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- 12 February 2019


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1. General
2. Material Alteration of Object of Guarantee
3. Remedies on Breach by Creditor of Duty to the Guarantor
4. Contribution Between Co-guarantors


1. General

A 'guarantee' is pretty much what the lay person's understanding of it is. It is a legally-binding assurance by a third party to a contract or other obligation that they will 'come good' for the duties of a direct party to the arrangement.

2. Material Alteration of Guarantee Obligation

. Posocco v. Battista

In Posocco v. Battista (Ont CA, 2016) the court set out principles applicable governing the guarantee in the face of subsequent changes to the underlying contract which is being guaranteed, and how a guarantor can waive the right to declare the guarantee void in those circumstances:
[24] In his reasons, the application judge correctly identified the basic principles concerning how a material alteration of the terms of the underlying contract of debt affects a guarantor’s continuing liability under a guarantee: (i) at common law and equity, a guarantor will be released from liability on a guarantee in circumstances where the creditor and the principal debtor agree to a material alteration of the terms of the contract of debt without the consent of the guarantor; however, (ii) it is open to the parties to make their own arrangements, so a guarantor can contract out of the protection afforded by the common law or equity: Manulife Bank of Canada v. Conlin, 1996 CanLII 182 (SCC), [1996] 3 S.C.R. 415, at paras. 2 and 4.

[25] The application judge also correctly recognized that determining the continuing liability of a guarantor requires determining the intention of the parties as demonstrated by the words of the guarantee, as well as the events and circumstances surrounding the transaction as a whole: Conlin, at para. 6.

[26] The Conlin decision summarizes several additional principles of interpretation applicable to guarantees:
(i) any contracting out of a guarantor’s protection against a material alteration of the terms of the contract of debt without his consent must be clear;

(ii) whether the guarantor contracted out of those protections must be determined by an interpretation of the clauses of the agreement, through a consideration of the transaction as a whole, and the application of the appropriate rules of construction;

(iii) any ambiguity in the terms used in the guarantee should be construed against the party which drew it by applying the contra proferentem rule;

(iv) if there is a doubt or ambiguity as to the construction or meaning of the clauses binding the guarantor, they must be strictly interpreted and resolved in favour of the guarantor; and

(v) the clauses binding guarantors must be strictly construed: Conlin, at paras. 4, 8, 15 and 22.
. Turfpro Investments Inc. v. Heinrichs

In Turfpro Investments Inc. v. Heinrichs (Ont CA, 2014) the court stated as follows on the situation where a guarantor is not consulted on material alternations to the obligations that they have guaranteed, and circumstances in which the normal rule may be excepted:
[13] A guarantor will be released from liability where the creditor and the principal debtor agree to a material alteration of the loan agreement without the consent of the guarantor: Manulife Bank of Canada v. Conlin, 1996 CanLII 182 (SCC), [1996] 3 S.C.R. 415, at para. 2. In that decision, Cory J. adopted the oft-quoted description of the rule by Cotton L.J. from Holme v. Brunskill (1878), 3 Q.B.D. 495 (C.A.), at pp. 505-6:
The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court… will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.
[14] This court recently addressed the material alteration test in GMAC Leaseco Corporation v. Jaroszynski, 2013 ONCA 765 (CanLII), 2013 ONCA 765, 118 O.R. (3d) 264, at paras. 76 - 77:
In Manulife at para. 10, Cory J. approves of Lord Westbury’s formulation in Blest v. Brown (1862), 4 De G.F. & J. 367, at p. 376: apart from any express stipulation to the contrary, a surety will be discharged where the contract has been changed, without his or her consent, unless the change is in respect of a matter that cannot “plainly be seen without inquiry to be unsubstantial or necessarily beneficial to the surety”.

Or, as this court put it in Royal Bank of Canada v. Bruce Industrial Sales Limited 1998 CanLII 3050 (ON CA), (1998), 40 O.R. (3d) 307, at p. 320, relying on Manulife, “alterations to the principal contract will be held to be material unless they are plainly unsubstantial or necessarily beneficial to the guarantor.”
[15] The basis for the rule relating to material alterations arises from the guarantor’s agreement to guarantee the risk arising from the contract between the creditor and the principal debtor. Fairness dictates that this risk not be altered unilaterally by the parties to that contract. Accordingly, a guarantor will be relieved from liability unless an exception applies.

