Manulife Bank of Canada v. Conlin, 1996 SCC 182

Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415

Manulife Bank of Canada Appellant

v.

John Joseph Conlin Respondent

Indexed as: Manulife Bank of Canada v. Conlin

File No.: 24499.

1996: May 30; 1996: October 31.

Present: La Forest, L’Heureux‑Dubé, Sopinka, Gonthier, Cory, Iacobucci and Major JJ.

on appeal from the court of appeal for ontario

Mortgages ‑‑ Guarantee ‑‑ Renewal agreement ‑‑ Release of guarantor from liability ‑‑ Mortgagor’s husband guaranteeing mortgage ‑‑ Mortgage clause providing that guarantors liable “as principal debtors and not as sureties”‑‑ Guarantee to remain binding “notwithstanding the giving of time for payment . . . or the varying of the terms of payment”‑‑ Mortgagor renewing mortgage at different interest rate ‑‑ Renewal agreement not signed by guarantor ‑‑ Whether guarantor waived equitable right to be released when principal loan renewed.

Courts ‑‑ Jurisdiction ‑‑ Mortgagor defaulting on mortgage ‑‑ Bank obtaining summary judgment against mortgagor and guarantor ‑‑ Whether Court of Appeal exceeded its jurisdiction in setting aside judgment and dismissing action against guarantor.

The respondent guaranteed a mortgage for a three‑year term with an interest rate of 11.5 percent per annum which his wife had provided as security for a loan from the appellant bank. In clause 34 of the mortgage agreement, the guarantors promised, as “principal debtors and not as sureties”, to pay the money secured by the mortgage. The guarantee was to remain binding “notwithstanding the giving of time for payment of this mortgage or the varying of the terms of payment hereof or the rate of interest hereon”. Shortly before the mortgage was to mature, the mortgagor and the bank executed an agreement which renewed the mortgage for a further three‑year term at a yearly interest rate of 13 percent. The renewal forms provided spaces for the signature of the “registered owner” and the “guarantor”, but the agreement was signed only by the mortgagor. The mortgagor defaulted on the mortgage, and the bank obtained a summary judgment against the mortgagor and the guarantors for the principal owing under the mortgage with interest at 13 percent per annum. The Court of Appeal, in a majority decision, set aside the judgment and dismissed the action against the respondent guarantor. This appeal is to determine (1) whether the Court of Appeal exceeded its jurisdiction in allowing the appeal and dismissing the action, rather than sending the matter back to trial, and (2) whether under the terms of the loan agreement, the respondent was released from his promise to pay the principal sum and other moneys secured by the mortgage when the term of the mortgage was extended and the rate of interest increased, without notice to him.

Held (L’Heureux‑Dubé, Gonthier and Iacobucci JJ. dissenting): The appeal should be dismissed.

(1) Jurisdiction

The Court of Appeal has jurisdiction to make any order or decision that ought to or could have been made by the court or tribunal appealed from. Considered in light of Rule 1.04(1), which provides that the rules are to be liberally construed, Rules 20.04(2) and (4) of the Rules of Civil Procedure gave the motions court judge the jurisdiction to dismiss the action against the respondent. The judge could either have found that there was no genuine issue for trial or he could have found that the only genuine issue was an issue of law. In either case, it would have been within his jurisdiction and, by extension, within the jurisdiction of the Court of Appeal, to dispose of the matter by dismissing the appellant’s claim. The appellant was not deprived of its right to have its case fully heard and to test all of the respondent’s evidence. Under Rule 39.02(1), a party to a motion may cross‑examine the deponent of any affidavit served by a party who is adverse in interest on the motion. The appellant chose not to exercise this right and left the respondent’s evidence unchallenged.

(2) Release from liability

Per La Forest, Sopinka, Cory and Major JJ.: It has long been clear that a guarantor will be released from liability on the guarantee in circumstances where the creditor and the principal debtor agree to a material alteration of the terms of the contract of debt without the consent of the guarantor. A surety can contract out of the protection provided to a guarantor by the common law or equity, but any contracting out of the equitable principle must be clear. The issue as to whether a surety remains liable will be determined by interpreting the contract between the parties and determining the intention of the parties as demonstrated by the words of the contract and the events and circumstances surrounding the transaction as a whole. If there is any ambiguity in the terms used in the guarantee, the words of the documents should be construed against the party which drew it, by applying the contra proferentem rule. As well, this Court has stated that the surety is a favoured creditor in the eyes of the law whose obligation should be strictly examined and strictly enforced. The guarantor in this case comes within the class of accommodation sureties, or those who enter into the guarantee in the expectation of little or no remuneration. The law has protected such guarantors by strictly construing their obligations and limiting them to the precise terms of the contract of surety.

Clause 34 and clause 7, dealing with renewal or extension of time, unambiguously indicate that the respondent was not bound by the renewal agreement. If the guarantor is to be treated as a principal debtor and not as a guarantor, then the failure of the bank to notify the respondent of the renewal agreement and the new terms of the contract must release him from his obligations since he is not a party to the renewal. Moreover, even if it were thought that the principal debtor clause does not convert the guarantor into a principal debtor, the equitable or common law rules relieving the surety from liability where the contract has been materially altered by the creditor and the principal debtor without notice to the surety would apply, in the absence of an express agreement to the contrary. Two aspects of the renewal agreement itself lead to the conclusion that the guarantor is not to be bound. First, the renewal agreement is once again a standard form prepared and used by the bank and it calls for the signature of the guarantor. Secondly, the renewal agreement states that the terms of the old mortgage will form part of the agreement, and by doing so indicates that this is a new agreement rather than merely an extension of an old agreement. Further, clause 7 of the original mortgage specifically distinguishes between extensions and renewals both in its heading and in its text. The failure to refer to a renewal agreement or even to a renewal in clause 34 strongly suggests that it has no application to a renewal. The words used in clauses 34 and 7 are sufficiently clear to conclude that the guarantor did not waive his equitable and common law rights either as a principal debtor or as a guarantor. If the wording of the two clauses should be found to be ambiguous, the contra proferentem rule must be applied against the bank. The wording of clause 34 binding the guarantor to variations in the event of an extension of the mortgage should not be applied to bind the guarantor to a renewal without notice since there is ambiguity as to whether clause 34 applies to renewals at all. In these circumstances as well, the guarantor should be relieved of liability.

Per Gonthier and Iacobucci JJ. (dissenting): Clause 34 amounts to a waiver of the respondent’s right to be discharged as a result of a material variation of the principal contract. Guarantee contracts are basically contracts, like any others, and should be construed according to the ordinary rules of contractual interpretation. The cardinal interpretive rule of contracts is that the court should give effect to the intentions of parties as expressed in their written document. The court will deviate from the plain meaning of the words only if a literal interpretation of the contractual language would lead either to an absurd result or to a result which is plainly repugnant to the intention of the parties. By clause 34, the guarantors agree to remain bound by the guarantee contract notwithstanding the giving of time for payment of the mortgage or the varying of the rate of interest. While clause 34 does not refer to “renewal” agreements by name, it does contain a clear waiver of the guarantors’ right to be discharged in the event of an extension of time or an increase in the rate of interest. The plain ordinary meaning of the words “the giving of time for payment . . . or the varying of the terms of payment” encompasses the renewal agreement. While the parties used a renewal agreement, at bottom, that renewal agreement extended the time for payment and increased the interest rate, events that are expressly covered in clause 34. Under clause 34, the bank did not have to notify the guarantors of the renewal agreement. The language of the clause is clear, and it would be odd to infer a condition of notice when the undertaking is so clear and unambiguous. As “principal debtors”, the guarantors would not be expected to sign the renewal agreement. The evident intention of the parties, in using this kind of language, was to preserve the liability of the surety even in circumstances where the principal obligation was no longer enforceable. The space for the guarantors’ signature on the renewal agreement is not helpful in trying to interpret the guarantee contract, since the wording or form of another subsequent contract, entered into three years later, cannot change the meaning of the original agreement. The respondent promised to guarantee the payment of the money secured by the original mortgage, and the terms of that mortgage thus determine the extent of his liability. The respondent is not liable for interest at the increased rate of 13 percent, but simply to repay the balance owing on the principal sum with interest charged at 11.5 percent per annum.

