Pax Management Ltd. v. Canadian Imperial Bank of Commerce, 1992 CanLII 27 (SCC), [1992] 2 SCR 998

Pax Management Ltd. v. Canadian Imperial Bank of Commerce, 1992 CanLII 27 (SCC), [1992] 2 SCR 998

Canadian Imperial Bank of Commerce Appellant

v.

Pax Management Ltd., Leader Investment Corp.,

Wesson Holdings Ltd., Thomas Anthony Bruce,

Keith Wilfred Dixon, Jonathan Edmund Jones,

Richard Gage Moody, Jack Jones Temple,

William Gordon Watt, Gary Groves Westover,

David Garth Wortman, Glen Donald Rost and

Glenonne Holdings Ltd. Respondents

and

Rost Enterprises Ltd. Respondent

Indexed as: Pax Management Ltd. v. Canadian Imperial Bank of Commerce

File No.: 22194.

1992: March 26; 1992: September 24.

Present: La Forest, Sopinka, Cory, Stevenson* and Iacobucci JJ.

on appeal from the court of appeal for british columbia

Guarantee ‑‑ Discharge of surety ‑‑ Creditor deceitful in obtaining guarantors' consent to appointment of receiver ‑‑ Whether guarantors entitled to be discharged in absence of any prejudice to their interests.

Appeal ‑‑ Role of court of appeal ‑‑ Appellate court should not interfere with trial judge's findings of fact in absence of palpable and overriding error.

Appellant Bank financed the purchase of the shares of a company by the individual respondents' holding company. The loan agreement, and subsequent operating and capital loans made by the Bank, were guaranteed by the respondents. The Bank subsequently became concerned with the company's financial health and considered calling the loans. Before making a decision on whether to call the loan and appoint a receiver, the Bank retained a firm of chartered accountants to examine the company's affairs. Although the Bank's intention was to ascertain whether to call the loans, the company was told by the Bank's representative that the investigation was to assist with the ongoing relationship between the company and the Bank. Before the accountants submitted their final report, the Bank made the decision to call the loans and to appoint a receiver. The company was insolvent at the time but the Bank was not aware of this. As the company was not in default of payment, and as the Bank had received legal advice that under the loan agreement the demand could not be justified unless the company was insolvent, the Bank sought the company's consent to a receivership. To induce the company's directors to sign the consent, the Bank's representative informed them that if they did not sign, the Bank would "commence proceedings the next day". In doing so, he misrepresented the Bank's intentions. The day after the consent was signed, the Bank served its demand for repayment of the loans, and the company was placed in receivership the next day. The respondents sued the Bank for wrongfully putting the company into receivership among other things. The Bank counterclaimed for the balance due on the loans and personal guarantees.

The Bank's counterclaim was allowed and the respondents' primary claims dismissed. The trial judge found that the Bank was deceitful in misleading the company as to the reason for the independent review of its finances and as to the Bank's intention to commence proceedings the next day if the consent for the appointment of a receiver was not signed. He held that the accountants' attendance at the company's office, without a valid consent, amounted to trespass and awarded damages. With respect to the receivership, he held the consent for the appointment of the receiver invalid because of the Bank's misrepresentations but did not conclude that the Bank's deceitful act entitled the respondents to be discharged from their guarantees. The trial judge found that, under the terms of the loan agreement, the company's insolvency entitled the Bank to call the loans, even though the Bank did not know that the company was insolvent at the time, and that the 24‑hour notice to pay the loans was sufficient time in the circumstances. He concluded that the company could not have met the demand even if it had been given more time, and that the rapid winding up of the company was in the best interests of the guarantors.

The Court of Appeal allowed respondents' appeal with respect to the Bank's claim against them on their guarantees. The court refused to interfere with the trial judge's findings of deceit and found that the two deceits committed by the Bank had the effect of discharging the respondents from their obligations under their guarantees. The court also dismissed the respondents' claim for damages against the Bank, upholding the trial judge's finding that they had in fact suffered no damages from the receivership.

The Bank appealed and the respondents cross‑appealed on the issue of damages for the Bank's deceit.

Held: The appeal should be allowed and the cross‑appeal dismissed.

The Court must decline to reconsider the issue of deceit. The trial judge made two separate and specific findings of deceit against the Bank and both findings were the result of his assessment of the credibility of a number of witnesses. Since there was no palpable and overriding error on the findings of fact and the application of the principles of law governing the assessment of the evidence involved, the Court should not interfere with these findings.

As well, in light of the principles for appellate review, the Court should not interfere with the trial judge's findings that the notice period of 24 hours to pay after the Bank called the loans was a reasonable period of time in the circumstances. The trial judge also found that the respondents' liability on their guarantees was reduced by the early receivership. It is thus difficult to see any damage resulting from the immediate appointment of a receiver. Accordingly, the respondents' claim for damages must fail.

The respondents are not entitled to be discharged because of the misrepresentations made to them by the Bank in the absence of any prejudice to their interests. The passage in Bank of India relied on by the Court of Appeal to reach its conclusion does not in fact support the discharge of the respondents in this case. A review of the general case law on the discharge of a guarantor's liability resulting from the conduct of the creditor supports the need for some prejudice to the guarantors in order for them to be discharged. A guarantor's liability will generally be fully discharged if a materially different risk from that undertaken is imposed on a guarantor by reason of a variation or breach of the terms of the principal contract. Where the creditor breaches the principal contract but the breach does not prejudice the guarantor, the guarantor will not be discharged. Further, if the creditor impairs the value of the security held in respect of the guarantee, then the guarantor is entitled to be discharged to the extent of the prejudice which he suffers as a result of the loss of the security. Accordingly, a guarantor should not be discharged from the obligation which he has undertaken except by acts which have some impact on the magnitude or likelihood of the materialization of that risk. Other objectionable or wrongful conduct by the creditor towards the guarantor should be dealt with by causes of action that are otherwise appropriate. Here, the Bank made misrepresentations which led to a consent that, as a result of the company's insolvency, was superfluous, and which caused no prejudice to the guarantors. As such, the respondents should not be discharged from their guarantees.

