National Trust Co. v. Mead, 1990 SCC 73

National Trust Co. v. Mead, [1990] 2 S.C.R. 410

National Trust Company Appellant

v.

David Mead, Remai Financial Corp. and Remai Construction (1981) Inc. Respondents

indexed as: national trust co. v. mead

File No.: 21157.

1990: February 23; 1990: August 16.

Present: Lamer C.J.* and Wilson, La Forest, L'Heureux‑Dubé, Gonthier, Cory and McLachlin JJ.

on appeal from the court of appeal for saskatchewan

Mortgages ‑‑ Action on covenant to pay ‑‑ Individual assuming mortgage from corporation which had waived provincial statutory protection against being sued on covenant to pay ‑‑ Provincial statute permitting only corporate mortgagors to waive protection ‑‑ Whether individual assuming mortgage bound by waiver as a successor or assign of original corporate mortgagor ‑‑ Whether assumption agreement effects a novation ‑‑ The Limitation of Civil Rights Act, R.S.S. 1978, c. L‑16, ss. 2, 40.

The respondent Remai Construction (1981) Inc. ("Remai") granted a mortgage to the appellant National Trust as security for a loan to be applied in the construction of a condominium unit. Remai waived the protection of the Saskatchewan Limitation of Civil Rights Act, s. 2(1) of which provides that no action lies on the covenant to pay in a mortgage. Section 2(2)(d) extends this protection to subsequent purchasers who assume such a mortgage. Under s. 40(1) of the same Act agreements purporting to waive the protection of the Act are null and void, but s. 40(2) creates an exception to ss. 2 and 40(1) by permitting corporate mortgagors to waive the protection and provides that such a waiver is binding on the corporation's successors and assigns.

The respondent Mead purchased the condominium unit from Remai and executed an assumption of liability agreement in favour of National Trust which contained a covenant making Mead personally liable on the mortgage. The mortgage fell into arrears and National Trust brought an action against Remai and Mead for the full amount of the principal and interest owing. The action against Remai was later discontinued. The chambers judge granted an order nisi for sale of the property but refused to order personal judgment for the deficiency against Mead. The Court of Appeal dismissed National Trust's appeal.

The issues in this appeal are (1) whether the general protection extended to individuals under s. 2(1) prevails over the exception contained in s. 40(2) for corporations and their successors or assigns; (2) whether the particular wording of the assumption agreement releases Mead from liability on the personal covenant; and (3) whether the assumption agreement effects a novation.

Held: The appeal should be dismissed.

Per Lamer C.J. and Wilson, La Forest, L'Heureux‑Dubé, Gonthier and Cory JJ.: Remai's exercise of its waiver under s. 40(2) of The Limitation of Civil Rights Act is not binding on Mead. Any exception to the principle in s. 2 that individual mortgagors be insulated from personal liability should be construed as narrowly as possible. The meaning of "successor" in s. 40(2) should be restricted to other corporations since the application of the s. 40(2) exception to "successors" was only intended to ensure liability on the personal covenant of a corporation which steps into the shoes of the original corporate mortgagor. While "assigns" would prima facie include individual assigns of corporate mortgagors, the purpose of this exception is to protect mortgagees who extend mortgages to corporations on condition that the latter provide a personal covenant and who then find that the corporation has unilaterally (and without the mortgagee's consent) assigned the mortgage to an individual on whom the personal covenant would not otherwise be binding under the Act. It is these "assigns" who must be bound by the personal covenant of the original corporate mortgagor if the mortgagee is to have the protection contemplated by s. 40(2). In this case the concern about the mortgagee's rights being unfairly defeated does not arise since National Trust freely entered into an assumption agreement with Mead. The fact that Mead assumed the mortgage by way of assumption agreement with National Trust means that he is entitled to the protection of s. 2(2)(d) of the Act, which is not subject to the waiver exception under s. 40(2).

The personal covenant set out in the assumption agreement is unenforceable against Mead. The wording of the agreement, in conjunction with the Act, is clearly capable of being construed as releasing Mead from any obligation to pay under the covenant. The agreement provides that Mead will be bound by all the terms of the mortgage "as though it had been originally made, executed and delivered to him as Mortgagor", in which case s. 2 would have applied, no exception under s. 40(2) would have been available, and the personal covenant would have been unenforceable pursuant to s. 40(1).

The assumption agreement did not effect a novation. The clause in the agreement stating that National Trust may at any time release the original mortgagor cannot be construed as a present release of Remai such as would be necessary to replace Remai with Mead as principal debtor. This conclusion is strengthened when the terms of the original mortgage are taken into consideration: the "no prejudice" clause confirms that there was no intention on the part of National Trust to release Remai. Taken together, these provisions are a strong indication that Mead's assumption of the debt was not accepted by National Trust in full consideration and substitution of Remai's obligation. The conduct of the parties does not negate that indication. National Trust's action in discontinuing its suit against Remai is equivocal, and cannot be construed as supporting an inference that the trust company was no longer looking to Remai for satisfaction of the debt. Discontinuance does not preclude a litigant from bringing the action at a later date, and thus does not constitute the kind of compelling circumstance necessary to found a novation.

Per McLachlin J.: Wilson J.'s conclusions and reasons were agreed with, subject to the comment that ss. 2(2)(d) and 40(2) of the Act involve a facial conflict which should be resolved by recourse to legislative intention.

Cases Cited

By Wilson J.