Per L’Heureux‑Dubé J. (dissenting): Subject to the following comment, Iacobucci J.’s reasons are substantially agreed with. Courts should generally use the “modern contextual approach” as the standard, normative approach to judicial interpretation, and may exceptionally resort to the old “plain meaning” rule in appropriate circumstances. To determine the appropriate definition of the phrase “the giving of time for payment . . . or the varying of the terms of payment” in the present context, Iacobucci J. reviewed the provisions in their immediate context, the contract as a whole, the consequences of proposed interpretations, the applicable presumptions and rules of interpretation, and admissible external aids. This process is not an application of the “plain meaning” approach but rather an application of the “modern contextual approach” to judicial interpretation. The rules which govern the interpretation of deeds and contracts generally are essentially the same as the rules for statutory interpretation. The “modern contextual approach” for statutory interpretation, with appropriate adaptations, is equally applicable to contractual interpretation. Statutory interpretation and contractual interpretation are but two species of the general category of judicial interpretation. Here, the resulting interpretation did not come from the “plain meaning” of the words, but from their “meaning in law”, because they are “legal terms of art”. Where an instrument uses a legal term of art, there is a presumption that the term of art is used in its correct legal sense, and this is the presumption that is resorted to by Iacobucci J. when he makes use of admissible external aids in determining the correct meaning of the phrase “to give time”.

Cases Cited

By Cory J.

Referred to: Holme v. Brunskill (1878), 3 Q.B.D. 495; Bank of Montreal v. Wilder, 1986 CanLII 3 (SCC), [1986] 2 S.C.R. 551; Bauer v. Bank of Montreal, 1980 CanLII 12 (SCC), [1980] 2 S.C.R. 102; First City Capital Ltd. v. Hall (1993), 1993 CanLII 8595 (ON CA), 11 O.R. (3d) 792; Holland‑Canada Mortgage Co. v. Hutchings, 1936 CanLII 20 (SCC), [1936] S.C.R. 165; Alberta Opportunity Co. v. Schinnour, 1990 ABCA 359, [1991] 2 W.W.R. 624; Citadel General Assurance Co. v. Johns‑Manville Canada Inc., 1983 CanLII 52 (SCC), [1983] 1 S.C.R. 513; Canadian Imperial Bank of Commerce v. Patel (1990), 1990 CanLII 6732 (ON SC), 72 O.R. (2d) 109; Co‑operative Trust Co. of Canada v. Kirkby, 1986 CanLII 3325 (SK QB), [1986] 6 W.W.R. 90; Royal Trust Corp. of Canada v. Reid (1985), 1985 CanLII 3079 (PE SCAD), 40 R.P.R. 287; Veteran Appliance Service Co. v. 109272 Development Ltd. (1985), 1985 CanLII 1405 (AB QB), 67 A.R. 117.

By Iacobucci J. (dissenting)

Holme v. Brunskill (1878), 3 Q.B.D. 495; Re Rotenberg and Borough of York (No. 2) (1976), 1976 CanLII 735 (ON CA), 13 O.R. (2d) 101; Keltic Leasing Corp. v. Curtis (1993), 1993 CanLII 5614 (NB CA), 133 N.B.R. (2d) 73; Bank of Montreal v. Wilder, 1986 CanLII 3 (SCC), [1986] 2 S.C.R. 551; Bauer v. Bank of Montreal, 1980 CanLII 12 (SCC), [1980] 2 S.C.R. 102; Consolidated‑Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888; Stevenson v. Reliance Petroleum Ltd., 1956 CanLII 27 (SCC), [1956] S.C.R. 936; Cornish v. Accident Insurance Co. (1889), 23 Q.B.D. 453; Citadel General Assurance Co. v. Johns‑Manville Canada Inc., 1983 CanLII 52 (SCC), [1983] 1 S.C.R. 513.

By L’Heureux‑Dubé J. (dissenting)

River Wear Commissioners v. Adamson (1877), 2 App. Cas. 743; Sydall v. Castings Ltd., [1967] 1 Q.B. 302; Inland Revenue Commissioners v. Williams, [1969] 1 W.L.R. 1197.

Statutes and Regulations Cited

Courts of Justice Act, R.S.O. 1990, c. C.43, s. 134(1).

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rules 1.04(1), 20.04(2), (4), 39.02(1).

Authors Cited

Black’s Law Dictionary, 5th ed. St. Paul, Minn.: West Publishing, 1979, “renewal”, “extension”.

Concise Oxford Dictionary of Current English, 9th ed. Oxford: Clarendon Press, 1995, “extend”, “renew”.

Côté, Pierre‑André. The Interpretation of Legislation in Canada, 2nd ed. Cowansville: Yvon Blais, 1991.

Driedger on the Construction of Statutes, 3rd ed. By Ruth Sullivan. Toronto: Butterworths, 1994.

Fridman, G. H. L. The Law of Contract in Canada, 3rd ed. Scarborough, Ont.: Carswell, 1994.

McGuinness, Kevin Patrick. The Law of Guarantee, 2nd ed. Scarborough, Ont.: Carswell, 1996.

APPEAL from a judgment of the Ontario Court of Appeal (1994), 1994 CanLII 1357 (ON CA), 20 O.R. (3d) 499, 120 D.L.R. (4th) 234, 41 R.P.R. (2d) 283, 75 O.A.C. 117, 17 B.L.R. (2d) 143, reversing a decision of the Ontario Court (General Division) finding the respondent liable to pay under a mortgage. Appeal dismissed, L’Heureux‑Dubé, Gonthier and Iacobucci JJ. dissenting.

H. Stephen Lee, for the appellant.

Raymond F. Leach and Barbara F. Fischer, for the respondent.

//Cory J.//

The judgment of La Forest, Sopinka, Cory and Major JJ. was delivered by

1 Cory J. -- I have read with great interest the clear and concise reasons of Justice Iacobucci. I am in agreement with his finding that the Court of Appeal had jurisdiction to make the order dismissing the action against the respondent. However, I must differ with his conclusion that by the terms of the guarantee, the respondent waived the equitable right of a guarantor to be released upon renewal of the mortgage loan with a different term and interest rates to which the guarantor did not consent.

The Position of a Guarantor as Defined by Equity and the Common Law

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

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

This rule has been adopted in a number of Canadian cases. See for example Bank of Montreal v. Wilder, 1986 CanLII 3 (SCC), [1986] 2 S.C.R. 551, at p. 562.

3 The basis for the rule is that any material alteration of the principal contract will result in a change of the terms upon which the surety was to become liable, which will, in turn, result in a change in the surety’s risk. The rationale was set out in The Law of Guarantee (2nd ed. 1996) by Professor K. P. McGuinness in this way, at p. 534:

The foundation of the rule in equity is certainly consistent with traditional thinking, but it is a fair question whether it is necessary to invoke the aid of equity at all in order to conclude that in a case where the principal contract is varied materially without the surety’s consent, the surety is not liable for any subsequent default. Essentially, a specific or discrete guarantee (as opposed to an all accounts guarantee) is an undertaking by the surety against the risks arising from a particular contract with the principal. If that contract is varied so as to change the nature or extent of the risks arising under it, then the effect of the variation is not so much to cancel the liability of the surety as to remove the creditor from the scope of the protection that the guarantee affords. When so viewed, the foundation of the surety’s defence appears in law rather than equity: it is not that the surety is no longer liable for the original contract as it is that the original contract for which the surety assumed liability has ceased to apply. In varying the principal contract without the consent of the surety, the creditor embarks upon a frolic of his own, and if misfortune occurs it occurs at the sole risk of the creditor. A law based approach to the defence is in certain respects attractive, because it moves the surety’s right of defence in the case of material variation from the discretionary and therefore relatively unsettled realm of equity into the more absolute and certain realm of law. In any event, it is clear quite certainly in equity and quite probably in law as well, that the material variation of the principal contract without the surety’s consent (unless subsequently ratified by the surety) will result in the discharge of the surety from liability under the guarantee.

And further at p. 541, he wrote:

Where the risk to which the surety is exposed is changed, the rationale for the complete release of the surety is easily explained. To change the principal contract is to change the basis upon which the surety agreed to become liable. A surety’s liability extends only to the contract which he has agreed to guarantee. If the terms of that contract (and consequently the terms of the surety’s risk) are varied then the creditor should no longer be entitled to hold the surety to his obligation under the guarantee. To require a surety to maintain a guarantee in such a situation would be to allow the creditor and the principal to impose a guarantee upon the surety in respect of a new transaction. Such a power in the hands of the principal and creditor would amount to a radical departure from the principles of consensus and voluntary assumption of duty that form the basis of the law of contract.

The Right of a Guarantor to Contract Out of the Protection Provided by the Common Law

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

5 The principle was explained by Professor McGuinness in The Law of Guarantee, supra, at p. 546, in these words:

There are certain types of amendment that may be made to the terms of a principal contract (or departures from the terms of the principal contract) that will not have the effect of discharging the surety under that contract, even though those changes may be of a material nature. For instance, where the changes that have been made to the principal contract were specifically authorized by the surety or were otherwise within the contemplation of the contract, the surety will not be discharged. Similarly, changes which are authorized within the guarantee will not relieve the surety from liability.