Cases Cited

Distinguished: Bank of India v. Trans Continental Commodity Merchants Ltd. & Patel, [1982] 1 Lloyd's Rep. 506 (Q.B.), aff'd [1983] 2 Lloyd's Rep. 298 (C.A.); Bank of Montreal v. Wilder, 1986 3 (SCC), [1986] 2 S.C.R. 551; applied: Ontario (Attorney General) v. Bear Island Foundation, 1991 75 (SCC), [1991] 2 S.C.R. 570; referred to: Royal Bank of Canada v. Nobes (1982), 1982 5346 (NS CA), 49 N.S.R. (2d) 634; Lapointe v. Hôpital Le Gardeur, 1992 119 (SCC), [1992] 1 S.C.R. 351; Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd., 1982 19 (SCC), [1982] 1 S.C.R. 726; Mister Broadloom Corp. (1968) Ltd. v. Bank of Montreal (1979), 1979 1902 (ON SC), 25 O.R. (2d) 198; Lee v. Jones (1864), 17 C.B.N.S. 482, 144 E.R. 194; Rose v. Aftenberger, 1969 317 (ON CA), [1970] 1 O.R. 547; Bank of Nova Scotia v. Ham, 1986 3290 (SK CA), [1986] 5 W.W.R. 249; Rosemex Inc. v. Banque de Montréal, 1990 3251 (QC CA), [1990] R.J.Q. 344.

Authors Cited

McGuinness, Kevin Patrick. The Law of Guarantee: A Treatise on Guarantee, Indemnity and the Standby Letter of Credit. Toronto: Carswell, 1986.

APPEAL and CROSS‑APPEAL from a judgment of the British Columbia Court of Appeal (1990), 1990 727 (BC CA), 49 B.C.L.R. (2d) 195, 1 C.B.R. (3d) 1, 2 B.L.R. (2d) 81, setting aside a judgment of Spencer J. (1988), 1 C.B.R. (3d) 31 and 70, dismissing respondents' action for wrongful appointment of a receiver and granting appellant's counterclaim against the respondents. Appeal allowed and cross‑appeal dismissed.

D. Ross Clark and Rhys Davies, for the appellant.

Richard R. Sugden, Q.C., and Peter A. Spencer, for the respondents.

The judgment of the Court was delivered by

//Iacobucci J.//

Iacobucci J. -- This appeal raises the issue of whether a guarantor will be discharged because of misrepresentations made to the guarantor by the creditor in the absence of any prejudice to the interests of the guarantor.

I. Facts

Facts

In 1980, all of the individual respondents except Rost purchased 90 percent of the shares of Beaver Transport Ltd. ("Beaver"), through their holding company, the respondent, Pax Management Ltd. ("Pax"). Beaver was a trucking company located in Fort St. John, British Columbia. The individual respondents, except Rost and Wortman, were doctors who practised together. Wortman is their business manager and manager of Pax. Rost is the operations manager of Beaver. The respondents Leader Investment Corp. ("Leader") and Wesson Holdings Ltd. ("Wesson") were owned by Pax. The remaining 10 percent of Beaver's shares were purchased by the respondent Rost through his company, the respondent Glenonne Holdings Ltd. ("Glennone").

The purchase of the shares was financed by the appellant, CIBC (the "Bank"). The loan agreement, and subsequent operating and capital loans made by the Bank, were structured as loans to Beaver with guarantees of its indebtedness by the respondents. The guarantees were general guarantees on the Bank's standard form providing for the guarantee of current and future liabilities to the Bank.

The Bank subsequently became concerned with the financial health of Beaver, and by 1983 was considering calling the loans. On March 1, 1983, Mr. Holford, the Fort St. John branch manager of the Bank, wrote to his regional office recommending that the loans be called and demand be made on the guarantees. The regional office referred the matter to the head office of the Bank in Toronto. The Bank's head office decided that it should have a firm of chartered accountants examine Beaver's affairs before making the decision to call the loans and appoint a receiver. The local branch of the Bank in Fort St. John was given the task of persuading Beaver to accept an independent review of its affairs. The assistant manager of the branch, Mr. Arthur, told Wortman that the reason for the investigation was to assist with the ongoing relationship between Beaver and the Bank. On that belief, Beaver agreed to the review and agreed to pay the investigation fees of approximately $10,000. Mr. Meikle, of the accounting firm of Samson, Belair began conducting the review.

After Meikle had begun his investigation, but before he had submitted any formal report to the Bank, the Bank made the decision to call its loans and to appoint a receiver. The Bank made this decision on the basis of an initial oral report from Meikle that Beaver was in financial difficulty and also on the belief that, if a receiver was appointed at this time, any deficiency would be smaller than if the appointment was delayed since Beaver's receivables were at their highest point. Although Beaver was in fact insolvent at the time, the Bank did not know this. Beaver was not behind in its payments to the Bank. The Bank knew there were problems with the wording of its loan agreement which made it difficult to justify a demand for the loans if Beaver was not in fact insolvent. The crucial section of the contract between the Bank and Beaver was in the following language:

5. The Principal Sum, interest and any other moneys advanced by the Bank hereunder shall become immediately payable and the security taken by the Bank from the Companies shall become enforceable in each and every of the following events:

(d) if the Companies or either of them shall commit or threaten to commit any act of bankruptcy or shall become insolvent or shall make an assignment or proposal under the Bankruptcy Act or a general assignment in favour of their or its creditors or a bulk sale of their or its assets, or if a bankruptcy petition shall be filed or presented against the Companies or either of them; [Emphasis added.]

