A Sigh Of Relief: Ontario Guarantees Enforceable In Accordance With Their Terms

In the recent case of Royal Bank of Canada v Samson Management & Solutions Ltd., 2013 ONCA 313, the Ontario Court of Appeal overturned a trial-level decision which held that a continuing guarantee was unenforceable where the guarantor had not consented to material changes to the underlying loan agreement. Now that the Supreme Court of Canada has dismissed a motion for leave to appeal, lenders can take some comfort that the clear language of a standard form guarantee will continue to be enforceable in accordance with its terms.

Facts

In 2005, Royal Bank of Canada made a small business loan of $150,000 to Samson Management and Solutions Ltd. The loan was supported by a general security agreement from Samson and personal guarantees from its principal and his spouse, Cheryl Cusack. It was Cusack's spousal guarantee that was the subject of the litigation.

The initial 2005 guarantee from Cusack was for $150,000, and in respect of all present and future liabilities of Samson. The guarantee was not tied to any specific loan, and Cusack received independent legal advice. In 2006 when the loan was increased to $250,000, a new loan was signed by Samson, and Cusack provided a new continuing guarantee in favour of RBC in respect of the Samson debt. Once again, the 2006 guarantee was not tied to any specific loan and Cusack received independent legal advice.

In 2008, the loan was increased to $500,000 and other new terms and conditions were documented in a new loan agreement. A new guarantee from Cusack was not requested by RBC and instead the bank 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 Each loan agreement cancelled and superseded the previous agreement. At the time of each of these changes to the underlying loan agreements, RBC did not have any contact with Cusack, nor did she ever receive a copy of any of the loan agreements.

Court Findings

The court at first instance held on summary judgment that the 2006 guarantee was unenforceable, as:

there were material changes to the underlying loan agreements following the granting of the 2006 guarantee to which Cusack never consented; and there was an obligation on RBC to apprise Cusack of changes to Samson's loan liability, so that she would be aware of change to her risk. In overturning that decision, the Court of Appeal noted that the motions judge did not analyze the specific language of...