opinion is that the appellant’s argument fails on the ground that the collateral agreement allowing for the discharge of the appellant cannot stand as it clearly contradicts the terms of the guarantee bond which state that it is a continuing guarantee.
The appellant has relied upon Byers v. McMillan. But upon my interpretation that the terms of the two contracts conflict, this case is really against him as it is there stated by Strong J. that a collateral agreement cannot be established where it is inconsistent with or contradicts the written agreement. To the same effect is the unanimous judgment of the High Court of Australia in Hoyt’s Proprietary Ltd. v. Spencer, which rejected the argument that a collateral contract which contradicted the written agreement could stand with it. Knox C.J., said at p. 139:
A distinct collateral agreement, whether oral or in writing, and whether prior to or contemporaneous with the main agreement, is valid and enforceable even though the main agreement be in writing, provided the two may consistently stand together so that the provisions of the main agreement remain in full force and effect notwithstanding the collateral agreement. This proposition is illustrated by the decisions in Lindley v. Lacey [supra], Erskine v. Adeane [supra], De Lassai le v. Guildford, [1901] 2 K.B. 215, and other cases.
Any such collateral oral agreement as contended for by the appellant therefore may not stand in the face of the written guarantee. It follows that an additional argument raised by the guarantor relating to a claim that the collateral contract had been fundamentally breached will not require to be dealt with. I would dismiss the appeal. In all
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circumstances of this case, I would not award costs to the respondent in any of the Courts.
Appeal dismissed without costs.
Solicitors for the defendent, appellant: Lockwood, Bellmore & Moore, Toronto.
Solicitors for the plaintiff respondent: Fraser & Beatty, Toronto.
Footnotes
- (1974), 1974 625 (ON SC), 6 O.R. (2d) 308 (S.C.).
- (1968), 1968 649 (BC CA), 2 D.L.R. (3d) 666 (B.C.C.A.).
- 1949 77 (ON CA), [1949] O.R. 123.
- (1932), 41 O.W.N. 146 (Ont. H.C.).
- (1920), 1920 438 (ON CA), 47 O.L.R. 298 (C.A.).
- 1969 317 (ON CA), [1970] 1 O.R. 547.
- [1910] 1 Ch. 464 (C.A.).
- 1970 152 (SCC), [1971] S.C.R. 493.
- [1968] 1 W.L.R. 625 (C.A.).
- [1951] 1 Lloyds L.R. 32 (K.B.D.).
- [1970] 1 Q.B. 177 (C.A.).
- 1969 2 (SCC), [1969] S.C.R. 515.