As Beaver was not in default of payment on the loan, and as the Bank had received legal advice that a demand could not be justified on the basis of the existing loan agreement, there being a question as to whether Beaver was actually insolvent, the Bank decided to seek Beaver's consent to a receivership.

The Bank's solicitors were instructed to prepare the following document which Meikle was to take to a meeting of all the shareholders on April 4, 1983:

We are writing on behalf of the members and directors of Beaver Transport Ltd., Pax Management Ltd., Leader Investment Corp. and Wesson Holdings Limited. As of March 31, 1983, we confirm that the direct principal indebtedness of Pax Management Ltd. stands at $300,000.00 and the direct principal indebtedness of Beaver Transport Ltd. stands at $1,700,495.00. We recognize that if a demand for payment of these sums is made, we will be unable to satisfy it, either now or in the foreseeable future.

We acknowledge that Beaver Transport Ltd. and Pax Management Ltd. are insolvent, and that therefore we consent to the appointment, which may be contemplated by you to be made in the immediate future, of a receiver or receiver‑manager under the terms of your debenture security with respect to the assets of any or all the issuers of the debentures. We also acknowledge that it would be pointless to delay the making of the appointment once demand for the repayment of your accounts has been made and we therefore waive any complaint we might have, if any, regarding the promptness of the appointment.

Beaver Transport Ltd.

Pax Management Ltd.

Although this document contained an acknowledgement that Beaver was insolvent, the subject of insolvency was not discussed at the shareholders' meeting. In convincing Beaver's directors (Drs. Dixon and Temple) to sign the consent and waiver, Holford emphasized the benefit to the guarantors of a speedy wind‑up of the failing company and the immediate appointment of a receiver; i.e., such a course would reduce the guarantors' liability by ensuring that incoming accounts receivable would be applied directly to the principal loan with the Bank, which was the subject of the guarantee, rather than to pay trade and other unsecured creditors. On being asked by the directors as to the consequences of failing to sign the consent, Holford said that the Bank would "commence proceedings the next day".

On April 5, 1983, the Bank formally served its demand for repayment of the loan on Beaver. As a result, Beaver was placed in receivership on April 6 and its assets liquidated, leaving a balance in excess of $1 million owing to the Bank.

The respondents sued the Bank for, among other things, wrongfully putting Beaver into receivership. The Bank counterclaimed for the balance due on the loans and personal guarantees. The Bank's counterclaim was allowed by the trial judge and the primary claims of the respondents dismissed. The respondents' appeal from the judgment on the guarantees was allowed by the British Columbia Court of Appeal.

II. Judgments

A. British Columbia Supreme Court (1988), 1 C.B.R. (3d) 31

Judgments

After a 38-day trial, Spencer J. delivered an exhaustive and carefully reasoned judgment. The learned trial judge held that the Bank's conduct had been deceitful, and that Beaver was entitled to damages as a result, but that the respondents were liable to the Bank on their guarantees. I will review only those parts of Spencer J.'s judgment (including a supplementary judgment (1988), 1 C.B.R. (3d) 70) which are germane to the present appeal.

Spencer J. held that Beaver had been misled by the Bank as to the reason for the independent review of its finances, and that the Bank's actions were deceitful (at p. 41):

The Fort St. John branch [of the Bank] was given the task of persuading Beaver to accept an independent review of its financial affairs. Mr. Arthur did that. In this case, I find that Mr. Wortman was misled about the reason why the bank wanted an independent accountant to investigate Beaver's affairs. He testified, and I accept, that Arthur told him the reason for the investigation was to assist with the ongoing relationship between Beaver and the bank. Mr. Arthur testified that the bank's reason for the investigation was to see if Beaver was viable and could continue in operation, but that was not what he told Wortman. This was at a time when Arthur knew the branch had recommended liquidation, and knew that his head office wanted to know what effect that would have on the rest of the connection before making its decision. It was deceitful of him to persuade Wortman to agree to an investigation of Beaver's affairs on the basis that it was to assist with an ongoing relationship. [Emphasis added.]

As there was no valid consent to the review by the accountants, their attendance at Beaver's office amounted to a trespass. The trial judge awarded damages against the Bank in the amount of the fees paid by Beaver to the accounting firm which conducted the review.

The trial judge then turned to the question of the receivership. Under the terms of its contract with Beaver, one of the circumstances which entitled the Bank to call its loans was if Beaver was insolvent. The trial judge found as a fact that Beaver was insolvent on April 4, 1983, and that Beaver continued to be insolvent to and beyond April 6, 1983, when the receiver was appointed. However, the trial judge found that, at the time that the Bank called the loan, it did not know that Beaver was insolvent. The Bank called the loan because it was in its financial interest to do so (at pp. 45-46):

Beaver was insolvent, as I shall discuss later, but I find as a fact that the bank decided to call its loans and appoint a receiver not because of any insolvency, but because it could see Beaver was in financial difficulty and it foresaw, correctly, that Beaver's business cycle had led it to the point in time when its receivables were at their highest point and must [sic] be used, as they came into the company, to meet the accounts payable, which were also at a high point. The Fort St. John branch knew that Beaver's business and income would drop sharply during the spring break‑up, and that historically it would not reach a high point again until the following winter. It foresaw, correctly in my opinion, that Beaver would have great difficulty in paying back the bank loan, which was not then in arrears, unless the full measure of its receivables were to be applied to it. . . . The bank knew that all Beaver's loan payments were up to date, and knew, from its solicitor's advice, that its loan agreement had problems in its wording which made it difficult to justify a demand of the loan.