Considered: Canada Permanent Trust Co. v. Neumann (1986), 1986 821 (BC CA), 8 B.C.L.R. (2d) 318; Re Bank of Nova Scotia and Vancouver Island Renovating Inc. (1986), 1986 913 (BC CA), 31 D.L.R. (4th) 560; Prospect Mortgage Investment Corp. v. Van‑5 Developments Ltd. (1985), 1985 273 (BC CA), 68 B.C.L.R. 12; disapproved: Eaton Bay Trust Co. v. Ling (1987), 1987 2492 (BC CA), 45 D.L.R. (4th) 1; referred to: Herold v. British American Oil Co. (1954), 1954 438 (AB SCTD), 12 W.W.R. (N.S.) 333; First City Trust Co. v. Friesen (1985), 1985 2335 (SK QB), 38 Sask. R. 220; Canada Trustco Mortgage Co. v. Grover, 1987 4991 (SK QB), [1987] 2 W.W.R. 766; Potash v. Royal Trust Co., 1986 34 (SCC), [1986] 2 S.C.R. 351; Disney Farms Ltd. v. Canadian Imperial Bank of Commerce, 1984 2494 (SK QB), [1984] 5 W.W.R. 285; Polson v. Wulffsohn (1890), 2 B.C.R. 39; Central & Eastern Trust Co. v. Rosebowl Holdings Ltd. (1981), 1981 3553 (NB CA), 34 N.B.R. (2d) 308; Central Trust Co. v. Bartlett (1983), 30 R.P.R. 267; Saskatchewan Trust v. Ross (1985), 1985 2841 (SK QB), 41 Sask. R. 121.

Statutes and Regulations Cited

Limitation of Civil Rights Act, R.S.S. 1978, c. L‑16, ss. 2 [am. 1983‑84, c. 44, s. 2], 40.

Queen's Bench Rules of Saskatchewan, rule 198(4).

APPEAL from a judgment of the Saskatchewan Court of Appeal (1988), 1988 5268 (SK CA), 70 Sask. R. 11, [1988] 5 W.W.R. 365, 52 D.L.R. (4th) 159, affirming the refusal of Wright J. to order a personal judgment against the respondent in a mortgage action. Appeal dismissed.

W. G. Turnbull, for the appellant.

Dale A. Canham, for the respondents.

//Wilson J.//

The judgment of Lamer C.J. and Wilson, La Forest, L'Heureux-Dubé, Gonthier and Cory JJ. was delivered by

WILSON J. -- The issue in this case is the right of a mortgagee in the province of Saskatchewan to sue on the personal covenant. The parties contend that resolution of this issue depends upon the interpretation of the relevant statute, the construction of an assumption agreement, and the application of the principle of novation.

1. The Facts

The respondent Remai Construction (1981) Inc. ("Remai") granted a mortgage in the amount of $40,725 to the appellant National Trust Company ("National Trust") on June 28, 1984 as security for a loan to be applied in the construction of a condominium unit in Saskatoon. The Limitation of Civil Rights Act, R.S.S. 1978, c. L-16 ("the Act"), provides that a mortgagee's right to recover the unpaid balance due on a mortgage is restricted to the land itself. Any personal covenant is void and unenforceable. The Act, however, permits corporate mortgagors to waive the protection provided by the Act and Remai did so in the present case.

On August 28, 1984, the respondent David Mead ("Mead") purchased the condominium unit from Remai and executed an Assumption of Liability Agreement ("Assumption Agreement") in favour of National Trust. The Assumption Agreement contained a covenant making Mead personally liable on the mortgage.

On October 1, 1986, the mortgage fell into arrears and two months later National Trust commenced an action against Remai and Mead jointly and severally for inter alia the full amount of the principal and interest owing. In its statement of defence, Remai alleged that the Assumption Agreement released it from its covenant to pay or alternatively constituted a novation which had the effect of discharging it from any further liability on the covenant. The action against Remai was discontinued.

Mead entered no statement of defence. National Trust then applied for an order nisi for sale and for personal judgment against Mead. Wright J. in chambers refused to order personal judgment for the deficiency but granted an order nisi for sale without recorded reasons. The Saskatchewan Court of Appeal dismissed National Trust's appeal. National Trust now appeals to this Court.

2. The Legislation

The Limitation of Civil Rights Act provides:

2(1) Where land is hereafter sold under an agreement for sale in writing, or mortgaged whether by legal or equitable mortgage for the purpose of securing the purchase price or part of the purchase price of the land affected, or where a mortgage is hereafter given as collateral security for the purchase price or part of the purchase price of land, the vendor's or mortgagee's right to recover the unpaid balance due shall be restricted to the land sold or mortgaged and to cancellation of the agreement for sale or foreclosure of the mortgage or sale of the property, and no action shall lie on the covenant for payment contained in the agreement for sale or mortgage.

(1.1) The benefit of subsection (1) extends to and includes a mortgage that secures, or is given as collateral security for, the purchase price or part of the purchase price of the land, whether or not the mortgagee was the vendor of that land.

(2) The benefit of subsections (1) and (1.1) extends to and includes:

(a)the personal covenant of the purchaser contained in any assignment by the vendor of such an agreement for sale;

(b)the personal covenant of the assignee contained in any assignment by the purchaser of such an agreement for sale;

(c)the personal covenant of the mortgagor contained in an agreement extending any such mortgage;

(d)the personal covenant of a purchaser of lands subject to any such mortgage, to assume and pay the mortgage;

and no action lies on any such personal covenant.

40(1) Subject to subsection (2), every agreement or bargain, verbal or written, express or implied, that this Act or any provision thereof shall not apply or that any benefit or remedy provided by it shall not be available, or which in any way limits, modifies or abrogates or in effect limits, modifies or abrogates any such benefit or remedy, is null, void and of no effect, and moneys paid under or by reason of any such agreement or bargain are recoverable in any court of competent jurisdiction.

(2) A corporate body may in writing agree that this Act or any provision thereof shall have no application to:

(a)any mortgage, charge or other security for the payment of money made, given or created by it after March 25, 1959;

(b)any agreement or instrument entered into by it after March 25, 1959, involving the payment by it of money, or its liability to pay money;

(c)any agreement or instrument renewing or extending or collateral to any such mortgage, charge, other security, agreement or instrument; or

(d)the rights, powers or remedities [sic] of any other person under any such mortgage, charge, other security, agreement or instrument;

and, notwithstanding anything in this Act, an agreement made by a corporate body under this subsection shall be binding upon the corporate body, its successors and assigns.

3. The Assumption Agreement

The relevant parts of the Assumption Agreement between National Trust (the Mortgagee) and Mead (the Purchaser) read as follows:

WHEREAS by a mortgage dated the 28th day of June, 1984 . . .