It is a question of interpretation whether such changes are authorized or contemplated.

The author added at p. 547 the following sage advice to lending institutions:

Since the courts have tended to give a narrow construction to provisions in standard form guarantees which authorize such changes, it would be most unwise for a creditor to agree to changes without first obtaining the consent of the surety, except where there is clear authorization for him to act solely upon his own initiative. Where the creditor seeks to show that the guarantee agreement provides a blanket authorization to make material alterations to the principal contract, the wording must be very clear that such a right was intended. [Emphasis added.]

6 The issue as to whether a surety remains liable will be determined by interpreting the contract between the parties and determining the intention of the parties as demonstrated by the words of the contract and the events and circumstances surrounding the transaction as a whole.

Principles of Interpretation

7 In many if not most cases of guarantees a contract of adhesion is involved. That is to say the document is drawn by the lending institution on a standard form. The borrower and the guarantor have little or no part in the negotiation of the agreement. They have no choice but to comply with its terms if the loan is to be granted. Often the guarantors are family members with limited commercial experience. As a matter of accommodation for a family member or friend they sign the guarantee. Many guarantors are unsophisticated and vulnerable. Yet the guarantee extended as a favour may result in a financial tragedy for the guarantor. If the submissions of the bank are accepted, it will mean in effect that a guarantor, without the benefit of notice or any further consideration, will be bound indefinitely to further mortgages signed by the mortgagor at varying rates of interest and terms. The guarantor is without any control over the situation. The position adopted by the bank, if it is correct, could in the long run have serious consequences. Guarantors, once they become aware of the extent of their liability, will inevitably drop out of the picture with the result that many simple and straightforward loans will not proceed since they could not be secured by guarantors.

8 In my view, it is eminently fair that if there is any ambiguity in the terms used in the guarantee, the words of the documents should be construed against the party which drew it, by applying the contra proferentem rule. This is a sensible and satisfactory way of approaching the situation since the lending institutions that normally draft these agreements can readily amend their documents to ensure that they are free from ambiguity. The principle is supported by academic writers.

9 G. H. L. Fridman, in his text The Law of Contract in Canada (3rd ed. 1994), at pp. 470-71, puts the position in this way:

The contra proferentem rule is of great importance, especially where the clause being construed creates an exemption, exclusion or limitation of liability. . . .

Where the contract is ambiguous, the application of the contra proferentem rule ensures that the meaning least favourable to the author of the document prevails.

Professor McGuinness, in his work The Law of Guarantee, supra, at pp. 612-13, explains the application of the rule as follows:

. . . the contra proferentum rule of construction (under which the provisions of an agreement that were inserted by a party for his own protection are subjected to a strict interpretation) provides one method through which the courts can restrict the scope of extremely broad provisions which purport to eliminate the rights of the surety. The justification for giving such provisions a narrow construction is clear: it is one thing to say that a party may, if he so chooses, agree to assume an excessive burden, and to waive the rights which the law generally recognizes as existing for his protection. It is quite another thing to assume that parties necessarily intend to enter into such obligations. The more natural assumption is the exact opposite. Where the guarantee was drafted by the creditor, and there is any ambiguity or imprecision in the terms of a provision which purports to limit the rights of a surety, it is only fair that the ambiguity be resolved against the party who prepared the document. If the creditor wishes to take away a right belonging to the surety, he should use clear language in the document.

McGuinness further explains the principle and its justification in these words, at p. 244:

Where it is the creditor who drafted the terms of the contract, consistence of principle would call for the guarantee to be construed narrowly and thus in effect against the creditor. It is submitted that the correct rule is that where there is only one reasonable interpretation that the words used in a guarantee can bear, the guarantee should be given that interpretation. In such a case, the contra proferentum rule would not come into play. Where, however, the agreement is ambiguous in the sense that there are two or more interpretations that might reasonably be given to its terms, the guarantee should be construed against the party who prepared it or proposed its adoption, whether that be the creditor or the surety.

10 As well, this Court has stated that the surety is a favoured creditor in the eyes of the law whose obligation should be strictly examined and strictly enforced. This appears from the reasons of Davis J. in Holland-Canada Mortgage Co. v. Hutchings, 1936 CanLII 20 (SCC), [1936] S.C.R. 165, at p. 172:

A surety has always been a favoured creditor in the eyes of the law. His obligation is strictly examined and strictly enforced.

He goes on to say:

“It must always be recollected,” said Lord Westbury in Blest v. Brown (1862), 4 De G. F. & J. 367, at 376,

in what manner a surety is bound. You bind him to the letter of his engagement. Beyond the proper interpretation of that engagement you have no hold upon him. He receives no benefit and no consideration. He is bound, therefore, merely according to the proper meaning and effect of the written engagement that he entered into. If that written engagement is altered in a single line, no matter whether it be altered for his benefit, no matter whether the alteration be innocently made, he has a right to say, “The contract is no longer that for which I engaged to be surety; you have put an end to the contract that I guaranteed, and my obligation, therefore, is at an end.”

Apart from any express stipulation to the contrary, where the change is in respect of a matter that cannot “plainly be seen without inquiry to be unsubstantial or necessarily beneficial to the surety,” . . . the surety, if he has not consented to remain liable notwithstanding the alteration, will be discharged whether he is in fact prejudiced or not.

Those comments are as true today as they were at the time they were written.

11 The appellant contends that this principle of interpretation has been abandoned and for that proposition relies upon the reasons of this Court in Bauer, supra. I cannot agree with this submission. The issue in that case was whether a particular clause within the guarantee was an exemption clause and thus subject to the special rules of construction applying to those clauses. It was held that the clause in question was not, in fact, an exemption clause. The general question as to whether the scope of surety obligations should be construed strictly was not explicitly addressed by the Court. It is also significant that the Alberta Court of Appeal in Alberta Opportunity Co. v. Schinnour, 1990 ABCA 359, [1991] 2 W.W.R. 624, found that the clause they were considering was analogous to that in issue in Bauer. Nonetheless they determined, correctly in my view, that it should be interpreted in accordance with the general rules of construction. Those rules should, in my view, include the contra proferentem rule and thus will be generally applicable to guarantee or surety clauses.

12 The position set out in Holland-Canada Mortgage Co., supra, was confirmed in Citadel General Assurance Co. v. Johns-Manville Canada Inc., 1983 CanLII 52 (SCC), [1983] 1 S.C.R. 513. At p. 521 of that case, it was said that “accommodation sureties” are those who entered into the guarantee “in the expectation of little or no remuneration and for the purpose of accommodating others or of assisting others in the accomplishment of their plans”. The protection offered to this class of guarantors was explained also at p. 521:

In respect of them, the law has been astute to protect them by strictly construing their obligations and limiting them to the precise terms of the contract of surety.

13 These sureties were contrasted with “compensated sureties” whose business consists of guaranteeing performance and payment in return for a premium. With respect to this latter class of sureties it was held at p. 524:

. . . in the case of the compensated surety it cannot be every variation in the guaranteed contract, however minor, or every failure of a claimant to meet the conditions imposed by the bond, however trivial, which will enable the surety to escape liability.

Although the primary issue in the case was the distinction between accommodation sureties and those who receive compensation, these words nonetheless represent the considered opinion of the Court. In my view, they are correct.

14 I would note in passing that the guarantor in this case comes within the class of accommodation sureties.

15 It follows that if there is a doubt or ambiguity as to the construction or meaning of the clauses binding the guarantor in this case, they must be strictly interpreted and resolved in favour of the guarantor. Further, as a result of the favoured position of guarantors, the clauses binding them must be strictly construed.

16 Finally, when the guarantee clause is interpreted, it must be considered in the context of the entire transaction. This flows logically from the bank’s position that the renewal agreement was an integral part of the original contract of guarantee. This position I believe is correct. It follows that fairness demands that the entire transaction be considered and this must include the terms and arrangements for the renewal agreement.

Application of the Principles of Interpretation to the Guarantee and Renewal Agreement Presented in this Case

17 It may be helpful to set out once again clauses 34 and 7 of the original guarantee agreement and recall that the renewal agreement called for the signature of the guarantor.