However, Spencer J. held that under the terms of the loan agreement, Beaver's insolvency entitled the Bank to call the loans, even though the Bank did not know that Beaver was insolvent at the time it called the loan (at p. 49):

I have found that the bank did not know Beaver to be insolvent when it called the loan but that it took action because of its assessment of Beaver's business risk. The question arises, can the bank rely on insolvency if it is later discovered. In my opinion it can. Paragraph 5(d) of the loan agreement [supra], Exhibit 1.12, gave the bank the right to call Beaver's loan and to appoint a receiver if it became insolvent in fact. It would not be a defence to the bank that it thought Beaver to be insolvent if in fact it was not. Honest belief in insolvency is no defence. The issue is to be judged objectively. The corollary is that even if the bank did not think Beaver to be insolvent and did not rely upon insolvency at the time, it may plead the fact of insolvency to justify calling the loan if that is later discovered.

Spencer J. held that the waiver signed by the directors at the April 4th meeting was invalid. Consequently, the Bank's attempt to have Beaver waive any complaint arising from the short period of time between the demand for payment and the appointment of the receiver was of no effect. Spencer J. found that the Bank's representative, Holford, had placed himself in a fiduciary relationship to the directors and to Beaver, by purporting to advise them as to their best business interests. Spencer J. further found that Holford was in breach of his fiduciary duty, and that this breach rendered the waiver invalid. Holford withheld information about the potential liability of the guarantors and about the likely cost of the receivership (at p. 55):

[Holford] did not explain the difficulty Beaver would have in carrying on business in the hands of a receiver, nor, I find, did he tell [the directors] the likely cost of a receivership. Meikle testified he did that, and that he warned the shareholders there might be as much as a $600,000 deficiency facing them as guarantors. I find him to be mistaken. I reject both his and Holford's evidence on that score. I accept the evidence of the shareholders, particularly Drs. Temple, Moody, Watt and Jones, that they walked out of that meeting with a sense of relief that their exposure would probably be limited to about $60,000. They had been given the bank's washdown sheet that said so.

Further, Holford lied about the Bank's intention to commence proceedings against Beaver the next day. This misrepresentation was relied upon by the directors who signed the consent and waiver form (at pp. 57-58):

When Dr. Dixon asked what would happen if they did not sign that evening, Holford replied to the effect that the bank would commence proceedings the next day. Dr. Dixon testified that he therefore remarked there was no point in refusing, and he and Dr. Temple accordingly signed. Others at the meeting confirm his recollection, and Holford belatedly admitted he spoke words to that effect. But Holford knew the decision for a receivership lay in Mr. Ellwood's hands at regional office, and that it rested upon the directors consenting. In saying that the bank would commence proceedings the next day, he knew he was lying. It was more than a misrepresentation of the future, it was clearly an implied misrepresentation of the bank's present intention, done to force the directors to sign. Drs. Dixon and Temple relied upon it. [Emphasis added.]

In summary, the consent form prepared by the Bank was invalid for all purposes, whether as an admission of insolvency and consent to a receiver or as a waiver of time to pay following the Bank's demand for payment of the loan.

In the absence of a valid waiver, the Bank's actions in calling the loan and appointing a receiver could only be justified if Beaver was in fact given the proper time to pay following the demand. After an exhaustive review of the authorities and the facts, Spencer J. concluded that 24 hours was sufficient time to pay in the circumstances. He relied on his finding that Beaver could not have met the demand even if it had been given a month (at p. 63):

Under all of those circumstances, I find that the lapse of time between the bank's demand, formally served on April 5, 1983, and the entry of the receiver into Beaver's business on April 6, 1983, was sufficient. A longer notice would have made no difference. . . .

Moreover, Spencer J. found that Beaver was bound to fail, and that the rapid winding up of Beaver was in the best interests of the guarantors (at p. 57):

But I think the advice to liquidate Beaver was good advice to the shareholders. Beaver, in my opinion, was bound to fail, probably before the summer. To fail sooner rather than later and apply the receivables to the bank's debt would, to that extent, save the directors and their other companies, Pax, Leader and Wesson, from some liability on their guarantees.

Spencer J. gave judgment against the corporate and personal guarantors (except for the respondents Rost, Rost Enterprises Ltd. and Glenonne whose liability was limited to $100,000) for the net amount of Beaver's debt owing to the Bank.

B. British Columbia Court of Appeal (1990), 1990 727 (BC CA), 1 C.B.R. (3d) 1

British Columbia Court of Appeal

The British Columbia Court of Appeal (Macdonald, Cumming and Hinds JJ.A.), unanimously allowed the respondents' appeal with respect to the Bank's claim against the respondents on their guarantees. Again, I will confine my review to those parts of the Court of Appeal's reasons which bear on the present appeal.