AND WHEREAS the Purchaser represents to the Mortgagee that he has purchased the said lands and premises and is now the owner thereof subject to the said mortgage.

AND WHEREAS the Purchaser has agreed to assume and covenant with the Mortgagee to pay to the Mortgagee the mortgage indebtedness now owing under the said mortgage.

NOW THIS INDENTURE WITNESSETH that in consideration of the premises and the sum of One Dollar ($1.00) now paid by the Mortgagee to the Purchaser, it is hereby agreed as follows:

1. The Purchaser covenants and agrees with the Mortgagee, that he will pay to it the said principal money now owing, and all monies that may be advanced hereafter with respect to the said mortgage, together with interest thereon, and that he will perform each and all of the covenants, conditions, and obligations in the said mortgage contained to be performed by the Mortgagor therein at the times and in the manner and in all respects as therein provided, and that he will be bound by each and all of the terms and covenants, conditions and obligations of the said mortgage as though it had been originally made, executed and delivered by him as Mortgagor.

AND THE PURCHASER HEREBY AUTHORIZES AND INSTRUCTS THE MORTGAGEE TO PAY TO THE MORTGAGOR NAMED IN THE SAID MORTGAGE OR TO HIS NOMINEE, THE FULL PROCEEDS OF THE LOAN THEREBY SECURED.

This Agreement shall extend to and bind and may be taken advantage of by the respective heirs, executors, administrators, successors and assigns as the case may be of each and every party hereto . . . all covenants shall be joint and several; time shall be of the essence hereof; and all provisions hereof shall have effect notwithstanding any statute to the contrary.

4. The Courts Below

As mentioned, Wright J. hearing the case in chambers gave no recorded reasons for his order nisi.

Writing for the Saskatchewan Court of Appeal (1988), 1988 5268 (SK CA), 70 Sask. R. 11, Cameron J.A. encapsulates the statutory scheme as follows at p. 12:

Ordinarily, a person who borrows money from another for the purpose of buying land and gives that other a mortgage upon the land to secure repayment of the loan, can have the land taken from him on foreclosure, if he defaults, but cannot be sued on his covenant to pay: The Limitation of Civil Rights Act, S.S. 1979, c. L-6, s. 2. That is subject, however, to an exception. A corporate borrower is empowered to agree when granting a mortgage that the statute will not apply to that mortgage: s. 40(2). And, according to the Act, an agreement or waiver of that sort binds both the corporation and its "successors and assigns".

After a review of the facts Cameron J.A. sought guidance from previous authority on the question whether a mortgagee is limited to its remedy against the land when an individual assumes a mortgage from a corporation which has waived the statutory protection of s. 2. He found the jurisprudence inconsistent on this point, noting that a great deal seemed to depend on the terms of the particular assumption agreement and whether it could be said to give rise to a novation.

He then considered the particular wording of the Assumption Agreement before him, especially the undertaking of Mead to perform all the covenants in the mortgage "as though it had been originally made, executed and delivered by him as Mortgagor". At pages 16-17, he found these words virtually dispositive of the matter before him:

The meaning of these words is clear. And if taken literally, so too is their effect. Had Mr. Mead been the original mortgagor he would have been entitled to the benefit of s. 2 of the Act, and would have been disabled by s. 40 from agreeing otherwise. Thus the effect of the words is to extend to him the benefit of the statute and, in turn, to limit National Trust to its remedy against the land. Even if this were uncertain, the result would not change, because the agreement falls to be construed contra proferentem -- against the one who drew it and in favour of the one who made it. Hence the words have to be given the meaning most favourable to Mr. Mead.

The Saskatchewan Court of Appeal also based its decision on a finding that novation had occurred in the form of a substitution of Mead for Remai as mortgagor. Cameron J.A. drew the four elements necessary to establish a novation from Herold v. British American Oil Co. (1954), 1954 438 (AB SCTD), 12 W.W.R. (N.S.) 333 (Alta. S.C.) and Canada Permanent Trust Co. v. Neumann (1986), 1986 821 (BC CA), 8 B.C.L.R. (2d) 318 (C.A.) as follows:

(i)The new debtor must assume the complete liability.

(ii)The creditor must accept the new debtor as a principal debtor and not as an agent or guarantor.

(iii)The creditor must accept the new contract in full satisfaction and substitution for the old contract.

(iv)The new contract must be made with the consent of the old debtor.

In this case Mead expressly assumed in clause 1 of the Assumption Agreement the complete liability under the mortgage. National Trust accepted him as principal debtor and gave valuable consideration. Mead undertook to repay the loan and agreed in clause 2 of the Agreement that if National Trust released Remai "from any or all of the covenants" contained in the mortgage, this would not affect his (Mead's) liability or National Trust's charge on the land. As between National Trust and Remai the Court of Appeal concluded that National Trust had discharged Remai. It premised this finding on National Trust's discontinuance of its action against Remai. The Court of Appeal also found that National Trust accepted the new arrangement in satisfaction of and in substitution for the old one based on the combination of the Assumption Agreement and National Trust's conduct in relation to Remai. Finally, Remai consented to the substitution of Mead as the new debtor. The court was therefore satisfied that the Assumption Agreement effected a novation and that the chambers judge was right in confining National Trust to its remedy against the land under s. 2(1) of the Act.

5. The Issues

The issues raised by this appeal are as follows:

A.Does the general protection extended to individuals under s. 2(1) of the Act prevail over the exception contained in s. 40(2) for corporations and their successors or assigns?

B.Does the particular wording of the Assumption Agreement release Mead from liability on the personal covenant?

C.Does the assumption agreement effect a novation?

6. Analysis

A. Statutory Interpretation

Section 2 of the Act provides that when land is mortgaged for purposes of securing the purchase price of land, the mortgagee's recovery rights are restricted to foreclosure and sale of the mortgaged land. No action on the personal covenant lies against the mortgagor for any deficiency. Section 2(2)(d) extends that protection to subsequent purchasers by sweeping within its ambit "the personal covenant of a purchaser of lands subject to any such mortgage, to assume and pay the mortgage".

