The recent Ontario Court of Appeal decision in Royal Bank of Canada v. Samson Management and Solutions Ltd. strikes a blow for contractual certainty and transactional efficiency, while in the process overturning a lower court determination that promoted neither.
Briefly, the bank entered into a loan arrangement with Samson Management. A husband and wife team guaranteed Samson’s indebtedness under a standard form bank guarantee covering all present and future indebtedness of Samson to the bank. Appropriate independent legal advice was obtained in support of the wife’s guarantee.
Subsequently, additional loan increases were made to Samson. On one occasion, both the husband and wife provided “fresh” guarantees covering the increased principal amount, while the wife received updated, independent legal advice. On two further occasions however, additional loan increases were made without involving the wife, as the bank took updated guarantees from the husband only.
The bank and husband clearly intended to retain the benefit of the wife’s earlier guarantee, exchanging documentation confirming the wife’s earlier guarantee should remain as continuing security. But why was the wife not involved? Possibly, she did not wish to risk additional liability under a new guarantee, or perhaps another round of independent legal advice was considered unpalatable.
More simply, perhaps her net worth didn’t warrant a bank request for an increase in her guarantee. In any event, it appears the wife was not asked to confirm the continued effectiveness of her guarantee in the face of such loan increases.
When Samson later failed, the bank sought enforcement of the husband’s newest guarantee, as well as enforcement of the wife’s earlier version. In the lower court, the motion judge enforced the husband’s guarantee, but following the Supreme Court of Canada’s 1996 decision in Manulife Bank of Canada v. Conlin declined to enforce the wife’s guarantee, holding the wife had not been consulted, the loan increases were materially prejudicial, and without consultation or consent her guarantee was unenforceable. The bank appealed.
The Ontario Court of Appeal agreed the law is generally as set forth in Conlin, i.e., that a guarantor will be released from liability where the underlying debt is materially altered without the guarantor’s consent. However, this common right to relief can be contracted out of, and the issue of whether or not a guarantor has effectively contracted out of its protection is one to be determined by reference to the express terms of the guarantee.
Acknowledging that the increases in Samson’s indebtedness were materially prejudicial, potentially exposing the wife to greater risk that her guarantee might be called upon, the Court of Appeal agreed the wife would normally have been discharged from liability, absent consent to the loan increases or clear wording in her guarantee. And this, in fact, is where the wife was caught.
Her guarantee was considered a continuing guarantee covering “all debts and liabilities, present or future” of Samson to the bank, and all amounts “remaining unpaid by [Samson] to the Bank . . . arising from any agreement or dealings between the Bank and [Samson].” Such comprehensive language left the bank free to agree on subsequent loan increases without regard to the wife’s guarantee.
In the end, Conlin was distinguished as a case not involving a continuing guarantee, where the wording of the guarantee did not create a prior consent for subsequent prejudicial actions.
What is the overall effect of Samson?
Most importantly, the Court of Appeal has once again emphasized that transacting “parties are free to make their own arrangements, and [that] a guarantor’s decision to contract out of the protection provided by the common law or equity will usually be respected by the courts. . . .”
Assuming that transacting parties are properly advised, Ontario courts will seek to facilitate their bargains by crafting commercial results that are both clear and certain. Specifically, if your client signs a continuing guarantee that gives the lender and its debtor broad latitude to increase the amount of the underlying indebtedness, you should (as guarantor’s counsel) expect that guarantee will likely remain enforceable.
Legal certainty promotes transactional efficiency, and ideally should lower the transactional costs of parties wishing to undertake routine business arrangements, not only by decreasing the risk (and later cost) of litigation, but also (hopefully) by decreasing the sometimes needless and costly repetition of confirmatory documents and other arrangements that often accompany instances of legal uncertainty.
Whether the legal certainty promoted by Samson will be long-lasting or not remains to be seen. Over the shorter term, the prudent banking practitioner is still probably best advised to seek a guarantor confirmation for any material changes proposed to an underlying loan. Happily however, the risk of not doing so, even if only inadvertently, may now be somewhat lessened, at least where one is dealing with a properly crafted guarantee.