The Court of Appeal largely upheld the trial judge's findings. The Court of Appeal noted that the trial judge had made two findings of deceit against the Bank, and that it was not for an appellate court to interfere with such findings (at p. 18):

We intend no disrespect to Mr. Clark [counsel for the Bank] in declining to review his submissions in detail. The learned trial Judge made two separate and specific findings of deceit against officers of the bank. Both findings were the result of his assessment of the credibility of a number of witnesses. Such findings of fact are not to be disturbed by an appellate Court unless it be shown that some palpable or overriding error occurred. We can find none. The respondents in this argument seek to have this Court review the evidence at the trial, and substitute our assessment for that of the trial Judge. Such a course is not open to us. . . .

Nonetheless, the Court of Appeal allowed the appeal and dismissed the Bank's claim against the respondents on their guarantees of the liability of Beaver. The Court found that the two deceits committed by the Bank were "acts of bad faith and concealment amounting to misrepresentation" (p. 19), which had the effect of discharging the respondents from their obligations under their guarantees. The Court of Appeal relied on Bank of India v. Trans Continental Commodity Merchants Ltd. & Patel, [1982] 1 Lloyd's Rep. 506 (Q.B. Com. Ct.), (particularly the passage at p. 515) to support their conclusion.

The Court of Appeal declined to interfere with the finding of Spencer J. that there had been sufficient time to pay after the demand for payment had been made. The Court of Appeal upheld the finding of the trial judge that the respondents had in fact suffered no damages from the receivership, given that "as a result of consenting to the receivership the guarantors minimized their exposure and Beaver ended its ongoing loss" (p. 20). Therefore the claim for damages against the Bank on this ground failed.

The Bank sought and was granted leave to appeal from the judgment of the Court of Appeal. The respondents sought and were granted leave to cross‑appeal on the issue of damages for the Bank's deceit.

III. Issues

A. Issues on the Appeal

Issues

1.Whether the learned trial judge and the Court of Appeal erred in finding that the Bank had been deceitful when its officer told the respondents that, if the consent form were not signed, the Bank would commence proceedings the next day.

2.Whether the Court of Appeal erred in holding that the effect of the deceitful acts was to discharge the guarantors in the absence of any prejudice to the guarantors.

B. Issue on the Cross‑appeal

Issue on the Cross-appeal

Whether the learned trial judge and the Court of Appeal erred, in light of the improperly obtained consent and waiver, in finding that there was a reasonable period of time given for repayment of the loan before a receiver was appointed and in therefore holding no claim for damages exists.

IV. Analysis

Analysis

I am of the opinion that the appeal should be allowed, and the cross‑appeal dismissed. Briefly put, I agree with the courts below that there was deceit by the Bank but disagree with the Court of Appeal that the effect of the deceit was to discharge the guarantors.

I will deal first with the question of deceit, which is raised as the first issue on the appeal, and also on the cross‑appeal, as I am of the view that this issue can and should be quickly disposed of. I will then go on to consider the question of the discharge of the guarantors.

A. Deceit

Deceit

Counsel for the Bank made a valiant attempt in argument to encourage us to reconsider the issue of deceit. However, I would not interfere with the trial judge's findings of fact, upheld by the Court of Appeal, on this issue. I would adopt the following passage from the judgment of the Court of Appeal (at p. 18):

The learned trial Judge made two separate and specific findings of deceit against officers of the bank. Both findings were the result of his assessment of the credibility of a number of witnesses. Such findings of fact are not to be disturbed by an appellate Court unless it be shown that some palpable or overriding error occurred. We can find none. The respondents in this argument seek to have this Court review the evidence at the trial, and substitute our assessment for that of the trial Judge. Such a course is not open to us. . . .

This Court has indicated on numerous occasions that an appellate court should not interfere with findings of fact in the absence of some palpable and overriding error. As we said recently in Ontario (Attorney General) v. Bear Island Foundation, 1991 75 (SCC), [1991] 2 S.C.R. 570, at p. 574:

. . . the rule is that an appellate court should not reverse the trial judge in the absence of palpable and overriding error which affected his or her assessment of the facts: Stein v. The Ship "Kathy K", 1975 146 (SCC), [1976] 2 S.C.R. 802; N.V. Bocimar S.A. v. Century Insurance Co. of Canada, 1987 68 (SCC), [1987] 1 S.C.R. 1247; Beaudoin‑Daigneault v. Richard, 1984 15 (SCC), [1984] 1 S.C.R. 2. The rule is all the stronger in the face of concurrent findings of both courts below. [See also Lapointe v. Hôpital Le Gardeur, 1992 119 (SCC), [1992] 1 S.C.R. 351.]

I am in complete agreement with the Court of Appeal that there was no palpable and overriding error in this case on the finding of facts and the application of the principles of law governing the assessment of the evidence involved.

On the cross‑appeal, the respondents argued that the trial judge and the Court of Appeal erred in not awarding damages for the Bank's deceit, since the deceit denied Beaver the opportunity of a reasonable time to pay after the Bank called the loans. The trial judge found that the notice period of 24 hours was sufficient based on the relevant factors prescribed by the authorities on the issue, including Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd., 1982 19 (SCC), [1982] 1 S.C.R. 726, and Mister Broadloom Corp. (1968) Ltd. v. Bank of Montreal (1979), 1979 1902 (ON SC), 25 O.R. (2d) 198 (H.C.). Moreover, the trial judge found that the respondents' liability on their guarantees was reduced by the early receivership of Beaver so it is difficult to see any damage resulting from the immediate appointment of a receiver assuming the demand to be invalid because it was tainted by the deceitfully obtained consent. The Court of Appeal declined to interfere with either of these findings. I agree with the Court of Appeal that it is inappropriate to interfere with the trial judge's findings in light of the principles for appellate review which I have just set out. Consequently, the cross‑appeal should be dismissed.