Clause 34: Guarantee and Indemnity

IT IS A CONDITION of the making of the loan secured by the within mortgage that the covenants set forth herein should be entered into by us, the Guarantors, namely John Joseph Conlin and Conlin Engineering & Planning Ltd. and now we the said Guarantors, and each of us, on behalf of ourselves, our respective heirs, executors, administrators and assigns, in consideration of the making of the said loan by the Mortgagee, do hereby jointly and severally covenant, promise and agree as principal debtors and not as sureties, that we and each of us shall and will well and truly pay or cause to be paid to the Mortgagee, the principal sum and all other moneys hereby secured, together with interest upon the same on the days and times and in the manner set forth in this mortgage, and will in all matters pertaining to this mortgage well and truly do, observe, fulfill and keep all and singular the covenants, provisos, conditions, agreements and stipulations contained in this mortgage, and do hereby agree to all the covenants, provisos, conditions, agreements and stipulations by this mortgage made binding upon the Mortgagor; and do further agree that this covenant shall bind us, and each of us notwithstanding the giving of time for payment of this mortgage or the varying of the terms of payment hereof or the rate of interest hereon or the giving of a release or partial release or covenant not to sue to any of us; and we and each of us agree that the Mortgagee may waive breaches and accept other covenants, sureties or securities without notice to us or any of us and without relieving us from our liability hereunder, which shall be a continuous liability and shall subsist until payment in full of the principal sum and all other moneys hereby secured.

Clause 7: Renewal or Extension of Time

PROVIDED that no extension of time given by the Mortgagee to the Mortgagor, or anyone claiming under it, or any other dealing by the Mortgagee with the owner of the equity of redemption of said lands, 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 monies hereby secured, and that this Mortgage may be renewed by an agreement in writing for any term with or without an increased rate of interest, or amended from time to time as to any of its terms including without limitation increasing the interest rate or principal amount notwithstanding that there may be subsequent encumbrances. And it shall not be necessary to register any such agreement in order to retain the priority of this Mortgage so altered over any instrument delivered or registered subsequent to this Mortgage.

18 Counsel for the appellant contended that there was no ambiguity in these clauses and that they made it clear that the respondent’s obligations as guarantor continued in spite of the renewal agreement. Counsel for the respondent came to exactly the opposite conclusion. He submitted that on the plain meaning of the clauses, the guarantor was not bound. A somewhat cynical observer might conclude that it should not be unexpected that counsel for the opposing parties would take these positions. However, the same conclusion cannot possibly be reached with regard to the judges who have considered these clauses. The trial judge and the minority in the Court of Appeal came to the same conclusion as the appellant. The majority in the Court of Appeal came to the opposite conclusion. That skilled and experienced judges could come to opposite conclusions with regard to the clauses might well lead one to suspect that the meaning of the clauses is unclear; in a word, they are ambiguous. Of course, if that be the case, the contra proferentem rule should be applied. However, for the reasons set out above, my view is that the clauses unambiguously indicate that the respondent was not bound by the renewal agreement. If I am in error and if the contra proferentem rule were applied it would strengthen and support my conclusion as to the interpretation of the clauses.

The Effect of the “Principal Debtor Obligation” Set Out in Clause 34

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

20 The appellant contended that the words in clause 34 which provide “the said guarantors . . . covenant, promise and agree as principal debtors and not as sureties” indicate that the respondent is bound as a principal debtor yet without any of the usual rights and benefits of a principal debtor such as notice with regard to renewal, and the opportunity to negotiate and consent to its terms. To take this position seems to me to be unfair and unreasonable.

21 The mortgagor as a principal debtor must be given notice of the renewal agreement. This is evident from the requirement that the mortgagor sign the renewal agreement. The principal debtor clause converts the guarantor into a full-fledged principal debtor with all the duties and obligations which that term implies. If the guarantor is to be responsible to the lending institution as a “full-fledged principal debtor” then he or she is entitled to the same notice of a renewal agreement as the principal debtor mortgagor. That is undoubtedly the reason the standard form of the renewal agreement provides a place for the guarantor to sign. Not just fairness and equity but the designation of the guarantor as a principal debtor leads to the conclusion that the guarantor must have notice of and agree to the renewal before he is bound by its terms. A guarantor reading clause 34 would be led to believe that as a principal debtor he would have the same notice of a renewal agreement as would the principal debtor mortgagor. If a lending institution wishes to have the guarantor obligated as a principal debtor, then the guarantor must be entitled to the same rights as the principal debtor which would include both notice and agreement as a party to a renewal.

22 Even if it were thought that the principal debtor clause does not convert the guarantor into a principal debtor, the equitable or common law rules relieving the surety from liability where the contract has been materially altered by the creditor and the principal debtor without notice to the surety would apply, in the absence of an express agreement to the contrary. The question is whether in this case, either as principal debtor or as surety, the guarantor has expressly contracted out of the normal protections accorded to him. This question must be determined as a matter of interpretation of the clauses of the agreement, through consideration of the transaction as a whole, and the application of the appropriate rules of construction.

Effect of the Renewal Agreement

23 In my view, the renewal agreement must be considered an integral part of the transaction. There are two aspects of the renewal agreement itself which lead to the conclusion that the guarantor is not to be bound. First, the renewal agreement is once again a standard form prepared and used by the bank and it calls for the signature of the guarantor. It must be assumed that all these standard form agreements prepared by the bank as a lending institution were meant to mesh with and complement each other. The requirement by the standard form of a signature by the guarantor then supports the respondent’s position that he was not, by the terms of the original loan agreement, deprived of the equitable and common law protection ordinarily extended to guarantors. Rather, he was expected to sign the renewal agreement. His signature would confirm his notice of the agreement and his consent to it.

24 The appellant submitted that the renewal agreement is simply an extension of the original mortgage which was contemplated by the terms of that mortgage. This submission should not be accepted. The original mortgage was for a period of three years, a term not uncommon in today’s mortgage market. The renewal agreement provides for an agreement as to the term of a new mortgage and the new rate of interest. The document itself appears to indicate that the renewal agreement constitutes a new mortgage arrangement. This can be gathered from the provision which reads:

All the covenants, conditions, powers and matters in the said mortgage shall apply to and form part of this agreement, except those amended herein. [Emphasis added.]

25 The standard form indicates that many variations in the original mortgage are to be agreed upon. For example, the mortgagor can select the length of the term of the loan; the rate of interest is to be agreed upon between the mortgagor and the lending institution. If the renewal agreement is no more than the extension of the original mortgage, the mischief that that position creates becomes obvious. What if the renewal provided for an extension of the term to 25 years at a substantially increased rate of interest? What if the situation with regard to the security had changed remarkably as a result of new zoning regulations or a new building code or there had been a marked change of use in the surrounding lands? To say that despite the changed circumstances the guarantor is, beyond the strict terms of the agreement, bound without any notice to an indefinite guarantee of a mortgage containing substantial changes in the term of the loan and the interest rate is worrisome indeed.

26 Further, it is significant that the renewal agreement states that the terms of the old mortgage will form part of the agreement. By doing so it indicates that this is a new agreement rather than merely an extension of an old agreement. This serves to strengthen my view that the respondent was no longer bound by the terms of the original guarantee upon the execution without notice to him of the renewal agreement.

Significance of Clause 7 of the Original Agreement

27 The reasons of Finlayson and Carthy JJ.A. forming the majority of this case in the Court of Appeal are in my view correct. Finlayson J.A. wrote ((1994), 1994 CanLII 1357 (ON CA), 20 O.R. (3d) 499, at p. 513):

The reference in cl. 7 to the renewal agreement taking priority over subsequent encumbrancers indicates to me that the mortgagee was not directing its corporate mind to the guarantors when negotiating this document. . . . Certainly, there is no express reference to the renewal agreement in cl. 34. On balance, and keeping in mind that these documents were all drawn and presented by the mortgagee, I conclude that the renewal agreement was a material change to the original mortgage debt not contemplated by the language of the guarantee and has the effect of releasing the guarantors from their obligations as sureties.

28 Carthy J.A.’s interpretation of the contract supports that of Finlayson J.A. but emphasizes different aspects. First, he stresses that clause 34 makes no reference to renewals. In his view, this is significant because it is a term commonly used with respect to mortgages and it is explicitly used in other clauses such as clause 7. Moreover, he found that clause 34 is perfectly capable of coherently referring to changes in the terms within the period of the original mortgage itself.

