A recent Ontario Superior Court of Justice decision provides valuable guidance to creditors on how to protect the enforceability of guarantees where material changes have been made to the underlying loan agreements. The case underscores that where material terms of a loan agreement are amended, restated or replaced, creditors should ensure that the guarantor either confirms the original guarantee or provides a new one. Simply relying on a continuing guarantee is not sufficient. In addition, to secure the enforceability of a guarantee a creditor should consider amending the original loan agreement rather than cancelling the agreement and replacing it with a new one.
The case arose in the context of Royal Bank of Canada (RBC) bringing a motion for summary judgment to enforce a guarantee that Cheryl Cusack had provided in support of her husband's business. In turn, Cusack also brought her own summary motion to discharge her from any liability in respect of her guarantee. The Ontario court sided with Cusack, ruling that the guarantee was unenforceable.
In an effort to help her husband to obtain a business loan, Cusack signed a continuing guarantee in 2005 in favour of RBC for the indebtedness of Samson Management and Solutions Ltd. Cusack's husband was the principal of Samson. The underlying loan agreement between RBC and Samson was for C$150,000. The guarantee covered Samson's present and future liabilities up to C$150,000 and was not tied to a specific loan. In addition, the guarantee provided that Cusack would become a principal debtor if RBC was unable to recover any amount on the guarantee.
In 2006 a new loan agreement was signed between RBC and Samson for C$250,000. Cusack signed a new guarantee in favour of RBC in the amount of C$250,000. As with the 2005 loan, this guarantee again covered present and future liabilities of Samson to RBC. The guarantee was not tied to a specific loan.
In 2008 RBC and Samson replaced the 2006 loan agreement with a new loan agreement for C$500,000. The 2008 loan also introduced new conditions on Samson pertaining to establishing performance ratio and compulsory reporting requirements. The new loan agreement required a C$250,000 guarantee from Cusack. However, Cusack did not sign a new guarantee, nor did she confirm that the earlier guarantee remained valid.
In 2009 the amount in the loan agreement was increased to C$750,000. Again, RBC did not take steps to obtain a new guarantee from Cusack or to ensure that she confirmed the last guarantee. In fact, Cusack was given no notice of the changes made to the loan agreement in 2008 or 2009.
Interestingly, RBC never had any direct contact with Cusack. RBC provided the guarantees to Cusack's husband who, in turn, gave them to Cusack. Cusack never saw any of the loan agreements between RBC and Samson. She had simply provided the guarantees to assist her husband's business.
The Ontario court held that Cusack's guarantee was unenforceable because the changes made to the underlying loan agreement were material changes which placed Cusack at a higher risk of having to pay RBC for Samson's loan. The amount of the loan had more than doubled and the reporting and performance ratio requirements placed more restrictions on Samson, which consequently increased Samson's risk of defaulting and leading to Cusack having to pay the money to RBC under the guarantee.
The court was clear that in order for RBC to enforce the guarantee, it should have notified Cusack of the changes to her liability as new loan agreements were being entered into. RBC should have asked Cusack either to confirm the existing guarantee or to provide a new one.
In a previous Ontario court case with similar facts, the court found that a continuing guarantee was enforceable because it covered future liabilities of the debtor and was not tied to a specific loan agreement. However, in that case the loan agreement had simply been amended rather than superseded, while in Cusack's case the 2008 loan agreement cancelled and superseded the 2006 agreement. Simply relying on a continuing guarantee that covers present and future liabilities of the debtor was not enough for RBC to enforce the guarantee once the new loan agreement with material changes was signed, even if the guarantee was not tied to a particular loan.
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