B. Discharge of the Guarantors

Discharge of the Guarantors

In holding that the guarantors should be discharged, the Court of Appeal relied on this passage of Bingham J. in Bank of India, supra, at p. 515, aff'd [1983] 2 Lloyd's Rep. 298 (C.A.):

Leaving aside what may be the special case of fidelity guarantees, I consider the true principle to be that while a surety is discharged if the creditor acts in bad faith towards him or is guilty of concealment amounting to misrepresentation or causes or connives at the default of the principal debtor in respect of which the guarantee is given or varies the terms of the contract between him and the principal debtor in a way which could prejudice the interests of the surety, other conduct on the part of the creditor, not having these features, even if irregular, and even if prejudicial to the interests of the surety in a general sense, does not discharge the surety. [Emphasis added by the British Columbia Court of Appeal.]

This same passage was quoted with approval by Wilson J. in Bank of Montreal v. Wilder, 1986 3 (SCC), [1986] 2 S.C.R. 551, at p. 567.

In my view, neither Bank of India nor Wilder support the conclusion of the Court of Appeal in the case at bar that, once there is a misrepresentation by the creditor, it is not necessary for there to be any prejudice, actual or potential, to the guarantors for them to be discharged. I find this especially so when one views these decisions in the light of the case law on the discharge of a guarantor's liability resulting from the conduct of the creditor.

With respect to Bank of India, looking at the judgment of Bingham J. as a whole, it is clear that, in the emphasized passage of the quotation above, Bingham J. was referring to concealment amounting to misrepresentations at the formation of the contract of guarantee. Bingham J. was not concerned with misrepresentations by the creditor subsequent to the formation of the contract. On the page previous to that from which the quotation in question is taken, Bingham J. said this about misrepresentations by the creditor (at p. 514):

Certain principles are well‑established. . . . Non‑disclosure at the time when the guarantee is given of facts potentially prejudicial to the surety may be held to amount to and to have the consequences of misrepresentation. (Lee v. Jones, (1864) 17 C.B.N.S. 482). [Emphasis added.]

An examination of the case relied upon by Bingham J. to support this proposition, Lee v. Jones (1864), 17 C.B.N.S. 482 (Ex. Ch.), 144 E.R. 194, settles the question. In that case, the defendant had executed a guarantee. The plaintiff sued the defendant on the guarantee. The defendant pleaded by way of defence that he had been induced to make the contract of guarantee by the fraudulent concealment by the plaintiff of a material fact. The Exchequer Chamber, by a majority, affirmed the judgment of the court below that the guarantor was discharged by the concealment. The following passage from the judgment of Blackburn J. makes it clear that the issue in Lee v. Jones was whether the misrepresentation was such that the guarantor would not have entered into the agreement had he known the truth (at p. 204 E.R.):

The improbability that any one could suppose that sureties would have entered into such an agreement if they had known the truth, is so great that the jury might well think that the plaintiffs knew that the defendant was in ignorance of it: and, if the jury so thought, they might from that alone draw the inference that the representation was fraudulently intended to deceive.

Moreover it is clear from the passage excerpted by the British Columbia Court of Appeal that Bingham J.'s main point in Bank of India, and in fact the basis on which that case was decided, was that there is no general principle that irregular conduct which is prejudicial to the surety discharges him or her from liability. The "irregular" conduct in Bank of India which was held not to discharge the guarantor was the creditor bank's delay in delivery of written confirmations of the principal contract. This position was affirmed on appeal, [1983] 2 Lloyd's Rep. 298. Goff L.J. stated (at p. 302):

[T]here is no general principle that "irregular" conduct on the part of the creditor, even if prejudicial to the interests of the surety, discharges the surety, though there are particular circumstances in which the surety may be discharged, of which the instances specified by the learned Judge provide certainly the most significant, and possibly the only, examples. . . . But that merely irregular conduct on the part of the creditor, even if prejudicial to the interests of the surety, does not discharge the surety, there can in my judgment be no doubt. [Emphasis added.]

In Wilder, supra, Wilson J. was faced with the question of the effect on the surety's liability of a breach of the principal contract between the creditor and the debtor. Wilson J. began by observing that a variation in the principal contract which prejudices the guarantor will discharge the guarantor (at p. 562):

It is trite law that any material variation of the terms of the contract between the creditor and the principal debtor to the prejudice of the guarantor without the guarantor's consent will discharge the guarantor.

Wilson J. emphasized that a guarantor gives his or her guarantee on the basis of the risk inherent in the contract which is being guaranteed, and that equity will intervene if the guarantor's right of subrogation is impaired by a variation by the creditor of the risk assumed by the guarantor without the guarantor's consent (at p. 566):

In the case of a specific contract it is to be assumed that the guarantor gave his guarantee in contemplation of an ascertainable and clearly identified risk inherent in the contract. The guarantor in such a case is discharged because he is powerless to protect against variation of the principal contract by the parties to that contract. Once he has given his guarantee on the basis of that particular risk equity protects him against any variation of it to which he was not a party.

Wilson J. held therefore that the question to be asked in determining whether a breach of the principal contract discharges the guarantor is whether the breach materially changed the risk assumed by the guarantor, to the guarantor's detriment (at p. 569):

. . . the key question becomes whether the subsequent breach of [the principal contract] by the Bank materially changed the risk assumed by the guarantors to the guarantors' detriment. I think there can be no doubt that it did. I agree with Lambert J.A. that the Bank's breach caused the Company's default. It materially impaired the value of the security it held for the Company's indebtedness by preventing the Company from continuing as a viable commercial operation. As a consequence, the guarantors' equitable rights of subrogation and indemnity were seriously interfered with if not effectively destroyed.