29 It is, I think, noteworthy and telling that clause 7 specifically distinguishes between extensions and renewals both in its heading and its text. This leads me to conclude that these terms do not refer to the same eventuality. Since clause 7 so carefully distinguishes between extensions and renewals, they must be referring to different situations. Both Black’s legal dictionary and The Oxford Dictionary give separate and distinct definitions of the terms extension and renewal. Black’s Law Dictionary (5th ed. 1979) at p. 1165 defines “renewal” as “[t]he act of renewing or reviving. A revival or rehabilitation of an expiring subject; that which is made anew or re-established” while it defines “extension” at p. 523 as “[a]n increase in length of time (e.g. of expiration date of lease, or due date of note). The word ‘extension’ ordinarily implies the existence of something to be extended”. This clearly indicates that an “extension” refers to extending an agreement which already exists, while a renewal refers to the revival of an agreement which has expired. This distinction is confirmed by The Concise Oxford Dictionary of Current English (9th ed. 1995) at p. 476, which defines “extend” as “lengthen or make larger in space or time” while “renew” is defined at p. 1164 as “revive; regenerate; make new again; restore to the original state”. It follows that the failure to refer to a renewal agreement or even to a renewal in clause 34 strongly suggests that it has no application to a renewal. If the lending institutions wished to have clause 34 apply to renewals, it would be a simple matter to use the specific term which is well known in the commercial world of mortgages.

30 Finally, the renewal agreement refers to incorporating the mortgage terms into the agreement. Clause 3 of the renewal agreement provides that:

All the covenants, conditions, powers and matters in the said mortgage shall apply to and form part of this agreement, except those amended herein. [Emphasis added.]

This, too, suggests that the renewal agreement is a new agreement and not an extension, since the original mortgage terms are only incorporated to the extent that they are not altered by the renewal. Although clause 34 contemplates a change in the interest rate, an extension would not ordinarily involve an alteration of the original terms, but rather a continuation of the same terms over a longer time period.

31 The appellant sought comfort from Co-operative Trust Co. of Canada v. Kirkby, 1986 CanLII 3325 (SK QB), [1986] 6 W.W.R. 90 (Sask. Q.B.). In that case, Armstrong J. noted that in some cases, a mortgage extension or renewal agreement could have exactly the same effect as a new mortgage. However, he concluded, correctly I believe, that on the facts of that case, there was no evidence to support the contention that the mortgage extension agreement was in fact a new mortgage. In my view, such a determination will involve a review of the particular guarantee clause and the whole transaction between the parties. The appellant also referred to the decisions in Royal Trust Corp. of Canada v. Reid (1985), 1985 CanLII 3079 (PE SCAD), 40 R.P.R. 287 (P.E.I. C.A.), and Veteran Appliance Service Co. v. 109272 Development Ltd. (1985), 1985 CanLII 1405 (AB QB), 67 A.R. 117 (Q.B.). In both those decisions, the terms renewal and extension agreement were used interchangeably. Yet I think that it becomes clear in reading both these decisions that this was not a central or major issue in the case. To repeat, it will be a question of fact to be determined on the particular transaction, agreement and circumstances presented in each case whether a renewal agreement is a new contract or simply an extension of the existing agreement.

32 It follows I find that the words used in clauses 34 and 7 are sufficiently clear to conclude that the guarantor did not waive his equitable and common law rights either as a principal debtor or as a guarantor. The renewal agreement which was entered into without notice to, or the agreement of, the guarantor materially altered the provisions of the original loan agreement. The guarantor was thereby relieved of his obligation.

33 If the wording of the two clauses should be found to be ambiguous, the contra proferentem rule must be applied against the bank. The wording of clause 34 binding the guarantor to variations in the event of an extension of the mortgage should not be applied to bind the guarantor to a renewal without notice since there is ambiguity as to whether clause 34 applies to renewals at all. In these circumstances as well, the guarantor should be relieved of liability.

Disposition

34 I would dismiss the appeal with costs.

//L’Heureux-Dubé J.//

The following are the reasons delivered by

35 L’Heureux-Dubé J. (dissenting) -- I substantially agree with my colleague Justice Iacobucci’s reasons and the result he reaches. I have only one comment which relates to the judicial interpretation methodology relied upon by my colleague.

36 The “modern contextual approach” is, in my view, the standard, normative approach to judicial interpretation, and one may exceptionally resort to the old “plain meaning” rule in appropriate circumstances. One example of the latter is statutory interpretation in the area of taxation, where the words and expressions used in legislative provisions quite often have a well-defined “plain meaning” within the business community.

37 In the case at bar, our Court is called upon to determine the appropriate definition of the phrase “the giving of time for payment ... or the varying of the terms of payment”, in the context and factual situation of the instant case.

38 My colleague decides the issue by going through a contractual interpretation exercise as follows. Firstly, the impugned contractual provisions are reviewed in the context of the whole contract. Secondly, the issue of the contra proferentem rule is addressed. Thirdly, the issue of the difference between “accommodating” and “compensated” sureties is examined. Fourthly, an authoritative academic text is relied upon: K. P. McGuinness, The Law of Guarantee (2nd ed. 1996).

39 Thus, after reviewing the provisions in their immediate context, the contract as a whole, the consequences of proposed interpretations, the applicable presumptions and rules of interpretation, and admissible external aids, my colleague comes to a contextual interpretation of the impugned phrase. I fully agree with both the process used and the conclusions he arrived at. However, with respect, that process is not an application of the “plain meaning” approach: in fact, the “modern contextual approach” to judicial interpretation is the one that is actually used in the instant case.

40 I agree with my colleague that “[t]he rules respecting the interpretation of guarantees are essentially the same as the rules which govern the interpretation of deeds and contracts generally”. But the rules which govern the interpretation of deeds and contracts generally are essentially the same as the rules for statutory interpretation. As Lord Blackburn stated in River Wear Commissioners v. Adamson (1877), 2 App. Cas. 743 (H.L.), at pp. 763-65:

. . . I shall therefore state, as precisely as I can, what I understand from the decided cases to be the principles on which the Courts of Law act in construing instruments in writing; and a statute is an instrument in writing. In all cases the object is to see what is the intention expressed by the words used. . . .

In construing written instruments I think the same principle applies. In the cases of wills the testator is speaking of and concerning all his affairs; . . .

In the case of a contract, the two parties are speaking of certain things only. . . . [In both cases] the Court . . . declares what the intention, indicated by the words used under such circumstances, really is.

And this, as applied to the construction of statutes, is no new doctrine. . . . My Lords, mutatis mutandis, I think this is applicable to the construction of statutes as much as of wills. And I think it is correct. [Emphasis added.]

41 Therefore, the “modern contextual approach” for statutory interpretation, with appropriate adaptations, is equally applicable to contractual interpretation. Statutory interpretation and contractual interpretation are but two species of the general category of judicial interpretation. In the instant case, the methodological reference provided by R. Sullivan in Driedger on the Construction of Statutes (3rd ed. 1994), at p. 131, applies equally to contractual interpretation:

There is only one rule in modern interpretation, namely, courts are obliged to determine the meaning of [that which is to be judicially interpreted] in its total context, having regard to [its] purpose . . ., the consequences of proposed interpretations, the presumptions and special rules of interpretation, as well as admissible external aids. In other words, the courts must consider and take into account all relevant and admissible indicators of [. . .] meaning. After taking these into account, the court must them adopt an interpretation that is appropriate. An appropriate interpretation is one that can be justified in terms of (a) its plausibility, that is, its compliance with the [. . .] text; (b) its efficacy, that is, its promotion of the [. . .] purpose; and (c) its acceptability, that is, the outcome is reasonable and just. [Emphasis added.]

42 This methodology was indeed the one followed by my colleague. In the case at bar, however, the resulting interpretation did not really come from the “plain meaning” of the words, but from their “meaning in law”, because they are “legal terms of art”. As Lord Diplock explained in Sydall v. Castings Ltd., [1967] 1 Q.B. 302, at pp. 313-14:

Documents which are intended to give rise to legally enforceable rights and duties contemplate enforcement by due process of law which involves their being interpreted by courts composed of judges, each one of whom has his personal idiosyncrasies of sentiment and upbringing, not to speak of age. Such documents would fail in their object if the rights and duties which could be enforced depended on the personal idiosyncrasies of the individual judge or judges upon whom the task of construing them chanced to fall. It is to avoid this that lawyers, whose profession it is to draft and to construe such documents, have been compelled to evolve an English language, of which the constituent words and phrases are more precise in their meaning than they are in the language of Shakespeare or of any of the passengers on the Clapham omnibus this morning. These words and phrases to which a more precise meaning is so ascribed are called by lawyers “terms of art” but are in popular parlance known as “legal jargon”. [Emphasis added.]

43 After having specified the nature of “legal terms of art”, Lord Diplock stated the basic rule of judicial interpretation, as well as the methodology, that are applicable in that context (at p. 314):

The words and phrases . . . which are “terms of art” must therefore be given the meaning which attaches to them as terms of art; . . .

