In our recent client update entitled Unenforceable Guarantees: Lenders Take Note! we reviewed the surprising Ontario Superior Court decision in Royal Bank of Canada v. Samson Management & Solutions Ltd. This case, heard in June 2012, addressed the enforceability of guarantees and has been of great interest to all lenders, borrowers, guarantors and their counsel given the unexpected outcome. We have since learned that the decision is under appeal and that the appeal is scheduled to be heard on January 9, 2013.

THE CASE UNDER APPEAL

In this case, Royal Bank of Canada (“RBC”) pursued summary judgment on a guarantee from Ms. Cheryl Cusack who defended the action on the basis that the guarantee was unenforceable. Ms. Cusack is the spouse of the defendant, Jason Brasseur, the principal of the defendant Samson Management and Solutions Ltd. (“Samson”). Samson and Mr. Brasseur did not file any material or appear or be represented in court and so summary judgment was granted against them in favour of RBC. As such, the case focused on the enforceability of the guarantee. On the basis of the facts set forth in his judgement and summarized in our recent update, Mr. Justice Glass found that the guarantee made by Ms. Cusack was unenforceable and granted summary judgment in favour of Ms. Cusack.  

THE APPELLANT’S POSITION

RBC’s position as described in the factum filed on its behalf is that Ms. Cusack is responsible under her guarantee for the debts of Samson, up to the $250,000 limit set forth in the guarantee. In her affidavit, Ms. Cusack stated that she signed the guarantee to assist her husband Mr. Brasseur in his business plans for Samson and that she obtained independent legal advice on the guarantee. RBC is of the view that Ms. Cusack benefitted from the loans to Samson, given that although she was not an employee of Samson she received income from Samson pursuant to an income splitting arrangement with Mr. Brasseur and she did not work outside the home.  

RBC points out that the guarantee was a standard form “all accounts” guarantee covering all indebtedness, present and future, at any time owing by Samson to RBC, with a limit of $250,000. The factum states that Ms. Cusack did not allege that RBC or anyone else made representations to her that the guarantee would be restricted to any particular credit facilities. In addition, the factum sets out there was no allegation or evidence that RBC acted in bad faith, or was improvident in dealing with its security, or otherwise misconducted itself.  

RBC’s argument is that there was no legal basis for Mr. Justice Glass to have dismissed the action against Ms. Cusack or declared her guarantee unenforceable. RBC states that he did so in reliance upon legal authorities that apply to specific guarantees, not to general or continuing guarantees and there was a misapprehension of the relevant evidence.  

THE RESPONDENT’S POSITION

As can be expected, Ms. Cusack’s position as described in the factum filed on her behalf disputes some of the factual statements set out in RBC’s factum, sets forth some additional facts that Ms. Cusack believes are relevant and on which Mr. Justice Glass relied in his decision and disagrees with the legal basis for the appeal. Among other things, Ms. Cusack’s factum states that Mr. Justice Glass did not err in applying the concept of material variation to the guarantee signed by Ms. Cusack, that it was properly concluded that there was a material variation in the risk after the execution of the guarantee and that there was no misapprehension of the evidence.  

PRACTICAL ISSUES IF THE DECISION IS UPHELD

The RBC factum states that the appeal raises issues of concern well beyond the interests of the parties to the appeal and that Mr. Justice Glass’ decision is contrary to long-established case law upholding the validity and enforceability of general or continuing guarantees to future liabilities. As the factum describes this point, “[t]his case law is so well established that the principles have rarely been challenged in court, unless there are exceptional or unusual circumstances, which is not the case here. If this decision stands, then the effectiveness of all lending institutions’ general or continuing guarantees will be undermined, creating uncertainty and rendering it difficult for lenders to realize on guarantees which they have bargained for as security for their loans.”  

Based on the facts set out in RBC’s factum, we would have a hard time disagreeing with the practical conclusions set out therein. In our view, based on those facts, if this decision is upheld, significant changes could be required to ordinary banking practise. In addition, it could become more challenging to obtain summary judgment on guarantees, significantly reducing the value of personal guarantees.  

NEXT STEPS

The appeal is scheduled to be heard at the Ontario Court of Appeal on January 9, 2013. We will be following the outcome of this appeal closely, and will provide a further update when a decision is rendered. Until then, remember the “lessons learned” as summarized in our prior update, and ensure that when acting as