Every so often, a debtor is faced with the inevitable, but holds on to any defence available, no matter how untenable it might be. The non est factum defence, which we have discussed previously (see newsletters of October 2014, October 2011, June 2002, and April 2002), is used when a person signs a debt obligation, but does not understand what was being signed. The latest case in which the debtor raised this defence was Bulut v. Carter, a 2014 decision of the Court of Appeal for Ontario.
Creditor had various business dealings with debtor. In 2006, debtor’s corporation signed a $300,000 promissory note in favour of creditor. Debtor personally guaranteed the note. In addition, three other members of debtor’s family also guaranteed the note. It seems that creditor did not have faith in the financial ability of debtor’s corporation to repay the note. Creditor’s fears were realised when debtor’s corporation defaulted under the note. Creditor made demand under the note and guarantees in October 2006, a mere six months after the loan was given, and two months later, debtor’s corporation went bankrupt.
Debtor’s corporation claimed that creditor had advanced funds to debtor’s corporation in 2004 and that the 2006 note related to the 2004 advance. Accordingly, debtor claimed that the promissory note and guarantees did not arise out of a fresh advance of money. The trial judge found that creditor had advanced the $300,000 in 2006. In addition, the trial judge and the Court of Appeal noted that the 2006 promissory note was given to ensure that debtor’s corporation could continue to engage in business dealings with creditor. Accordingly, both levels of court held that there was a valid and enforceable promissory note.
The real defence arose from the claim of debtor’s family members that, when they signed the promissory note, they did not understand what they were signing. The trial judge accepted that defence and dismissed the action against the family members. Creditor appealed.
The Court of Appeal noted that the defence of non est factum “is available to someone who, as a result of misrepresentation, has signed a document mistaken as to its nature and character and who has not been careless in doing so.”
The court had to determine whether the family members had set out sufficient facts to fall within that test.The family members testified that they believed they were signing the guarantee in their capacity as shareholders of the corporation, rather than personally. They said that debtor had instructed them, on an urgent basis, to go to the office of the lawyer who represented all parties, for the purpose of signing some documents. They did so. They said that they did not know what they were signing and did not understand that they were personally guaranteeing the indebtedness of the debtor’s corporation.
The court first noted that, “on their own evidence, the Carter family members were careless in signing the document that consisted of one page. The Carter family members did not read it. They did not ask any questions about it. They did not ask for an opportunity to obtain independent legal advice. The court then noted that misrepresentation is essential to a defence of non est factum and that the family members could not demonstrate they signed the guarantee due to any misrepresentation. They testified that they were not told anything about the document other than to sign it.
The court held that, based on the evidence of the family members, they failed to meet both of the pre-conditions necessary to establish the defence. Accordingly, the court allowed the appeal and granted judgment against the family members.
Unusual This case was unusual in that the defence actually made it past the trial judge. Normally, it does not get that far.