a) Banque Royale du Canada v. 9093-1833 Québec inc., J.E. 2008-1522 (C.S.) (on appeal)
In a recent case, the Superior Court of Québec lessened the obligations of a guarantor, criticized a bank for having failed to obtain a guarantee that it had agreed to require from a company, causing an increase in risk borne by the guarantor which prevented this guarantor from being subrogated in the rights of the bank against the borrower. The Court also discussed the parameters of a bank’s duty to inform the guarantor.
In this case, Royal Bank of Canada (the "Bank") had granted an operating loan to a company. The principal shareholder of the company, as well as his spouse, had offered personal solidary guarantees with respect to the company’s debts and obligations owed to the Bank. A few months later, a third party also guaranteed the company’s indebtedness. Following the company’s failure to honour the terms of the loan agreement, the bank demanded repayment of amounts owed to it from the company and the guarantors.
In its decision, the Superior Court of Québec states that the Bank had a duty to inform the guarantor. If the guarantor is in a vulnerable position and the bank omits disclosing certain information that causes damages to the guarantor, it has failed to fulfill its duty to inform. All information that protects the guarantor’s rights is pertinent to disclose. However, it is important to emphasize that the guarantor is responsible for remaining knowledgeable both of its duties as guarantor and of the operation of its business.
Given that the guarantor in this case was an experienced business woman and that she understood her undertaking as guarantor, she was not in a position of informational vulnerability. However, by not insisting that a first ranking movable hypothec be obtained on the company’s investment certificates as the Bank had undertaken to do, the Bank increased the risks borne by the guarantors without having advised them of this fact. This prevented them from being subrogated in the rights of the Bank against the borrower. The Court concluded that the Bank had caused the guarantors to suffer direct, concrete and real damages, and consequently, in light of the bank’s negligence, reduced the obligations of the guarantors by an amount equivalent to the value of the movable hypothec.
b) Banque Nationale du Canada v. Lemay,  R.J.Q. 127 (C.A.) (motion to appeal to the Supreme Court dismissed)
The Court of Appeal of Québec recently overturned a judgment of the Superior Court with regards to suretyships, dismissing the claim of the guarantor and deciding that the latter had, by its payments, implicitly waived its right to subrogation. This decision, however, calls upon banks to exercise caution in order not to deprive a guarantor of the benefit of being subrogated to the rights of the bank against the borrower (benefit of subrogation), at the risk of losing their recourse against the guarantor.
Dissatisfied with the decision rendered by the Superior Court of Québec, the National Bank of Canada (the "Bank") appealed to the Court of Appeal of Québec. In this case, the Bank had granted a loan to a farmer for the purchase of a sprinkler, after the farmer confirmed that the sprinkler was free of any real rights, hypothecs or security. The loan was secured by a movable hypothec on the sprinkler, and the farmer’s spouse accepted to guarantee the total amount of the loan.
However, the declarations made by the farmer were false and the Bank was joined with two other creditors who took priority, having already financed the purchase and registered movable hypothecs thereon. The Bank instituted an action against the farmer and his spouse after the sprinkler had been taken in payment by one of the higher ranking secured creditors. In her defence, the spouse alleged that the guarantee was null since her consent was vitiated at the time she signed the guarantee. The spouse argued that she would not have guaranteed the loan had she known that the Bank had only obtained a third ranking hypothec. She also cited the Bank’s negligence for having deprived her of subrogation to a first ranking hypothec since the Bank should have verified at the Register of Personal and Movable Real Rights for other hypothecs already registered against the sprinkler. The Superior Court of Québec judge ruled that the spouse, as guarantor, was justified in invoking the subrogation exception, that she was released of her obligations and that the Bank had been negligent in not securing itself as a first ranking creditor.
The Court of Appeal of Québec overturned the Superior Court’s judgment and ruled that the spouse had implicitly waived her rights to subrogation. The Court confirmed that a guarantor cannot waive its benefit of subrogation in advance, but may waive it once all the conditions provided by law were satisfied. The facts demonstrated that the spouse had knowingly accepted to make the payments on behalf of the farmer although she knew that the Bank did not have a first ranking security. By making these payments to the Bank, the spouse confirmed her obligation as guarantor and therefore waived the benefit of subrogation. This waiver was clear and unequivocal. The Court of Appeal therefore concluded that the spouse would not be discharged of her obligations towards the Bank.