The lexicon of terms of art is to be found in the decided cases and in the textbooks consulted by legal practitioners.

44 It is quite obvious that where courts expound judicial interpretations of “legal terms of art” using such external aids as legal textbooks, the resulting outcome cannot appropriately be labelled a “plain meaning” definition.

45 Where an instrument uses a legal term of art, there is a presumption that the term of art is used in its correct legal sense: Inland Revenue Commissioners v. Williams, [1969] 1 W.L.R. 1197 (Ch.; Megarry J.).

46 This is the presumption that is resorted to by my colleague Iacobucci J. when he makes use of admissible external aids -- i.e.: McGuinness, supra, -- in determining the correct meaning of the phrase “to give time”. As McGuinness reviews extensive case-law authority that establishes the generally accepted “meaning in law” of these “legal terms of art”, it is an admissible external aid to judicial interpretation: see Driedger, supra, at pp. 428, 468 and 474; see also P.-A. Côté, The Interpretation of Legislation in Canada (2nd ed. 1991), at pp. 449-53 and 457-58.

47 Subject to the above considerations, I concur with my colleague’s disposition of the appeal.

//Iacobucci J.//

The reasons of Gonthier and Iacobucci JJ. were delivered by

48 Iacobucci J. (dissenting) -- This appeal raises questions regarding the proper method for interpreting guarantees. Specifically, we are asked to determine whether the wording of the contract in issue was clear enough to waive the guarantors’ equitable right to be released when the principal loan was renewed.

I. Background

49 On February 20, 1987, the appellant Manulife Bank of Canada (at the time known as The Regional Trust Company) made a loan of $275,000 to Dina Conlin. The loan was for a term of three years and bore interest at the rate of 11.5 percent per annum. Dina Conlin provided security for the loan in the form of a first mortgage against lands located in Welland, Ontario.

50 The terms of the loan required the signature of two guarantors: the respondent John Joseph Conlin, who was the mortgagor’s husband; and Conlin Engineering and Planning Limited, an Ontario corporation. In clause 34 of the mortgage agreement, the two promised, “as principal debtors and not as sureties”, to pay the money secured by the mortgage. They further agreed to all of the particular conditions and stipulations of the mortgage which were binding upon the mortgagor.

51 The guarantee was to remain binding “notwithstanding the giving of time for payment of this mortgage or the varying of the terms of payment hereof or the rate of interest hereon”. The liability of the guarantors was stated to be continuous, subsisting “until payment in full of the principal sum and all other moneys hereby secured”.

52 In 1989, the respondent and Dina Conlin separated.

53 In 1990, shortly before the mortgage was to mature, Dina Conlin and the appellant executed an agreement which renewed the mortgage for a further three-year term at a yearly interest rate of 13 percent. The renewal forms provided spaces for the signature of the “registered owner” and the “guarantor”, but the agreement was signed only by Dina Conlin. The respondent had no notice or knowledge of the renewal.

54 In March of 1992, Dina Conlin defaulted on the mortgage.

55 After fruitless efforts to sell the Welland lands, the bank initiated proceedings for summary judgment against Dina Conlin and the guarantors. The bank claimed the principal owing under the mortgage with interest at the rate of 13 percent per annum. Judgment was obtained on the motion. However, a majority of the Court of Appeal set aside the judgment and dismissed the action against the respondent: (1994), 1994 CanLII 1357 (ON CA), 20 O.R. (3d) 499, 120 D.L.R. (4th) 234, 41 R.P.R. (2d) 283, 75 O.A.C. 117, 17 B.L.R. (2d) 143.

II. Relevant Contractual Provisions

56 (7) RENEWAL OR EXTENSION OF TIME

PROVIDED that no extension of time given by the Mortgagee to the Mortgagor, or anyone claiming under it, or any other dealing by the Mortgagee with the owner of the equity of redemption of said lands, 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 monies hereby secured, and that this Mortgage may be renewed by an agreement in writing for any term with or without an increased rate of interest, or amended from time to time as to any of its terms including without limitation increasing the interest rate or principal amount notwithstanding that there may be subsequent encumbrances. And it shall not be necessary to register any such agreement in order to retain the priority of this Mortgage so altered over any instrument delivered or registered subsequent to this Mortgage.

(34) GUARANTEE AND INDEMNITY

IT IS A CONDITION of the making of the loan secured by the within mortgage that the covenants set forth herein should be entered into by us, the Guarantors, namely John Joseph Conlin and Conlin Engineering & Planning Ltd. and now we the said Guarantors, and each of us, on behalf of ourselves, our respective heirs, executors, administrators and assigns, in consideration of the making of the said loan by the Mortgagee, do hereby jointly and severally covenant, promise and agree as principal debtors and not as sureties, that we and each of us shall and will well and truly pay or cause to be paid to the Mortgagee, the principal sum and all other moneys hereby secured, together with interest upon the same on the days and times and in the manner set forth in this mortgage, and will in all matters pertaining to this mortgage well and truly do, observe, fulfill and keep all and singular the covenants, provisos, conditions, agreements and stipulations contained in this mortgage, and do hereby agree to all the covenants, provisos, conditions, agreements and stipulations by this mortgage made binding upon the Mortgagor; and do further agree that this covenant shall bind us, and each of us notwithstanding the giving of time for payment of this mortgage or the varying of the terms of payment hereof or the rate of interest hereon or the giving of a release or partial release or covenant not to sue to any of us; and we and each of us agree that the Mortgagee may waive breaches and accept other covenants, sureties or securities without notice to us or any of us and without relieving us from our liability hereunder, which shall be a continuous liability and shall subsist until payment in full of the principal sum and all other moneys hereby secured.

III. Judgments Appealed From

A. Ontario Court (General Division)

57 In a very succinct judgment, Killeen J. granted the bank’s motion for summary judgment against both Dina Conlin and the respondent. He found that, according to the “clear and unequivocal language” of clauses 7 and 34, the respondent was liable under his guarantee despite the renewal of the mortgage and despite the increase in the rate of interest: “In my view, there is no escape for the guarantor”.

B. Ontario Court of Appeal (1994), 1994 CanLII 1357 (ON CA), 20 O.R. (3d) 499

(a) Finlayson J.A.

58 Finlayson J.A. first considered the following language in clause 34: “the said guarantors . . . covenant, promise and agree as principal debtors and not as sureties . . .” (emphasis added). He found an apparent inconsistency between this last phrase and the fact that, on the face of the contract, the respondent appeared to be signing as a surety and not as a principal debtor. Having briefly discussed the difference between contracts of indemnity and contracts of guarantee, Finlayson J.A. concluded that it was unnecessary to resolve the exact nature of the guarantor's status, stating: “the reference to the guarantor as principal debtor can be disregarded for the purposes of this appeal” (p. 511).

59 Finlayson J.A. then turned to the main issue of whether the renewal agreement extinguished the respondent’s liability under his guarantee. He noted that, in equity, either an increase of the interest rate or an extension of the mortgage's term constitutes a material change of the original contract which will extinguish a guarantor's liability.

60 Therefore, it was necessary to determine whether clause 34 constituted a waiver, on the part of the sureties, of these equitable rights. After reviewing several cases where the language of a particular guarantee was held to embrace a renewal agreement, Finlayson J.A. stated that “each of these cases must be confined to its own wording” (pp. 511-12). Furthermore, the language of the Manulife guarantee clause did not, in the opinion of Finlayson J.A., clearly contemplate the renewal agreement. Accordingly, the material change to the loan, effected through the renewal agreement, released the guarantors from their respective obligations.

(b) Carthy J.A. (concurring with Finlayson J.A. in the result)

61 Carthy J.A. began by stating that the law has always treated sureties as “favoured” creditors. While a surety can contract out of his legal rights, the language used to do so must be clear.

62 Applying a "strict" interpretation to the loan agreement, Carthy J.A. concluded that the guarantee agreement was not "explicit enough to embrace a renewal" (p. 515). Furthermore, he found that the wording of clause 7 did not stipulate clearly that the loan could be renewed by an agreement which was not signed by the guarantors. The guarantors had not waived their equitable rights and, accordingly, the renewal agreement extinguished their liability.

(c) Robins J.A. (dissenting)

63 Robins J.A. first reviewed the rule in Holme v. Brunskill (1878), 3 Q.B.D. 495 (C.A.) which states that any material variation of the principal contract without the surety’s consent will discharge the surety. He went on to note that a guarantor can contract out of this equitable protection.