On a plain reading of s. 2(2)(d) National Trust cannot recover from Mead on his personal covenant. This statutory intent is reinforced by s. 40(1) of the Act, which provides that agreements purporting to waive the protection of the Act are "null, void and of no effect".

Section 40(2), however, creates an exception to s. 2 and 40(1) of the Act by permitting corporate mortgagors to waive the protection. In its mortgage agreement with National Trust, Remai expressly waived the protection under s. 2 of the Act and gave a personal covenant on the mortgage. Under the terms of s. 40(2) such a waiver is binding upon "the corporate body, its successors and assigns". The question to be decided therefore is whether Mead is bound by the waiver as a successor or assign of Remai. The answer turns on the interaction between ss. 2 and 40(1) of the Act, which preclude enforcement of the personal covenant against an individual mortgagor, and s. 40(2) of the Act, which binds successors and assigns to a waiver of s. 2 by a corporate mortgagor.

As the Saskatchewan Court of Appeal points out, existing case law on the point is not very helpful. In First City Trust Co. v. Friesen (1985), 1985 2335 (SK QB), 38 Sask. R. 220 (Q.B.), an individual assumed a mortgage from a corporate builder. MacLeod J. rejected an argument that s. 40(2) bound only corporate successors and assigns. At page 223 he states:

Whether the mortgagee can or cannot obtain personal judgment against the defendant Friesen depends on the terms of the assumption agreement. Without that agreement, there would be no privity of contract between the mortgagee and Friesen, and personal judgment could only go against the defendant corporate body . . . .

I am satisfied that the position of persons such as Friesen, (that is, successors and assigns) was contemplated by the legislature, whose words must be accepted for what they say, without imposing an artificial construction on those words to benefit a person who, if different circumstances had prevailed, could have been able to invoke the protection of the statute as against the mortgagee.

In Canada Trustco Mortgage Co. v. Grover, 1987 4991 (SK QB), [1987] 2 W.W.R. 766 (Sask. Q.B.), Wright J. (the chambers judge in the case at bar) rejected First City on the strength of this Court's judgment in Potash v. Royal Trust Co., 1986 34 (SCC), [1986] 2 S.C.R. 351. In Potash this Court was asked to interpret s. 10 of the federal Interest Act, R.S.C. 1970, c. I-18, which provided that individuals must be given the right to pay off a mortgage after five years. The respondent in that case entered into a renewal agreement after five years without paying off the mortgage and then proceeded to pay it off subsequent to entering into the renewal agreement. Although the Act did not specifically provide that a person could not waive its provisions, I stated for the Court at p. 373 that "I agree with counsel for Potash that s. 10(1) was enacted in the public interest and that the long standing rule against contracting out or waiver should apply to it." Wright J. does not expand his application of Potash to the facts of Grover but I assume that he took from it that, if parties cannot waive protective provisions in circumstances where the statute is silent, then where the statute expressly invalidates a waiver (e.g., s. 40(1) of the Act), any exception to that protection should be construed as narrowly as possible. The facts in Grover were for all intents and purposes the same as in the case at bar. Wright J. found that the applicant mortgagee was not entitled to judgment against the individual mortgagor to whom the mortgage had been assigned by the original corporate mortgagor.

I agree with Cameron J.A. that these cases are not of much assistance. I turn therefore to a consideration of the purpose of s. 2 of the Act. Section 2 protects individual mortgagors from being personally liable on a mortgage and restricts the mortgagee's remedy to the property. Individuals usually take out mortgages to secure residential houses or farms. Their home is typically the largest single asset they have. One can well imagine that once that is lost the individual in many instances has little else to seize and imposing the additional burden of personal liability would be onerous and perhaps futile. I note in passing that s. 2 was originally enacted by the Saskatchewan legislature in 1934 (S.S. 1934-35, c. 89, s. 4) at a time when many prairie farmers were "losing the farm" thanks to the notorious and disastrous effects of the "dustbowls" and the Depression.

Section 40 of the Act was enacted through a series of amendments to the statute between 1953 and 1961. The purpose in permitting corporate borrowers to waive the protection provided under the Act was, in my view, aptly described by Malone J. in Disney Farms Ltd. v. Canadian Imperial Bank of Commerce, 1984 2494 (SK QB), [1984] 5 W.W.R. 285 (Sask. Q.B.) at pp. 287-88:

Since 1965 the Limitation of Civil Rights Act [R.S.S. 1965, c. 103, s. 27] has permitted bodies corporate to waive the entire provisions thereof. A similar waiver provision is also found in the Saskatchewan Land Contracts (Actions) Act, R.S.S. 1978, c. L-3 [s. 5]. In my opinion, the purpose of these provisions is to facilitate corporate financing that otherwise may not be available if lenders could not realize upon their security on default by a corporate borrower. I am also of the opinion that the provisions of the Limitation of Civil Rights Act were primarily intended to benefit and protect individuals, as distinct from limited companies, who usually are more sophisticated in the management of their affairs and require larger amounts of capital to maintain their operations.

I think it is clear that the policy concerns animating the protection of individuals from personal liability for mortgage deficiencies are not particularly compelling when applied to corporations. The meaning to be attributed to the provisions of the Act should reflect these policy concerns. Thus, any exception to the principle in s. 2 that individual mortgagors be insulated from personal liability should be construed as narrowly as possible.

Turning to s. 40(2) of the Act, the provision states that if a corporation waives its protection, that waiver binds all successors and assigns "notwithstanding anything in this Act". When used in reference to corporations, a "successor" generally denotes another corporation which, through merger, amalgamation or some other type of legal succession, assumes the burdens and becomes vested with the rights of the first corporation. In terms of s. 40(2) of the Act it is understandable that a new corporation should be bound by the waiver of the old one since the new one is essentially supplanting the old one in all respects. Indeed, restricting the meaning of "successor" in s. 40(2) to other corporations makes sense in light of the policy driving the Act. In my view, the application of the s. 40(2) exception to "successors" was only intended to ensure liability on the personal covenant of a corporation which steps into the shoes of the original corporate mortgagor. It is apparent that Mead is not a "successor" to Remai here.

