In the recent case of Samson8, the Ontario Court of Appeal overturned the 2012 decision of the Ontario Superior Court of Justice9 which held that a continuing guarantee of a borrower’s present and future debt was unenforceable on the basis that the guarantor had not consented to material changes to the underlying loan agreement. With the release of this decision, many lenders can breathe a sigh of relief that a standard form guarantee document was found to be enforceable in accordance with its specific terms.
The facts of this case are straightforward. In 2005, Royal Bank of Canada (“RBC”) made a small business loan in the amount of $150,000 to Samson Management and Solutions Ltd. (“Samson”). This loan was supported by a general security agreement from Samson and personal guarantees from the principal of Samson and his spouse, Cheryl Cusack (“Cusack”). It was Cusack’s spousal guarantee that was the subject of the litigation.
Initially in 2005, Cusack gave a continuing guarantee in favour of RBC in the amount of $150,000 in respect of all present and future liabilities of Samson (the “2005 Guarantee”). The 2005 Guarantee was not tied to any specific loan between RBC and Samson and the guarantor received independent legal advice at that time. In 2006 when the loan amount was increased to $250,000, a new loan agreement was signed by RBC and Samson, and Cusack provided a new continuing guarantee in favour of RBC in the amount of $250,000 in respect of the debt owing by Samson to RBC (the “2006 Guarantee”). Once again, the 2006 Guarantee was not tied to any specific loan and the guarantor received independent legal advice prior to its execution.
In 2008, the loan amount was extended to $500,000 and other new terms and conditions were documented in a new loan agreement. A new guarantee from the guarantor was not requested by RBC and instead RBC 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 Each loan agreement cancelled and superseded the previous loan agreement. At the time of each of these changes to the underlying loan agreements, RBC did not have any contact with Cusack, nor did the guarantor ever receive a copy of any of the loan agreements in place between RBC and Samson.
On a motion for summary judgment, Justice Glass of the Ontario Superior Court of Justice held that the 2006 Guarantee was unenforceable on two grounds10. First, after considering the Supreme Court of Canada’s decision in Conlin11, Justice Glass held that there were material changes to the underlying loan agreements following the granting of the 2006 Guarantee which were never consented to by the guarantor. Second, the motions judge found that there was an obligation on RBC to apprise Cusack of changes to Samson’s loan liability, so that she would be aware of a change to her risk. Justice Glass noted that each loan agreement cancelled and superseded the previous loan agreement, rather than amending the existing loan agreement. He also focused on one clause from the 2006 Guarantee which provided that the guarantor would become the principal debtor in the event that RBC was not be able to recover any sum of money on the guarantee. The existence of this clause supported his conclusion that the guarantor (as the potential principal debtor) needed to be given notice of the material changes to the underlying loan agreement.
In overturning the decision of Justice Glass, the Ontario Court of Appeal (“Court of Appeal”) noted that the motions judge did not analyze the language of the 2006 Guarantee in his reasons12, which language it found to be very broad and clearly stated. Although the Court of Appeal agreed with Justice Glass that the changes to the underlying loan arrangements were material alterations, it ruled that the 2006 Guarantee was enforceable on the basis that Cusack had contracted out of the protections provided by the common law and specifically the right to be notified of these changes.13 In its view, 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.14
In determining the effect of a change to an underlying loan arrangement on the enforceability of a guarantee, the Court of Appeal first examined whether the alteration constituted a material change and second, whether the language of the guarantee permitted the material change. In examining the facts at hand, the Court of Appeal found that the language of the 2006 Guarantee was broad and clearly designed to contract out of the ordinary protections of the common law.15 The Court of Appeal placed particular emphasis on language in the 2006 Guarantee that showed Cusack had contracted out of her right to be notified of material alterations. The first paragraph of the 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, and it shall apply to and secure any ultimate balance due or remaining unpaid to the Bank.” The Court of Appeal 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.16
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.17
Although RBC was successful on appeal, there are nevertheless important implications for lenders stemming from this case. First, the Samson decision serves as a cautionary warning to lenders that whenever an underlying loan agreement is amended, restated or replaced, it is recommended that any supporting guarantees be confirmed in writing by the guarantor as continuing to guarantee the debt obligations of the principal debtor in order to avoid potential litigation. Second, whenever possible lenders should require that guarantors become signatories to the loan agreement and any amendments to it in order to ensure that the guarantor is bound by the terms and conditions therein. Finally, from a best practices perspective, when documenting any change in loan arrangements, it would be prudent for lenders to ensure their credit documents include language clearly indicating their intention to amend and restate an existing loan agreement rather than to terminate and replace it with a new loan agreement so that any existing guarantees and security continue to secure the amended and restated loan agreement.
* Thomas Gertner, a summer student in our Toronto Office, also contributed to this post