64 Robins J.A. then looked at the terms of clause 34 which stated that the guarantee would remain binding “notwithstanding the giving of time for payment of this mortgage or the varying of the terms of payment hereof or the rate of interest hereon”. He concluded that these words clearly contemplated both the extension of the mortgage’s term and the increase in the interest rate, as implemented by the renewal agreement. In other words, by clause 34, the guarantors waived their equitable rights to be released from their obligations in the event of these particular changes to the loan contract.

65 Having decided that the respondent was liable as a guarantor, Robins J.A. did not find it necessary to consider whether the guarantors were, in fact, “principal debtors”.

66 However, while he found the respondent to be liable under the guarantee, Robins J.A. would have varied the order of the motions court judge such that Conlin would only be liable for the principal amount secured under the mortgage and interest thereon calculated at 11.5 percent per annum. He based this variation on the finding that the guarantors agreed to be liable for the moneys secured under the original mortgage. In his view, although they agreed to be liable notwithstanding any change in the interest rate, they did not agree to be liable for that higher rate of interest.

IV. Issues

67 Before our Court, the appellant raised a threshold issue of jurisdiction. It claimed that the Court of Appeal had erred in dismissing the action when that order was not requested by either party at the motion for summary judgment or on appeal and when neither counsel nor the courts ever discussed this form of relief. Accordingly, there are two major issues before us:

1.Did the majority of the Ontario Court of Appeal exceed its jurisdiction in allowing the appeal and dismissing the action, rather than sending the matter back to trial?

2.Under the terms of the loan agreement, was the respondent John Joseph Conlin released from his promise to pay the principal sum and other moneys secured by the mortgage, when the term of the mortgage was extended and the rate of interest increased, without notice to the respondent?

V. Analysis

A.Did the Court of Appeal have jurisdiction to dismiss the action as against the respondent?

68 Section 134(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43, states as follows:

134. -- (1) Unless otherwise provided, a court to which an appeal is taken may,

(a)make any order or decision that ought to or could have been made by the court or tribunal appealed from;

(b)order a new trial;

(c)make any other order or decision that is considered just.

69 The order originally appealed from was granted on a motion for summary judgment brought by the bank. The respondent Conlin had brought no cross-motion for summary judgment dismissing the action. There had been no examination for discovery and no trial. Given that an appeal court may not make an order which the trial judge would not have had the jurisdiction to make (Re Rotenberg and Borough of York (No. 2) (1976), 1976 CanLII 735 (ON CA), 13 O.R. (2d) 101 (C.A.), at p. 110), the appellant argued before us that the Court of Appeal had jurisdiction only to set aside the order for summary judgment and send the matter back for trial. The question to be answered, therefore, is whether the motions court judge had the jurisdiction to dismiss the action against the respondent.

70 The original motion for summary judgment was brought pursuant to Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. Rule 20.04(2) states:

Where the court is satisfied that there is no genuine issue for trial with respect to a claim or defence, the court shall grant summary judgment accordingly.

Rule 20.04(4) states:

Where the court is satisfied that the only genuine issue is a question of law, the court may determine the question and grant judgment accordingly, . . .

The interpretive guide to the rules is set out in Rule 1.04(1):

These rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits.

71 Considered in light of Rule 1.04(1), in my opinion, Rules 20.04(2) and (4) gave Killeen J. the jurisdiction to dismiss the action against the respondent. The motions court judge could either have found that there was no genuine issue for trial or he could have found that the only genuine issue was an issue of law. In either case, it would have been within his jurisdiction and, by extension, within the jurisdiction of the Court of Appeal, to dispose of the matter by dismissing Manulife’s claim.

72 However, the appellant further argues that Finlayson and Carthy JJ.A. erred in basing their decisions on the unproven assertion that Conlin had never consented to the 1990 renewal agreement. The appellant claims that it had no opportunity to fully test Conlin’s affidavit evidence with regard to consent and that, therefore, it was denied the right to have its case fully heard.

73 I do not agree with this assertion. The appellant did, in fact, have the opportunity to test Conlin’s evidence. Rule 39.02(1) of the Rules of Civil Procedure says that a party to a motion may cross-examine the deponent of any affidavit served by a party who is adverse in interest on the motion. However, the bank chose not to exercise this right and left Conlin’s evidence unchallenged. Therefore, in my opinion, the appellant was not deprived of its right to have its case fully heard and to test all of the respondent’s evidence.

74 This case is far from the circumstances that arose in Keltic Leasing Corp. v. Curtis (1993), 1993 CanLII 5614 (NB CA), 133 N.B.R. (2d) 73 (C.A.). In that case, the trial judge erred in making a finding of fact on a question which had not been addressed at all by the parties. The Court of Appeal found that this deprived the plaintiff of its right to adduce evidence in support of its position. However, in the case before us, the question of Conlin’s consent, or lack thereof, to the renewal agreement was addressed before Killeen J. and, as discussed above, the appellant had full opportunity to counter this with evidence to the contrary.

75 For these reasons, it is my view that there is no reason to interfere with the Court of Appeal’s procedural handling of this case.

B.Under the terms of the loan agreement, was the respondent released from his promise to pay the principal sum and other moneys secured by the mortgage when the term of the mortgage was extended and the rate of interest increased without the respondent’s consent?

76 It is well accepted that any material variation of the terms of a contract between debtor and creditor, which is prejudicial to the guarantor and which is made without the guarantor’s consent, will discharge the guarantor: Holme v. Brunskill, supra, at pp. 505-6; Bank of Montreal v. Wilder, 1986 CanLII 3 (SCC), [1986] 2 S.C.R. 551, at p. 562. An increase in the rate of interest and an extension of the time for payment are both material changes to the loan agreement sufficient to discharge a surety: K. P. McGuinness, The Law of Guarantee (2nd ed. 1996), at ¶¶ 10.23 and 10.51.

77 However, this right to be discharged as a result of a material variation of the principal contract can be waived by the surety. As McIntyre J. said in Bauer v. Bank of Montreal, 1980 CanLII 12 (SCC), [1980] 2 S.C.R. 102, at p. 107, “it is open to the parties to make their own arrangements, and a surety is competent to contract himself out of the protection of the equitable rule”. The question to be resolved, therefore, is whether clause 34 amounts to a waiver of the respondent’s equitable rights. Before dealing with this question, I believe it would be helpful to discuss briefly some of the interpretive principles relating to guarantees.

(a) Interpretive principles relating to guarantees

78 In my opinion, there is no special rule of construction for guarantees. Guarantee contracts are basically contracts, like any others, and should be construed according to the ordinary rules of contractual interpretation. As McGuinness states, supra, at p. 238, “The rules respecting the interpretation of guarantees are essentially the same as the rules which govern the interpretation of deeds and contracts generally.”

79 The cardinal interpretive rule of contracts is that the court should give effect to the intentions of parties as expressed in their written document. As Estey J. said in Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at p. 899, quoting Meredith J.A. in Pense v. Northern Life Assurance Co. (1907), 15 O.L.R. 131, at p. 137: “[In all contracts], effect must be given to the intention of the parties, to be gathered from the words they have used.” The court will deviate from the plain meaning of the words only if a literal interpretation of the contractual language would lead either to an absurd result or to a result which is “plainly repugnant to the intention of the parties”: McGuinness, supra, at p. 239; and see the reasons of Estey J. in Consolidated-Bathurst, supra, at p. 901.

80 When interpreting guarantees, like other contracts, the court may apply the contra proferentem rule where the wording of the guarantee supports more than one meaning. According to this rule, the ambiguity will be resolved in favour of the party who did not draft the contract. This is an interpretive rule of last resort, to be used only when all other means of ascertaining the intentions of the parties, as expressed by their written contract, have failed. See the words of Cartwright J. in Stevenson v. Reliance Petroleum Ltd., 1956 CanLII 27 (SCC), [1956] S.C.R. 936, at p. 953. As Lindley L.J. said in Cornish v. Accident Insurance Co. (1889), 23 Q.B.D. 453, at p. 456:

. . . this principle ought only to be applied for the purpose of removing a doubt, not for the purpose of creating a doubt, or magnifying an ambiguity, when the circumstances of the case raise no real difficulty.

81 There is some suggestion in the case law that guarantee agreements entered into by an “uncompensated” or “accommodating” surety will be interpreted more strictly than those entered into by a compensated surety. In this respect, most notable is the decision of the Court in Citadel General Assurance Co. v. Johns-Manville Canada Inc., 1983 CanLII 52 (SCC), [1983] 1 S.C.R. 513.