The word "assign" has, of course, a broader meaning. An "assign" is anyone to whom an assignment is made and presumably, but for the specific reference to "successors", would include both individuals and corporations. As between mortgagors, an assignment would be an agreement between the original mortgagor and his purchaser by which the latter would assume the mortgage debt in exchange for valuable consideration. Section 2(2)(b) of the Act specifically extends the protection of s. 2 to assignees of purchasers whereas s. 40(2) binds assigns of corporations who have waived s. 2 "notwithstanding anything in this Act". This would presumably include individual assigns of corporate mortgagors. It is my view, however, that the purpose of this exception is to protect mortgagees who extend mortgages to corporations on condition that the latter provide a personal covenant and who then find that the corporation has unilaterally (and without the mortgagee's consent) assigned the mortgage to an individual on whom the personal covenant would not otherwise be binding under the Act. It is those "assigns" who must be bound by the personal covenant of the original corporate mortgagor if the mortgagee is to have the protection contemplated by the section. This situation would arise where there is an assignment of the mortgage from a corporate mortgagor to an individual without an assumption agreement between the individual mortgagor and the mortgagee.

Where the mortgagee (in this case National Trust) has entered into an assumption agreement with the new mortgagor, however, the concern about the mortgagee's rights being unfairly defeated simply does not arise. National Trust was completely free in the present case to decide whether or not to let Mead assume the mortgage from Remai. If it saw itself as exposed to an undue risk if it could not sue on the personal covenant to recover a deficiency on the mortgage debt, it was at liberty to refuse to enter into the Assumption Agreement with Mead. It is noteworthy that while ss. 2(2)(a) - (d) extend the protection of the Act to circumstances of assignment, extension or assumption of a mortgage, s. 40(2) only binds successors and assigns to a waiver by a corporate body. There is no evidence on the record indicating whether Remai assigned its mortgage to Mead. Even if it had, however, the fact that Mead also assumed the mortgage by way of Assumption Agreement with National Trust entitles him to the benefit of s. 2(2)(d), which in turn is not subject to the waiver exception under s. 40(2). Remai's exercise of its waiver under s. 40 of the Act does not therefore bind Mead.

B. Assumption Agreement

I am in general agreement with the reasoning of the Court of Appeal regarding the interpretation and effect of the Assumption Agreement. The wording of the Agreement, in conjunction with the Act, is clearly capable of being construed as releasing Mead from any obligation to pay under the personal covenant set out in the Agreement. It provides inter alia that Mead will be bound by all of the terms, covenants, conditions and obligations of the mortgage "as though it had been originally made, executed and delivered by him as Mortgagor." The Court of Appeal pointed out that had the Agreement been originally made, executed and delivered by Mead as mortgagor, s. 2 would have applied, no exception under s. 40(2) would have been available, and the personal covenant would have been unenforceable pursuant to s. 40(1). National Trust would have been restricted to its remedy against the land. The doctrine of contra proferentem would resolve any lingering ambiguity in Mead's favour.

National Trust submits that the doctrine of contra proferentem is inapplicable here because the construction put on the Agreement by the Court of Appeal would make the inclusion of the personal covenant pointless. It could have no effect. Since the Court should strive to give meaning to the parties' agreement, it should reject an interpretation that would render one of its terms ineffective.

In my view, the presence of s. 40(1) in the Act belies the claim made by National Trust that the ideal construction of the Agreement is one that gives effect to each and every one of its terms. Section 40(1) explicitly contemplates the inclusion of a personal covenant in a mortgage but states that such covenants are null, void and of no effect subject to the exception contained in s. 40(2) for corporate mortgagors. Although the closing paragraph of the Assumption Agreement states that "all provisions hereof shall have effect notwithstanding any statute to the contrary", this cannot be enforced by National Trust in face of the explicit prohibition in the statute against contracting out of its protection.

In the result, I think the Court of Appeal construed the Assumption Agreement correctly when it declared that the personal covenant was unenforceable against Mead. I do not find it necessary to invoke the doctrine of contra proferentem to buttress this conclusion.

C. Novation

The respondent Mead has pleaded in the alternative that the Assumption Agreement effected a novation so that the old agreement with Remai was gone and the new agreement with Mead as mortgagor was substituted for it. If this were so Mead would unquestioningly be entitled to the protection of s. 2 of the Act. While it is not strictly necessary to decide this issue since I have already concluded that, as a matter of interpretation of the Assumption Agreement, Mead is not liable on the covenant, it may nevertheless be helpful if the Court were to try to resolve some of the confusion concerning the application of the doctrine of novation in a mortgage context.

The common law has long recognized that while one may be free to assign contractual benefits to a third party, the same cannot be said of contractual obligations. This principle results from the fusion of two fundamental principles of contract law: 1) that parties are able to make bargains with the parties of their own choice (freedom of contract); and 2) that parties do not have to discharge contractual obligations that they had no part in creating (privity of contract). Our law does, however, recognize that contractual obligations which a party has freely assumed may be extinguished in certain circumstances and the doctrine of novation provides one way of achieving this.

A novation is a trilateral agreement by which an existing contract is extinguished and a new contract brought into being in its place. Indeed, for an agreement to effect a valid novation the appropriate consideration is the discharge of the original debt in return for a promise to perform some obligation. The assent of the beneficiary (the creditor or mortgagee) of those obligations to the discharge and substitution is crucial. This is because the effect of novation is that the creditor may no longer look to the original party if the obligations under the substituted contract are not subsequently met as promised.

Because assent is the crux of novation it is obvious that novation may not be forced upon an unwilling creditor and, in the absence of express agreement, the court should be loath to find novation unless the circumstances are really compelling. Thus, while the court may look at the surrounding circumstances, including the conduct of the parties, in order to determine whether a novation has occurred, the burden of establishing novation is not easily met. The courts have established a three-part test for determining if novation has occurred. It is set out in Polson v. Wulffsohn (1890), 2 B.C.R. 39 as follows:

1.The new debtor must assume the complete liability;

2.The creditor must accept the new debtor as principal debtor and not merely as an agent or guarantor; and

3.The creditor must accept the new contract in full satisfaction and substitution for the old contract.