Jim Shanks is a partner in the financial services group at Gowling Lafleur Henderson LLP.
Briefly, the bank entered into a loan arrangement with Samson Management. A husband and wife team guaranteed Samson’s indebtedness under a standard form bank guarantee covering all present and future indebtedness of Samson to the bank. Appropriate independent legal advice was obtained in support of the wife’s guarantee.
Subsequently, additional loan increases were made to Samson. On one occasion, both the husband and wife provided “fresh” guarantees covering the increased principal amount, while the wife received updated, independent legal advice. On two further occasions however, additional loan increases were made without involving the wife, as the bank took updated guarantees from the husband only.
The bank and husband clearly intended to retain the benefit of the wife’s earlier guarantee, exchanging documentation confirming the wife’s earlier guarantee should remain as continuing security. But why was the wife not involved? Possibly, she did not wish to risk additional liability under a new guarantee, or perhaps another round of independent legal advice was considered unpalatable.
More simply, perhaps her net worth didn’t warrant a bank request for an increase in her guarantee. In any event, it appears the wife was not asked to confirm the continued effectiveness of her guarantee in the face of such loan increases.
When Samson later failed, the bank sought enforcement of the husband’s newest guarantee, as well as enforcement of the wife’s earlier version. In the lower court, the motion judge enforced the husband’s guarantee, but following the Supreme Court of Canada’s 1996 decision in Manulife Bank of Canada v. Conlin declined to enforce the wife’s guarantee, holding the wife had not been consulted, the loan increases were materially prejudicial, and without consultation or consent her guarantee was unenforceable. The bank appealed.
The Ontario Court of Appeal agreed the law is generally as set forth in Conlin, i.e., that a guarantor will be released from liability where the underlying debt is materially altered without the guarantor’s consent. However, this common right to relief can be contracted out of, and the issue of whether or not a guarantor has effectively contracted out of its protection is one to be determined by reference to the express terms of the guarantee.
Acknowledging that the increases in Samson’s indebtedness were materially prejudicial, potentially exposing the wife to greater risk that her guarantee might be called upon, the Court of Appeal agreed the wife would normally have been discharged from liability, absent consent to the loan increases or clear wording in her guarantee. And this, in fact, is where the wife was caught.
Her guarantee was considered a continuing guarantee covering “all debts and liabilities, present or future” of Samson to the bank, and all amounts “remaining unpaid by [Samson] to the Bank . . . arising from any agreement or dealings between the Bank and [Samson].” Such comprehensive language left the bank free to agree on subsequent loan increases without regard to the wife’s guarantee.
In the end, Conlin was distinguished as a case not involving a continuing guarantee, where the wording of the guarantee did not create a prior consent for subsequent prejudicial actions.
What is the overall effect of Samson?
Most importantly, the Court of Appeal has once again emphasized that transacting “parties are free to make their own arrangements, and [that] a guarantor’s decision to contract out of the protection provided by the common law or equity will usually be respected by the courts. . . .”
Assuming that transacting parties are properly advised, Ontario courts will seek to facilitate their bargains by crafting commercial results that are both clear and certain. Specifically, if your client signs a continuing guarantee that gives the lender and its debtor broad latitude to increase the amount of the underlying indebtedness, you should (as guarantor’s counsel) expect that guarantee will likely remain enforceable.
Legal certainty promotes transactional efficiency, and ideally should lower the transactional costs of parties wishing to undertake routine business arrangements, not only by decreasing the risk (and later cost) of litigation, but also (hopefully) by decreasing the sometimes needless and costly repetition of confirmatory documents and other arrangements that often accompany instances of legal uncertainty.
Whether the legal certainty promoted by Samson will be long-lasting or not remains to be seen. Over the shorter term, the prudent banking practitioner is still probably best advised to seek a guarantor confirmation for any material changes proposed to an underlying loan. Happily however, the risk of not doing so, even if only inadvertently, may now be somewhat lessened, at least where one is dealing with a properly crafted guarantee.
Jim Shanks is a partner in the financial services group at Gowling Lafleur Henderson LLP.