Background:
- Contract: The dispute centers around a contract between Essential and Option Industries Ltd. (a subsidiary of Kos Corp) to manufacture rigs for $22 million.
- Settlement Agreement: Due to financial troubles faced by Option, both parties entered into a Settlement Agreement in 2016. The agreement included payment to CRA on behalf of Option and a corporate guarantee by Kos Corp for $250,000 to discharge specific liens.
Issues
- Enforceability of the Guarantee: The Defendant argued that the guarantee was invalid due to lack of consideration since it wasn’t under seal, and no direct benefit was conferred to Option.
- Satisfaction of Obligations: The Defendant claimed that its obligations were fulfilled when the liens were eventually discharged, and payments were made under a Consent Order.
Court’s Findings
- Consideration: The court found that adequate consideration was provided since the Plaintiff allowed an 18-month forbearance period for Option to resolve its financial issues, and partial payment was made indirectly through a court order benefiting Option’s creditors.
- Guarantee Obligations: The court interpreted the guarantee as absolute, holding Kos Corp liable despite partial payments under a previous court order.
- Penalty Argument: The Defendant’s assertion that the $250,000 guarantee was an unenforceable penalty was rejected. The court determined that it was a genuine pre-estimate of damages given the potential exposure if the liens were not discharged.
- Summary Judgment: The court granted summary judgment in favor of the Plaintiff for the enforcement of the guarantee and dismissed the Defendant’s application for summary dismissal.
Conclusion
Kos Corp was held liable for $250,000 under the corporate guarantee despite partial discharge of obligations and previous payments to Option’s creditors.