There has been some disagreement among courts across the country as to the weight to be attributed to these elements and it might be helpful to review some of the authorities. Indeed, such a review makes it clear that these three factors are not the only ones to be considered. The courts are usually confronted with an amalgam from which they must distil their finding of fact as to whether novation has occurred or not.

I start with the conduct of the parties. In Central & Eastern Trust Co. v. Rosebowl Holdings Ltd. (1981), 1981 3553 (NB CA), 34 N.B.R. (2d) 308 (C.A.), Rosebowl had granted a mortgage to Central with one Huestis acting as guarantor of the loan. Rosebowl subsequently sold the property to another party who assumed the mortgage. When Central subsequently informed Rosebowl as to the balance then due on the mortgage, Rosebowl advised Central that the mortgage had been assumed by its purchaser and that a new mortgage was being recorded. Thereafter, Central closed out Rosebowl's account. Approximately two years later the purchaser started to fall into arrears. Rosebowl was not informed of these defaults until Central decided to sell the property under the power of sale contained in the mortgage. Proceedings were brought against Rosebowl and Huestis when the sale resulted in a deficiency.

Rosebowl and Huestis submitted that Central took all the necessary steps to give effect to the sale and assumption of mortgage by the purchaser when it closed out Rosebowl's account as opposed to crediting it with the monthly instalments made by the purchaser. It was also stressed that Rosebowl's solicitor acted for the trust company when the equity of redemption was transferred. Ryan J.A., writing for the court, held that these circumstances were insufficient to establish a novation. He held that there was no express agreement to the effect that Central would accept the purchaser as principal debtor and give up its right of action against Rosebowl and Huestis nor did the evidence support an inference to that effect.

What if changes have been made to the terms of the original mortgage? In Canada Permanent Trust Co. v. Neumann, supra, the Neumanns joined together with another couple, the Mas, and granted a mortgage to Canada Permanent. Later wishing to absolve themselves of this liability, the Neumanns conveyed all their interest and title to the Mas in return for the latter's promise to assume sole liability for the mortgage debt. Canada Permanent was not a party to this transfer and did not specifically release the Neumanns from their debt. The Mas later entered into a modification agreement reducing the interest rate as well as the amount of the monthly instalments. The Neumanns were not aware of this agreement until the Mas defaulted and the trust company demanded payment. Canada Permanent brought suit against the Neumanns on their personal covenant. The trial judge allowed the action and granted judgment in an amount calculated in accordance with the modification agreement.

Carrothers J.A. allowed the Neumanns' appeal, finding that there had been a novation. He based his judgment on the fact that the modification agreement had altered the mortgage in several respects, holding at p. 321:

There cannot be two contracts of mortgage and two methods of calculating the mortgage debt existing in respect of the same mortgage at the same time. This is legally repugnant and can only be construed as a novation and an acceptance on the part of the trust company of the Mas exclusively as principal debtors, thus releasing the Neumanns of their obligation. These circumstances are, in my view, consistent with novation.

A different result on similar facts was reached in the case of Central Trust Co. v. Bartlett (1983), 30 R.P.R. 267 (N.S.C.A.). There, the equity of redemption in certain lands had been transferred several times. After each transfer the transferee entered into an assumption agreement with Central Trust providing that all remedies were reserved by the mortgagee. The final transferee renewed the mortgage at a much higher rate of interest than the rate in the original mortgage and subsequently fell into arrears. The property was sold and Central Trust sued Bartlett on his personal covenant for the deficiency. Bartlett argued, inter alia, that the mortgagee could be taken as impliedly releasing him from his obligations under the mortgage by entering into a renewal agreement with another party on very different terms and without his consent. Hart J.A. rejected this argument at p. 272 and held that Bartlett continued to be liable for the original amount in the mortgage:

In no event could Mr. Bartlett become liable for any amount in excess of the amount he undertook to pay in accordance with the rate of interest set forth in his agreement. A tender of this amount would, I believe, end any further obligation he may have to the mortgagee under the assumption agreement. The mere extension of time to pay would not, in my view, be evidence of an intention to release the other persons liable to pay the mortgage debt.

In my view, significant changes in the terms of a mortgage effected without the consent of the original mortgagor constitute very strong evidence of novation. It is not necessary, of course, for a different contract to be brought into existence for a novation to take place. The essence of novation is the substitution of debtors. However, where significant changes in terms occur and the creditor has not applied to the original mortgagor for its consent, I believe this is a strong indication that the creditor is no longer looking to the mortgagor for payment.

This view has been expressed by the British Columbia Court of Appeal on a number of occasions: see especially Re Bank of Nova Scotia and Vancouver Island Renovating Inc. (1986), 1986 913 (BC CA), 31 D.L.R. (4th) 560 and Eaton Bay Trust Co. v. Ling (1987), 1987 2492 (BC CA), 45 D.L.R. (4th) 1. In the Vancouver Island case the purchaser had entered into an agreement with the bank on substantially changed terms. When the purchaser fell into arrears the bank looked to Vancouver Island for the deficiency. The British Columbia Court of Appeal held that usually such changes in terms would support Vancouver Island's argument that there had been a novation. However, not so in this case because the guarantor of Vancouver Island's liability on the covenant acted as solicitor for the purchaser and was therefore well aware of the amendments to the mortgage and must be taken to have expressly or impliedly consented to them.