Thus the guarantors were discharged in Wilder because of the finding of prejudice to them.

I should now like to turn to a brief discussion of other relevant case law on discharge of sureties. In general, once a contract of guarantee has been made, the surety will be discharged entirely only if the principal contract is varied without the guarantor's consent, in a manner not obviously to the benefit of the guarantor, or if the creditor breaches the contract of guarantee. The surety will be partially discharged from his or her obligation under the guarantee if the creditor impairs the value of the security, but only to the extent that the surety's rights of subrogation under the contract of guarantee are affected. This was the position summarized by Laskin J.A. (as he then was) in Rose v. Aftenberger, 1969 317 (ON CA), [1970] 1 O.R. 547 (C.A.), at p. 554:

In my view, the encompassing principle to be applied is that a surety is discharged if either the principal contract to which he gave his guarantee is varied without his consent in a matter (as the Supreme Court of Canada said in Holland‑Canada Mortgage Co. v. Hutchings, 1936 20 (SCC), [1936] S.C.R. 165 at p. 172 . . .), not plainly unsubstantial or necessarily beneficial to the guarantor; or, if the terms of the contract of guarantee between the creditor and the surety are breached by the creditor. Where, as here, there is simply a wrongful dealing with the security taken by the creditor, and it is not shown that the taking (and hence the keeping as well) of the security was a condition of the giving of the guarantee, then the surety cannot be relieved beyond the value of the security lost to him.

To the same effect is the following summary from K. P. McGuinness, The Law of Guarantee (1986), at p. 282:

[A] surety is entitled to a full release from liability only in two situations: (1) where the effect of the conduct or dealing of the creditor is to vary the risk of default by the principal; and (2) where the creditor violates a condition of the surety's liability. Where an act by the creditor merely affects the amount for which the surety will be liable in the event of default, discharge is available only to the extent of the prejudice actually suffered.

It is clear therefore that the existing authorities base discharge from liability on two principles. First, that the guarantor has undertaken a particular risk, and should not have a materially different risk imposed upon him or her by the variation or breach of the terms of the principal contract. In such situations, since it should be left to the surety to decide whether to continue as a surety and bear the new risk, he or she is entitled to be discharged absolutely if his or her consent was not obtained. Second, where the surety's risk of being called upon remains the same, but the amount for which he or she will be liable is increased by an act of the creditor, the surety may be entitled to be discharged to the extent of that increase.

However, where the creditor breaches the principal contract but the breach does not prejudice the guarantor, the guarantor will not be discharged. So, in Royal Bank of Canada v. Nobes (1982), 1982 5346 (NS CA), 49 N.S.R. (2d) 634 (C.A.), the Nova Scotia Supreme Court, Appeal Division, held that even if the creditor had breached the principal contract by giving the debtor inadequate time to respond to the demand for payment, the guarantor would not have been entitled to be discharged because the debtor could not have responded to the demand in any event. That is, the breach of the principal contract in no way prejudiced the guarantors (at p. 643):

Even assuming that no notice of the demand was given to Coastal [the debtor] or, alternatively, that it was not given reasonable time to respond to the demand before the receiver was appointed and that the latter's entry into Coastal's premises was therefore both premature and wrongful, such, under the circumstances, is not in my opinion the kind of interference with the security arrangement that should discharge the guarantors. I say this because it is clear from the findings of fact of Chief Justice Cowan that it would not have made any practical difference as far as the guarantors and Coastal were concerned if the demand for payment was unobjectionable . . . . Coastal just couldn't respond to a payment demand.

See also McGuinness, supra, at p. 257:

Despite dicta to the contrary in a number of early cases, it now seems fairly clear that an alteration of the principal contract which clearly is not material to the surety's risk and which therefore cannot prejudice the surety, or a departure from the terms of the principal contract which is necessarily beneficial to the surety, will not relieve the surety from liability. As noted above, there would appear to be no doctrinal basis that would justify release in such a case. By definition, a surety is a person who has agreed to assume the risk of the default of another person. If that obligation is changed in such a way that the risk is necessarily reduced, then the burden of the surety is not increased. However, in order for the surety to continue to be bound where the principal contract has been altered, the lack of prejudice or immateriality of the alteration must be self-evident.

Finally, if the creditor impairs the value of the security held in respect of the guarantee, then the surety is entitled to be discharged to the extent of the prejudice which he or she suffers as a result of the loss of the security: Bank of Nova Scotia v. Ham, 1986 3290 (SK CA), [1986] 5 W.W.R. 249 (Sask. C.A.), and Rosemex Inc. v. Banque de Montréal, 1990 3251 (QC CA), [1990] R.J.Q. 344 (C.A.). To quote McGuinness, supra, at p. 282:

Where an act by the creditor merely affects the amount for which the surety will be liable in the event of a default, discharge is available only to the extent of the prejudice actually suffered. Consequently, an act or default by a creditor that interferes with the right of the surety to the transfer of the security will usually discharge the surety from liability only to the extent of any loss suffered by the surety, since the value of a security (and therefore the prejudice suffered by the surety as a result of its loss or impairment) is in most cases readily capable of measurement.

