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Guarantee - Breach by Creditor - Remedies

Bank of Montreal v. Javed (Ont CA, 2016)

In this case, in which the Court of Appeal held that a bank had breached it's duty to a guarantor to advise them of the status of the principal loan, the court considered remedies available to the guarantor, particularly discharge of the guarantee and damages:
[13] However, in my view, the motion judge erred in failing to find that the Bank breached its obligations to Mr. Shah by refusing to respond to his inquiries. Staff of the Bank explained the refusal to disclose the information as the consequence of the debtor’s change in account authorization. However, in this case, the guarantee itself contemplated that the guarantor(s) could seek information from the Bank regarding the debt secured by the guarantee.

[14] Although the guarantee does not expressly oblige the Bank to disclose information regarding the primary debtor on request of the guarantor, it suggests that the guarantor could make reasonable request for information regarding the state of the primary debtor’s indebtedness and, hence, the state of the guarantor’s exposure under the guarantee, if it were made in the proper form. The guarantee provides:
Any request by the undersigned to the Bank for useful information respecting the content and the terms and conditions of the debts and liabilities of the Customers hereby guaranteed or the progress made in their performance, shall be made in writing by such undersigned to the Bank.
[15] I make the following comments regarding this contractual term. First, and importantly, the clause in question did not entitle Mr. Shah to obtain access to the Company’s business account information, as he requested. Rather, the clause is directed at “the content and the terms and conditions” of the Company’s debts and liabilities to the Bank, if secured by the guarantee, and the Company’s “progress” in satisfying those obligations.

[16] This language, in my view, supports the conclusion that the guarantor was entitled, on the bargain made by the parties, to information regarding the state of the Company’s indebtedness to the Bank, to the extent that it was secured by the guarantee, and, hence, to information about the state of the guarantor’s personal exposure under the guarantee. In other words, the guarantor had the right to inquire of the Bank concerning the amount for which he was liable under the guarantee. The guarantor was not entitled to know the particulars of the Company’s business account with the Bank.

[17] Second, while no written request was made to the Bank, there is uncontroverted evidence that Mr. Shah made verbal requests for information to a Bank employee. In my view, the failure to make the request in the proper form is not fatal in the circumstances of this case. See Citadel Assurance v. Johns-Manville Canada, 1983 CanLII 52 (SCC), [1983] 1 S.C.R. 513, at p. 519, where the court recognized the general proposition, but added qualifications that do not apply in this case. The Bank therefore had a contractual obligation to provide information to Mr. Shah as set out in the guarantee.

[18] In this case, however, the Bank provided nothing to Mr. Shah in response to his request, for information. It therefore breached its contractual obligation to provide information to him, in accordance with the terms of the guarantee.

(d) The guarantee is not to be discharged

[19] What is the effect of the Bank’s breach of its contractual disclosure obligation? Mr. Shah argues that the guarantee must be discharged. I disagree.

[20] A guarantee is a contract, and the ordinary principles of contract law apply to a creditor’s breach. Consequently, only the most serious misconduct on the part of the creditor will discharge a guarantee. Some examples from the cases include: a creditor acting in bad faith toward the surety; the creditor concealing material information at the inception of the guarantee; where the creditor causes or connives the default of the principal debtor; or where there is a variation in the terms of the contract between the creditor and the principal debtor of a type that would prejudice the interests of the surety: Bank of India v. Trans Continental Commodity Merchants Ltd. & Patel, [1982] 1 Lloyd's Rep. 506 (Q.B. Com. Ct.), at p. 515, aff'd [1983] 2 Lloyd's Rep. 298 (C.A.) at p. 302; Bank of Montreal v. Wilder, 1986 CanLII 3 (SCC), [1986] 2 S.C.R. 551; Pax Management Ltd. v. Canadian Imperial Bank of Commerce, 1992 CanLII 27 (SCC), [1992] 2 S.C.R. 998; Manulife Bank of Canada v. Conlin, 1996 CanLII 182 (SCC), [1996] 3 S.C.R. 415.

[21] In Pax Management, Iacobucci J. held, at para. 42, p. 1021:
A guarantor should not be discharged from the obligation which he or she has undertaken except by acts which have some impact on the magnitude or likelihood of the materialization of that risk. Other objectionable or wrongful conduct by the creditor towards the guarantor should be dealt with by causes of action that are otherwise appropriate such as the tort of deceit or breach of fiduciary duty.
[22] Kevin McGuiness notes in The Law of Guarantee, 3d ed. (Markham, Ont.: LexisNexis Canada Inc., 2013) at s. 12.2 (p. 1001):
Usually, the measure of a surety’s damage where the creditor breaches the terms of the principal contract can be equated with a degree of prejudice suffered as a result of the breach in much of the same way as the prejudice suffered by the principal can be so quantified. Where such quantification is practical, then in order to compensate the surety adequately for the breach – and also to deter creditors from committing such breaches – the surety should obtain a partial release from liability under the guarantee to the extent of the amounts so quantified.
[23] In this case, as in Pax Management, the breach by the Bank of its contractual disclosure obligation to Mr. Shah was not sufficiently serious to give rise to a right of rescission in his favour. The breach then comes down to a question of damages based on proven prejudice to the guarantor.

[24] The reasonableness of this approach is reinforced by the law’s expectation, in general terms, that the guarantor, not the creditor, is responsible for monitoring the debtor’s behaviour. As McGuiness observes, at p. 948: “there is no general duty of active diligence imposed by law upon the creditor; as a person who has given the guarantee, it is the surety’s business, rather than the creditor’s to see that the principal performs the guaranteed obligation.” Further, at p. 363, he states: “[t]he assumption that has guided the courts is that in most cases, sureties have a superior ability to that of the creditor to monitor the performance of the principal.”

[25] There is no evidence that Mr. Shah sought any information from the Company regarding the state of its indebtedness to the Bank and was refused. In his affidavit on the motion, Mr. Shah claims only that if he had been aware of the amount of the loan, he could have somehow saved the business or convinced his business partner to sell assets in order to repay the loan. These claims were entirely abstract and speculative. Mr. Shah adduced no evidence to substantiate them.

[26] The appellants, therefore, did not discharge their positive obligation to prove damages for the Bank’s breach, and consequently are not entitled to any set-off against or reduction in the amount owed on the guarantee.

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