I noted earlier that there are three requirements for an effective novation. The significance attached by some courts to changes in the mortgage terms has given rise to the suggestion that a fourth requirement should be added, namely the consent of the original debtor. Consent as an added element arose from the decision of Egbert J. in Herold v. British American Oil Co., supra, a case dealing with a typical commercial contract. The Herold case has been followed in British Columbia: see Eaton Bay Trust Co., supra; Neumann, supra; and Prospect Mortgage Investment Corp. v. Van-5 Developments Ltd. (1985), 1985 273 (BC CA), 68 B.C.L.R. 12 (C.A.). In Neumann, Lambert J.A. attempted to bring some clarity to the issue by drawing a distinction between those instances where what takes place is akin to the straightforward assignment of a simple debt and those instances where the burdens or benefits to one of the parties to the original contract have been altered. At pages 322-23 he said:

In my opinion, in a case where the old debtors are co-covenantors on a straightforward mortgage of land so that they are simply debtors, the situation is comparable to the situation of the assignability of another simple debt, that is, the consent of the old debtor is not required. So in straightforward mortgage cases the fourth principle of novation referred to . . . does not apply. In such a case the consent of the party being released is not a requisite of the complete novation. The situation may well be otherwise where both the burden and the benefits are being altered for one of the parties to the original contract.

In my view, if Lambert J.A. meant to suggest in this passage that the consent of the original debtor is required for a novation in cases where there have been significant changes in the original mortgage terms, I think he must be in error. It seems to me that if the original mortgagor consents to the mortgage being assumed by his assignee on different terms, this would indicate rather that he considers himself to continue to be bound despite the assignment. Consent to changed terms, in other words, does not indicate novation but rather continuing liability. On the other hand, when changes in the terms have been effected without the knowledge or consent of the original mortgagor, that will be a strong indication in favour of novation.

With respect to the effect of assumption and renewal agreements, it would appear that some courts have come perilously close to holding that the execution of such agreements per se effects a novation. Thus, for example, in Saskatchewan Trust v. Ross (1985), 1985 2841 (SK QB), 41 Sask. R. 121, Osborn J. of the Saskatchewan Queen's Bench held that a novation had been effected when the purchaser of the equity of redemption submitted all the documents regarding assumption of the mortgage in accordance with the request of the mortgagee. This, together with the mortgagee's failure to communicate in any way with the original mortgagor until the purchaser had been in default for several months, was sufficient in the court's view to establish a novation.

Other courts have come out strongly that the execution of an assumption agreement in and of itself is not sufficient to establish a novation. For example, in Prospect Mortgage, supra, Esson J.A. commented at p. 26:

Because novation is essentially an issue of fact, it would be wrong in principle to say, as a generalization, that assumption agreements or extension agreements, or other particular classes of documents, do or do not create a novation. The question must be decided in each case having regard to all of the circumstances of which the language of the new contract is only one.

In my view, the execution of an assumption agreement does not per se effect a novation. As Esson J.A. quite rightly noted, because novation is a question of fact, it would be wrong to hold that the execution of a document by itself would satisfy the doctrine. This is not to say, however, that such an agreement may not carry significant weight in determining whether a novation has taken place. Indeed, if the parties have directed their minds to setting out the terms of the debt relationship in writing, it seems to me that the terms of that agreement should conclude what the parties intended their relationship to be. In other words, in the absence of a written agreement or clear contractual language, the conduct of the parties may take on greater significance in elucidating the intent of the parties than when such an agreement has in fact been executed and is clear. Thus, the language of assumption agreements is deserving of careful scrutiny even although the subsequent conduct of the parties may also be factored into the Court's determination.

"No prejudice" clauses of various kinds have been considered by the courts with conflicting results. In Central Trust Co. v. Bartlett, supra, the equity of redemption in certain lands had been transferred several times. Each transferee executed an assumption agreement which contained a clause reserving all security taken by the mortgagee in respect of the mortgage. The court in that case held that since the assumption agreement specifically provided that Bartlett was not to be released, this negatived any finding of novation.

The British Columbia Court of Appeal first considered the effect of such clauses in Prospect Mortgage, supra. In that case the mortgage company attempted to hold Van-5 to its covenant after a sale of the mortgaged lands had resulted in a deficiency. When Van-5 purchased the property, it signed an agreement containing the following clause:

. . . the Covenantors further covenant and agree with the Mortgagee that the liability of the covenantors under this Mortgage shall not be released or affected in any manner whatsoever by any acts, omission or thing whatsoever done by or consented to by the Mortgagee or the Mortgagor except for the payment in full of the principal monies, interest and all other monies secured by this Mortgage.

Van-5 sold its interest to the purchasers who also signed an agreement with Prospect. By the terms of the agreement, the interest rate on the mortgage was to remain the same although the amount of the monthly payments was increased. The agreement also contained a "no prejudice" clause. Van-5 contended that it was no longer liable on the covenant since there had been a novation of the mortgage when it sold its interest to a subsequent purchaser who entered into an agreement on different terms. Esson J.A. held that the language of the modification agreement by itself did not effect a novation. Indeed, he noted that the language in fact expressed a contrary intention on the part of Prospect. Esson J.A. continued at p. 27:

On this issue, however, the language of the new agreement is not conclusive against the covenantors who, of course, are not parties to it. There are matters raised in the affidavits submitted by the covenantors which may be capable of establishing an intention by the creditor, notwithstanding the language of the agreement, to accept a new contract in full satisfaction of and in substitution for the old.

On this basis the court refused the petitioner's application for personal judgment and directed a trial of the novation issue.

The following year in Re Bank of Nova Scotia and Vancouver Island Renovating Inc., supra, Macfarlane J.A. of the same court took a very similar approach to Esson J.A.. In that case both the original mortgage and the renewal agreement contained similar clauses to those in Prospect Mortgage. Macfarlane J.A. refused to treat these provisions as determinative and articulated the following rationale for his refusal at p. 565:

So far as the without prejudice clause in the renewal agreement is concerned, it is not binding on the mortgagors because the mortgagors were not parties to that agreement. The clause is, however, circumstantial evidence which may be looked at in considering whether it was the intention of the bank to accept Van Isle in the place of the Pearsons as mortgagors and to substitute the new agreement with Van Isle for the old agreement with the Pearsons. Similarly, the clause in the original mortgage entitled "Extension of Time" is a clause that can be looked at as circumstantial evidence in determining whether the original mortgagors are bound or not.

In the result the court looked to the conduct of the parties to determine the novation issue. It found that the intention of the bank was to deal with Van Isle alone and therefore the bank had to be taken as accepting the new contract in substitution for the old one.