82 In that case, the respondent, Johns-Manville, had entered into a contract with a supplier. That supplier had entered into a payment bond which named the appellant, Citadel, as guarantor of the supply contract. A condition of the bond was that no suit could be commenced under the bond without proper notice being given to the appellant surety and to the supplier. The supplier defaulted and the respondent commenced an action against the guarantor, Citadel. The respondent gave proper notice to the guarantor. However, while notice was given to the supplier, it did not strictly comply with the requirements of the bonding agreement. The guarantor denied liability under the bond on the basis that the notice provisions of the bond had not been complied with.

83 The Court rejected this argument and held that the guarantor was liable under the bonding agreement despite the respondent’s failure to comply strictly with the terms of the contract. The basis for the decision was that guarantee agreements entered into for valuable consideration should be interpreted according to the ordinary rules of contractual construction. In obiter, McIntyre J., at pp. 521 and 523, went on to suggest that a different, stricter rule would apply to guarantors who had not received compensation:

In respect of them [i.e., uncompensated sureties], the law has been astute to protect them by strictly construing their obligations and limiting them to the precise terms of the contract of surety. Any material variation in the terms of the guaranteed indebtedness and any extension of time or postponement of the debtor’s obligation, or any discharge or relinquishment of any security for the debt without the consent of the surety will discharge him. In other words, courts have adopted the strictissimi juris construction of the surety contract.

. . . surety contracts should be more liberally construed in favour of claimants in the case of compensated sureties than in the case of accommodation sureties.

84 In my opinion, the above statement should be understood in the context in which it was made. In Citadel General Assurance, the issue was not one of contractual interpretation. Rather, it was a question of what consequences were to flow from a clear breach of the contract. For these reasons, it is my view that the comments in Citadel General Assurance are not a sufficient basis for holding generally that guarantee contracts should be subject to special, stricter rules of interpretation if the guarantor has not received compensation.

(b)Application of the rules of interpretation to the contract between Conlin and Manulife

85 In applying the above principles to this case, a number of sub-questions arise from the arguments of the parties which I now will address.

(i)Does clause 34 amount to a waiver of the respondent’s equitable rights?

86 By clause 34, the guarantors agree to remain bound by the guarantee contract notwithstanding the giving of time for payment of the mortgage or the varying of the rate of interest.

87 The respondent argued that clause 34 does not include a waiver of the guarantors’ right to be discharged in the event of a renewal of the mortgage. According to this argument, since the renewal agreement constituted a material change, it discharged the guarantors.

88 It is true, as the respondent contends, that clause 34 does not refer to “renewal” agreements by name. However, the clause does contain a clear waiver of the guarantors’ right to be discharged in the event of an extension of time or an increase in the rate of interest:

. . . this covenant shall bind us, and each of us notwithstanding the giving of time for payment of this mortgage or the varying of the terms of payment hereof or the rate of interest hereon . . .

89 The respondent maintained that a renewal was not the same thing as the giving of time for payment. He pointed out that clause 7 uses the term “renewal” while clause 34 does not. According to this line of argument, if the parties had intended the guarantee agreement to include a waiver of the right of discharge in the event of a renewal of the mortgage, they would have said so explicitly in clause 34.

90 However, I do not find this argument persuasive. The plain ordinary meaning of the words, “the giving of time for payment . . . or the varying of the terms of payment” encompasses the renewal agreement. Through this agreement, the appellant bank extended the term of the loan by three years and increased the rate of interest charged on the debt. I can see no support for the respondent’s contention that the “giving of time for payment”, as detailed in clause 34, does not include the giving of time for payment as effected by the renewal agreement.

91 In his book The Law of Guarantee, supra, at p. 556, McGuinness discusses the effect of agreements “to give time” to the principal debtor and says that the “giving of time” includes those agreements “which provide specifically for an extension of time for performance. . . . [for] further time in which to pay ... the guaranteed debt”. This is precisely what the renewal agreement accomplished and, thus, this is what was contemplated by the language of the guarantee agreement.

92 In other words, what we must consider is the substantive effect of the renewal agreement, rather than the form of the instrument by which it was executed. The parties did use a renewal agreement, but, at bottom, that renewal agreement extended the time for payment and increased the interest rate, events that are expressly covered in clause 34.

93 With respect, I do not agree with Carthy J.A. when he says that the words “notwithstanding the giving of time for payment” should be interpreted to refer only to forbearance by the bank to pursue remedies during the original term of the mortgage. This is a case where we should heed the warning of Lindley L.J. in Cornish v. Accident Insurance Co., supra, and not use the contra proferentem doctrine in any guise to create a doubt, or to magnify an ambiguity. Like Killeen J., I am of the view that the plain wording of the agreement in question raises no real difficulty.

(ii)Under clause 34, did the appellant have to notify the guarantors of the renewal agreement?

94 One of the last phrases of clause 34 reads as follows: “we and each of us agree that the Mortgagee may waive breaches and accept other covenants, sureties or securities without notice to us” (emphasis added). By contrast, the preceding phrase which waives the guarantors’ rights to be discharged in the event of certain material changes to the principal contract does not contain this phrase, “without notice to us”. The respondent contends that this omission means that, if the bank failed to notify the guarantors of the relevant material changes, the guarantors would be discharged from their obligations. Because the respondent received no notice of the renewal agreement, he was released from his liability.

95 Again, I am unable to agree with this line of argument. As already stated, the language of clause 34 is clear: the guarantor unconditionally promises to remain bound notwithstanding the extending of time or the changing of the rate of interest charged. It is rather odd to infer a condition of notice when the undertaking is so clear and unambiguous. Of course, the parties could have included a requirement of notice, but, as the language of the waiver in clause 34 is so clear, they would have had to do so explicitly. It may be that the insertion of the words “without notice to us”, in connection with the waiver of breaches and the accepting of other covenants, sureties or securities, was simply made out of an abundance of caution, but, regardless, this cannot affect the clear waiver relating to extending time and changing the interest rate.

(iii)What is the effect of the respondent promising “as a principal debtor and not as a surety”?

96 Clause 34 provides that the respondent and Conlin Engineering enter the agreement “as principal debtors and not as sureties”. In his concurring judgment, Carthy J.A. reasoned that, as “principal debtors”, the guarantors would be “expected” to be signatories to the renewal agreement. With respect, I do not agree.

97 I agree with Robins J.A.’s conclusion that the evident intention of the parties, in using this kind of language, was to preserve the liability of the surety even in circumstances where the principal obligation was no longer enforceable, although I express no opinion on whether the language is sufficient to accomplish such an objective. In any event, it is unnecessary to consider whether this clause was sufficient to turn clause 34 into an indemnity agreement, because I am of the opinion that the respondent is liable as a guarantor.

(iv)What is the significance of the fact that the renewal form provides a space for the guarantor’s signature?

98 The respondent points to the fact that the renewal agreement had a space for the signature of the guarantor as proof that the reasonable expectations of the parties were that, in the absence of the guarantors’ consent to a renewal agreement, any such agreement would discharge the guarantors. With respect, I do not agree.

99 Our primary task is to determine the meaning of the guarantee contained in clause 34. This agreement was entered into in 1987. The wording or form of another subsequent contract, entered into three years later, cannot change the meaning of the original agreement. In my opinion, the space for the guarantors’ signature on the renewal agreement is not helpful in trying to interpret the guarantee contract.

(v)What exactly is the extent of the respondent’s obligation?

100 The respondent promised to guarantee the payment of the money secured by the 1987 mortgage. In my view, the terms of that mortgage determine the extent of the respondent’s liability. Clause 34 does include a waiver of the guarantors’ rights to be discharged in the case of material variation of the terms of the loan agreement. However, the fact that the renewal agreement does not discharge the respondent does not mean that the respondent is liable for the money secured by that renewal agreement -- a contract to which he never consented. In clause 34, the guarantors promise to pay “the principal sum and all other moneys hereby secured” (emphasis added), i.e., secured by the original mortgage agreement. In other words, the respondent is not liable for interest at the increased rate of 13 percent. Rather, his responsibility, as specified in the 1987 agreement, and as found by Robins J.A. in the Court of Appeal, is to repay the balance owing on the principal sum with interest charged at the rate of 11.5 percent.

VI. Disposition

101 For the foregoing reasons, I would allow the appeal, with costs here and below, set aside the judgment of the Court of Appeal, and substitute therefor an order to the effect that the respondent is liable under his guarantee to pay the balance owing on the principal amount with interest at 11.5 percent per annum.

Appeal dismissed with costs, L’Heureux‑Dubé, Gonthier and Iacobucci JJ. dissenting.

Solicitors for the appellant: Lee, Bowden, Concord, Ontario.

Solicitors for the respondent: Siskind, Cromarty, Ivey & Dowler, London, Ontario.