As I understand their argument, the respondents do not really dispute the above summary of the case law in so far as it relates to conduct of the creditor directed towards the principal debtor affecting a surety. However, they submit that these principles do not apply where the creditor's wrongful conduct is against the surety directly. In cases where there has been an act of bad faith against the surety, they submit that the surety should be automatically discharged without having to decide what damage or prejudice was suffered. As I have already stated, this position is not supported by the cases cited by the Court of Appeal or the respondents (Bank of India and Wilder), so the question becomes whether it is a desirable extension of the principles of discharge of a guarantor's liability? In my view it is not.

Simply put, no serious or compelling reason has been advanced to justify departing from the current state of law in the manner proposed by the respondents. A guarantor should not be discharged from the obligation which he or she has undertaken except by acts which have some impact on the magnitude or likelihood of the materialization of that risk. Other objectionable or wrongful conduct by the creditor towards the guarantor should be dealt with by causes of action that are otherwise appropriate such as the tort of deceit or breach of fiduciary duty. In this respect, the respondents sought to further justify the Court of Appeal's discharge of the impugned guarantees on the basis of a breach of fiduciary duty by the Bank's representative to Beaver's directors. Accepting for the sake of argument that there was a breach of fiduciary duty as found by the trial judge, I do not agree that it should be given the effect proposed by the respondents. In my opinion, the trial judge gave proper effect to the alleged breach of fiduciary duty by the Bank in finding invalid the impugned waiver and consent obtained at the April 4, 1983 meeting.

The conduct of the Bank in this case consisted of misrepresentations made to individuals who where both the principals of the debtor, Beaver, and the guarantors. The result of the misrepresentations was that these individuals consented to placing Beaver in receivership. The misrepresentations had the effect of rendering the consent thereby obtained invalid. If Beaver had not in fact been insolvent at the time the consent was obtained (a finding which is not challenged before this Court), then the ensuing demand and receivership would have constituted a breach of the principal loan agreement. However, I agree with Spencer J. that his finding that Beaver was insolvent at that time provided a justification for the Bank's calling the loan and, when Beaver failed to pay, appointing a receiver.

Spencer J. repeatedly emphasized that not only did placing Beaver in receivership not operate to the detriment of the guarantors, but in fact it was also advantageous to them. For example, he stated (at pp. 57 and 68):

Beaver . . . was bound to fail, probably before the summer. To fail sooner rather than later and apply the receivables to the bank's debt would, to that extent, save the directors and their other companies . . . from some liability on their guarantees.

Because of [the misrepresentation], the receivership probably commenced earlier than it otherwise would have done, with the result the bank was able to reduce the shortfall and therefore the liability on the guarantees by the amount recovered from the accounts receivable which would otherwise have gone to pay down Beaver's trade creditors.

The respondents argue that it is simplistic to assert that, since Beaver was insolvent, the Bank's actions did not either cause damage to or increase the risk of the guarantors. They emphasize that the guarantors were doctors and that they could have personally raised the funds so as to avoid receivership, or attempted to sell the business. In my view, these arguments cannot succeed because they are simply attempts to set aside reasonably supportable findings of facts of the trial judge. The trial judge found not only that Beaver was insolvent, but also that its failure was inevitable. He also addressed the possibility of the guarantors being able to do anything to improve this situation, stating (at p. 62):

Beaver's attempts to raise money, or be sold or find new business had met with failure. At trial, Wortman admitted it would have been difficult to find alternative financing as of April 4, 1983. . . . Although the shareholders say now they could have raised money themselves to add to the company's equity, none of them could have done so without borrowing or negotiating a sale of assets. Most of the shareholders deny that Holford or Meikle suggested that they put in more equity during the April 4 meeting, but I believe there was mention of that and that the suggestion was met with silence.

In short, what occurred in this case was that the Bank made misrepresentations which led to a consent that, as a result of Beaver's insolvency, was superfluous, and which caused no prejudice to the guarantors.

C. Conclusion

Conclusion

In light of the principles that I have reviewed, I conclude that the respondents are not entitled to be discharged on their guarantees. Since the respondents have not alleged that misrepresentations were made at the time the contracts of guarantee were made (nor is there any evidence of any such misrepresentations), the passage they rely on from Bank of India is of no assistance to them. There was no variation of the principal contract between the Bank and Beaver. Even assuming that the Bank did breach the principal contract by giving insufficient time to Beaver to comply with the demand (which is not the case), the respondents suffered no prejudice as a result of such a breach and so Wilder does not help their cause. There was no material alteration to their detriment of the risk that they had assumed. In Royal Bank of Canada v. Nobes, supra, the Nova Scotia Supreme Court, Appeal Division, held that a guarantor should not be discharged in such circumstances, even assuming there was a breach of the principal contract, because the debtor could not have complied with the demand for payment even if it had been in accordance with the contract. The same argument applies a fortiori where not only could the debtor not have complied with the demand for payment, but also any breach of the contract by way of insufficient time to pay subsequent to the demand actually increased the value of the security held by the creditor and reduced the risk assumed by the guarantors.

I therefore conclude that the respondents should not be discharged from their guarantees.

V. Disposition

Disposition

Accordingly the appeal is allowed, the judgment of the British Columbia Court of Appeal dismissing the appellant's claim against the respondents on their guarantees is set aside, and the judgment of the trial judge is restored. The cross‑appeal is dismissed.

Under the circumstances, the parties should bear their own costs in this Court and in the British Columbia Court of Appeal. I would not disturb the orders made by Spencer J. with respect to costs at trial.

Appeal allowed and cross‑appeal dismissed.

Solicitors for the appellant: Davis & Company, Vancouver.

Solicitors for the respondents: Davis, Gourlay, Spencer, Slade, West Vancouver; Sugden, McFee & Roos, Vancouver.

• Stevenson J. took no part in the judgment.