The judgment of the same court in Eaton Bay Trust Co. v. Ling, supra, seems to be very much at odds with both of the previous decisions. In that case Lynch sold his property to Ling, who in turn assumed the mortgage at a higher interest rate with the mortgagee. Ling did not execute a formal assumption agreement and did not give Eaton Bay a personal covenant. Lynch's mortgage contained a "no prejudice" clause. When the mortgage fell into arrears, Eaton Bay sued Lynch on his personal covenant. Lynch argued that there had been a novation as the terms of the mortgage had been amended without his notice or consent.

Carrothers J.A. rejected Lynch's argument on the following grounds. He held that, in the usual course of events, material changes in terms would be a strong indication that there had been a novation of the mortgage. This, he held, was a consequence of the dual aspect of a mortgage, i.e. the pledge of land and the personal covenant. Carrothers J.A. referred to his own judgment in Canada Permanent Trust Co. v. Neumann, supra, for the proposition that it was legally repugnant to have two different mortgage debts. Notwithstanding the fact that material changes had been made to the original mortgage, the court went on to hold that there had been no novation in the circumstances. It viewed the "no prejudice" clause in the original mortgage as evidencing in futuro consent on the part of Lynch to the kind of alterations embraced by the renewal agreement between Eaton Bay and Ling.

I am in general agreement with the decisions in Prospect Mortgage and Vancouver Island but I am uneasy with the Ling decision. It seems to me that the notion of in futuro consent may work considerable inequities in some circumstances. Given the conduct of the mortgagee in that case, I would have been inclined to hold that a novation had been effected.

The Saskatchewan Court of Appeal applied four tests of novation in the present case and found that each of them had been met. The court noted that it was permitted to take all the circumstances into account. In doing so the court not only considered the language of the Assumption Agreement but as well took into account the fact that National Trust had discontinued its action against Remai. Cameron J.A. held that this action supported an inference that National Trust both accepted Mead as principal debtor and accepted the new contract in full satisfaction of and substitution for the old contract (the second and third tests).

The Assumption Agreement executed by Mead contained the following provision regarding release of Remai:

2. It is agreed that the Mortgagee may at any time and in such manner as it thinks fit release the Mortgagor named in the said mortgage from any or all of the covenants therein contained and that neither such release nor anything herein contained nor anything done pursuant hereto shall affect or be construed to affect the lien, charge or encumbrance of or conveyance effected by the said mortgage, or the priority thereof over other liens, charges, encumbrances, or conveyances, or, except as expressly provided by any such release of the Mortgagor, to release or affect the liability of the Purchaser or of any party or parties whomsoever who may now be or hereafter become liable to the Mortgagee under or on account of the said mortgage; nor shall anything herein contained or done in pursuance hereof affect or be construed to affect any other security or instrument, if any, held by the Mortgagee as security for the aforesaid mortgage indebtedness. [Emphasis added.]

The Court of Appeal construed this clause as effecting the release of Remai. With great respect, I think it was in error in so doing. In this provision Mead agrees with National Trust that National Trust is free in the future to release the original mortgagor and that, should it do so, Mead's liability would in no way be affected. Such a provision, in my opinion, does not effect a novation. Its effect, as I see it, is to preserve National Trust's remedies against both Remai and Mead until such time as National Trust releases Remai. It cannot itself be construed as a present release of Remai such as would be necessary in order to replace Remai with Mead as principal debtor.

This conclusion is, in my opinion, strengthened when the terms of the original mortgage are taken into consideration. That mortgage contained a "no prejudice" clause which read:

20. NO extension of time given by the Mortgagee to the Mortgagor or any one claiming under the Mortgagor, nor any other dealing by the Mortgagee with the owner of the equity of redemption in the Mortgaged Premises shall in any way affect or prejudice the rights of the Mortgagee against the Mortgagor or any other person liable for the payment of the moneys secured by this Mortgage. No forebearance by the Mortgagee to seek any remedy for breach of any covenant, agreement, provision or proviso contained in this Mortgage shall operate as a waiver of any rights or remedies of the Mortgagee with respect to such or any subsequent or other breach. [Emphasis added.]

This clause confirms that there was no intention on the part of National Trust to release Remai. Taken together, these provisions are a strong indication that the assumption of the debt by Mead was not accepted by National Trust in full consideration and substitution of Remai's obligation. The question therefore becomes whether the conduct of the parties can negative that indication.

The action of National Trust in discontinuing its suit against Remai could be construed as supporting an inference that the trust company was no longer looking to Remai for satisfaction of the debt. Indeed, the Court of Appeal viewed it in that light. With respect, I think that the Court of Appeal erred in so doing. I think it attributed too much significance to the discontinuance of National Trust's action against Remai. While I appreciate that the Assumption Agreement contemplated that National Trust could release Remai "at any time and in such manner as it thinks fit", I believe that its conduct in discontinuing its action against Remai is equivocal, particularly in light of Rule 198(4) of the Saskatchewan Queen's Bench Rules which states that discontinuance of an action shall not be a defence to any subsequent action against the party. Since discontinuance does not preclude a litigant from bringing the action at a later date, it is not, in my view, an adequate basis on which to find an intention to release the original mortgagor. It does not constitute the kind of compelling circumstance necessary to found a novation.

No other circumstances were presented as indicating that novation occurred. Since I have found that there was no intention on the part of National Trust to release Remai, it follows that the test for novation has not been met.

7. Disposition

I would dismiss the appeal on the combined interpretation of the Act and the Assumption Agreement. The respondent, David Mead, is entitled to his costs.

//McLachlin J.//

The following are the reasons delivered by

MCLACHLIN J. -- I agree with Wilson J.'s conclusions and reasons, subject to the following comment. I view ss. 2(2)(d) and 40(2) of the Act as involving a facial conflict, which I would resolve by recourse to legislative intention, and in particular the intention of the legislature to benefit the non-corporate borrower.

Appeal dismissed with costs.

Solicitors for the appellant: Pederson, Rourke, Pinch, Saskatoon.

Solicitors for the respondents: Rendek, McCrank, Halvorsen, Canham, Regina.

• Chief Justice at the time of judgment.