Cheryl Cusack and
Jason Brasseur are married. In 2005, Ms. Cusack signed a "continuing" guarantee
for the indebtedness of Mr. Brasseur's company to the Royal Bank of Canada
("RBC") for $150,000. The guarantee covered present and future liabilities of
the company and were not tied to any specific loan between RBC and the company.
Ms. Cusack received independent legal advice before signing the guarantee.
RBC also held a
first ranking security interest in the company's assets and a personal guarantee
from Mr. Brasseur.
In 2006, RBC agreed
to increase the company's operating line of credit to $250,000. Ms. Cusack and
Mr. Brasseur each gave fresh personal guarantees for $250,000 to RBC that
covered the company's present and future liabilities.
These guarantees were also
continuing guarantees and were not tied to any specific loan between RBC and the
company.
Ms. Cusack
acknowledged that she received independent legal advice before signing the fresh
guarantee.
In 2008, the amount
of the loan covered by the loan agreement between RBC and the company was
increased to $500,000. RBC did not request a new guarantee from Ms. Cusack but
did obtain a new personal guarantee from Mr. Brasseur in the amount of
$500,000. The 2008 loan agreement stated that the new loan agreement
"supersedes and cancels" the 2006 agreement. It also stated that among the
security for the loan and all other obligations of the company to the bank was
Ms. Cusack's 2006 guarantee in the amount of $250,000.
In 2009 the loan
agreement between RBC and the company was again increased to $750,000. Mr.
Brasseur signed a new personal guarantee for that amount. RBC did not request a
new guarantee from Ms. Cusack and left in place her 2006 guarantee for
$250,000.
RBC did not have any
contact with Ms. Cusack at any time. She never saw any of the loan agreements
between RBC and the company. RBC provided the guarantee forms to Mr. Brasseur
who gave them to Ms. Cusack, along with the form for independent legal
advice.
The company's
business failed in 2011. RBC made demands on Mr. Brasseur and Ms. Cusack under
their guarantees. His 2009 guarantee and her 2006
guarantee.
The Ontario Court of
Appeal (Justices MacPherson, Cronk and Lauwers) held that the single issue in
the case was whether Ms. Cusack had contracted out of the of protection provided to
a guarantor by common law and equity.
The court held that it has long been the law that a guarantor
will be released from liability on a guarantee in circumstances where the
creditor and the principal debtor agree to a material alteration of the terms of
the loan agreement without the consent of the guarantor. The issue as to
whether a guarantor remains liable will be determined by the interpretation of
the contract between the parties and determining the intention of the parties as
demonstrated by the wording of the contract and the events and circumstances
surrounding the transaction as a whole.
It was common ground
that RBC and the company made loan arrangements over time which increased the
risk to which Ms. Cusack was exposed by her guarantee even though her financial
exposure was capped at $250,000. At common law, these alterations in the loan
arrangements would have resulted in Ms. Cusack's discharge from liability on the
guarantee in the absence either of her consent or clear language in the
guarantee permitting RBC and the company to make the alternations without her
consent.
The Court of Appeal
however found that the standard form bank guarantee contained such clear
language and that the bank did not need to and had no duty to inform the
guarantor about future credit facilities and that the guarantor had the onus of
inquiring about the state of the accounts between the bank and the principal
debtor.
The Court of Appeal
held that the language of the guarantee was very broad and was plainly designed
to ensure that a guarantor does not contract out of the ordinary protections of
the common law. It held that the first paragraph on the first page of the
guarantee was critical. Such paragraph provided that Ms. Cusack would pay on
demand to RBC "all debts and liabilities, present or future, direct or indirect,
absolute or contingent, mature or not, at any time owing by" the company to
RBC. The clause made it clear that RBC could increase the amount of its loan to
the company and Ms. Cusack would remain liable under the guarantee.
The guarantee was
what is known as a "continuing" or "all accounts" guarantee. The difference
between a specific guarantee and a continuing or all accounts guarantee is that
the second form of guarantee is for the debts of the company
already incurred or which would be incurred subsequently. In addition, such a
guarantee provides that all monies borrowed from the bank shall be deemed to
form part of the liabilities despite circumstances that include irregularities,
defects or informality in the borrowing.
With respect to
whether there was a "material alternation" in the terms of the guarantee that
would relieve Ms. Cusack from liability, the Court of Appeal held that
analytically, a court was required to consider two distinct steps in this
regard. The first step was to consider whether the challenged alternation to
the underlying loan arrangement was material as a matter of law. The second
step was to consider whether the language of the guarantee permitted the
material alteration.
In this case, the
court held that while the subsequent advances by RBC to the company were
material alterations to the principal loan contract, they were contemplated by
the parties, permitted by the clear language of the guarantee and inherent in a
continuing all accounts guarantee that contemplated increases in the size of the
underlying indebtedness.
Regards,
Blair
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