In Royal Bank v. Edna Granite & Marble Inc., Royal Bank of Canada (the "Bank") brought an action against a Borrower and Guarantors regarding an amount owing on a loan that the Defendant had defaulted on.
According to the loan agreement, the Borrower was to make monthly payments on the loan. The loan agreement also provided that the Borrower was responsible for paying, inter alia, all legal fees incurred by the Bank in connection with the enforcement or termination of the loan agreement and the security. Similarly, the guarantee agreement provided that the Guarantors were liable to the bank for all legal costs, on a solicitor and own client basis, incurred by or on behalf of the bank resulting from any action instituted on the basis of the guarantee.
The Borrower failed to make the agreed upon monthly payments. The last payment made by the Borrower was in November of 2013; however, the Guarantors proposed in May of 2014 that they would pay $500 per month for a year. The Bank did not respond in writing to this new arrangement, but the Bank's collections officers acknowledged that the offer was made and insisted that the repayment terms would have to be revised after a year.
The Guarantors provided post-dated cheques for $500, but some of them were returned for non-sufficient funds. The last payment made by the Guarantors was in May of 2016.
There were four issues before the Court:
- Did the Bank agree to the new terms proposed by the Guarantors in May of 2014?
- Did the Bank act in bad faith and fail to help mitigate the Defendants' losses?
- Did the limitation period for bringing the claim begin to run when the Borrower stopped making payments in November 2013, or when the Guarantors made their last payment in May of 2016?
- Could the Court use its discretion to lower the costs awarded when the loan agreement specified the apportionment of costs?
On the first issue, the Court found that while there was some ambiguity in the evidence, it was unnecessary to decide if the Bank had agreed to the new terms, given that the Guarantors also defaulted on the new proposed terms.
The Court dismissed the counterclaim that alleged that the Bank had acted in bad faith, or failed to take action required to help the Defendants mitigate their losses, on the basis that there was no evidence on the record to that effect.
On the third issue, the Court held that the limitation period only began running once the Guarantors stopped making payments, not when the Borrower stopped making payments. The Court found that the Guarantors were making payments to the credit of the Borrower's loan. As quoted in the judgment, the Court found that it is irrelevant who pays a creditor's loans, whether it be "by the borrower, by the Guarantors, or by Santa Claus (para. 10)". The fact that there are payments being made on account of the borrower's outstanding debt is sufficient to prevent the limitations period from running.
On the fourth issue, the Court found that while costs are discretionary under the Courts of Justice Act, the costs in this case were payable as a matter of contract, not judicial discretion (para. 16). In the same manner that the loan agreement is enforceable, so too is the requirement that the Defendants pay the full amount of the Bank's legal fees.
This case illustrates that the limitation period on loan default actions does not start to run provided that payments are being made on account of the debt, by the borrower or guarantors. It also emphasizes the importance of having properly worded loan and security instruments to ensure that financial institutions can recover their enforcement costs, including legal fees. While the Court did not need to address the issue in the present case, in order to minimize the risk of challenges to loan instruments, any agreement to vary the terms of payment should be properly documented by way of forbearance agreement.