In the recent case of Royal Bank of Canada v Samson Management & Solutions Ltd., 2013 ONCA 313, the Ontario Court of Appeal overturned a trial-level decision which held that a continuing guarantee was unenforceable where the guarantor had not consented to material changes to the underlying loan agreement. Now that the Supreme Court of Canada has dismissed a motion for leave to appeal, lenders can take some comfort that the clear language of a standard form guarantee will continue to be enforceable in accordance with its terms.
Facts
In 2005, Royal Bank of Canada made a small business loan of $150,000 to Samson Management and Solutions Ltd. The loan was supported by a general security agreement from Samson and personal guarantees from its principal and his spouse, Cheryl Cusack. It was Cusack's spousal guarantee that was the subject of the litigation.
The initial 2005 guarantee from Cusack was for $150,000, and in respect of all present and future liabilities of Samson. The guarantee was not tied to any specific loan, and Cusack received independent legal advice. In 2006 when the loan was increased to $250,000, a new loan was signed by Samson, and Cusack provided a new continuing guarantee in favour of RBC in respect of the Samson debt. Once again, the 2006 guarantee was not tied to any specific loan and Cusack received independent legal advice.
In 2008, the loan was increased to $500,000 and other new terms and conditions were documented in a new loan agreement. A new guarantee from Cusack was not requested by RBC and instead the bank continued to rely on the 2006 guarantee. In 2009, the loan amount was further increased to $750,000 and again, RBC continued to rely on the 2006 guarantee. Each loan agreement cancelled and superseded the previous agreement. At the time of each of these changes to the underlying loan agreements, RBC did not have any contact with Cusack, nor did she ever receive a copy of any of the loan agreements.
Court Findings
The court at first instance held on summary judgment that the 2006 guarantee was unenforceable, as:
- there were material changes to the underlying loan agreements following the granting of the 2006 guarantee to which Cusack never consented; and
- there was an obligation on RBC to apprise Cusack of changes to Samson's loan liability, so that she would be aware of change to her risk.
In overturning that decision, the Court of Appeal noted that the motions judge did not analyze the specific language of the 2006 guarantee, which it found to be very broad and clearly stated. Although the Court agreed that the changes to the underlying loan arrangements were material, it ruled that the 2006 guarantee was enforceable as Cusack had contracted out of the ordinary protections provided by the common law, and specifically the right to be notified of those changes.
The first paragraph of the 2006 guarantee provided that the guarantor was to 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 [Samson to RBC] or remaining unpaid by the customer to the Bank, heretofore or hereafter incurred or arising and... incurred by or arising from agreement or dealings between the Bank and [Samson]...". This clause made it clear that RBC could increase the amount of its loan to Samson and Cusack would remain liable under the guarantee. Additionally, the continuing obligation of Cusack was also clearly expressed in Section 2 of the guarantee which provided: "This guarantee shall be a continuing guarantee and shall cover all the liabilities".
The Court noted that one purpose of a "continuing all accounts" guarantee like that signed by Cusack is to allow the customer and the lender to alter their business arrangements without having to involve the guarantor. The Court also stressed that Cusack had received independent legal advice and it determined that she knew and accepted that Samson's indebtedness to RBC could increase in the future even though her guarantee was limited.
In summarizing its conclusions, the Court of Appeal stated that while the increased loan advances made by RBC to Samson were material alterations to the principal loan contract, they were contemplated by the parties, permitted by the clear language of the 2006 guarantee, and inherent in a continuing all accounts guarantee that contemplates increases in the size of the underlying indebtedness. These findings, effectively upheld by the Supreme Court's denial of leave, are a welcome confirmation that lenders may still rely on the clear terms of guarantees.
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