[16] Applicable jurisprudence appears to recognize four exceptions to the rule. First, relief will be denied if the alteration is plainly unsubstantial. Secondly, relief will also be denied if the alteration is necessarily beneficial to the guarantor; that is, it cannot be prejudicial to the guarantor or otherwise than beneficial to the guarantor.

[17] An example of a material alteration that may discharge a guarantor from liability is described by Kevin P. McGuinness in The Law of Guarantee, 3d ed. (Markham, Ont.: LexisNexis, 2013) at para. 11.265:
A binding agreement made by a creditor with the principal debtor to allow the principal further time in which to pay or perform the guaranteed debt or obligation will discharge the surety from liability, where the length of time so granted is not trivial. This principle of law is of great antiquity. Two justifications may be advanced for the rule. The first is that any binding agreement to extend time is prejudicial to the surety, since the effect of such an agreement is to prevent the surety from claiming against the principal, in the event that the creditor calls upon the surety to pay or perform at the time originally contemplated. If the surety were able to so claim, then the practical effect would be to nullify the agreement between the principal and creditor as to the extension of time. If on the other hand the surety were precluded from claiming against the principal by virtue of the extension of time, then the principal would be in a better position than the debtor (which would be inconsistent with the secondary nature of the surety’s liability). [Citations omitted.]
[18] Thirdly, as noted by Cory J. in Manulife, at para. 4, a guarantor may contract out of protections provided by the common law or equity. For instance, typically, an institutional lender’s standard form guarantee will contain provisions allowing for time extensions for repayment, renewal, and forbearance.

[19] Lastly, alteration of the risk assumed by the guarantor may be addressed by obtaining a guarantor’s consent to the proposed or actual alteration.

3. Remedies on Breach by Creditor of Duty to the Guarantor

. Bank of Montreal v. Javed

In Bank of Montreal v. Javed (Ont CA, 2016), where the Court of Appeal held that a bank had breached it's duty to the 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:
[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.

4. Contribution Between Co-guarantors

. Can-Win Leasing (Toronto) Limited v. Moncayo

Here in Can-Win Leasing (Toronto) Limited v. Moncayo (Ont CA, 2014) the Court of Appeal considered the contribution rights of one (paying) co-guarantor against others, in the unusual situation where the need to honour the guarantee had not yet arisen. Because of this unusual circumstance, the case considers the law of co-surety in depth:
[31] A demand by the creditor is not a prerequisite to the surety’s right to pay the creditor and to seek contribution from its co-surety. The issue is in what circumstances a surety is entitled to do so in the absence of default by the principal debtor, and whether those circumstances existed here.


The Applicable Principles

[32] The trial judge analyzed the issues in terms of the voluntary payment by one party of another party’s debts. He referred to Re Korex Don Valley ULC, above, and Owen v. Tate, reflex, [1975] 2 All E.R. 129 (C.A.). While the principles are similar, in my view the appeal should be addressed on the basis of rights between co-sureties.[1]

[33] Having paid more than its rateable share of Can-Win Truck’s debt, Can-Win Leasing had an equitable right, independent of contract, to recover contribution from its co-sureties. However, “[t]o give rise to a right of contribution, payment must have been made by the surety in a situation where [the surety] was legally obliged to pay”: Kevin McGuinness, The Law of Guarantee, 3rd ed. (Markham: LexisNexis Canada, 2013), at p. 785. The surety is entitled to pay as soon as his or her liability arises under the terms of the guarantee: McGuinness, at p. 786. However, as McGuinness notes, doing so is “risky” because co-sureties may argue that the payment was imprudent or unnecessary.

[34] In such circumstances, McGuinness suggests at p. 786:
[A] surety will often wish to settle a potential claim against him[self], yet at the same time will be unwilling to prejudice any right which he may have to recover part of the payment which he is to make from his co-sureties. If a surety wishes to make a payment in settlement, he should give notice to his co-sureties of his intention to negotiate a settlement. Should the co-sureties then refuse to take part in the negotiation, a claim for contribution may then be made without fear that the co-sureties will successfully defend by challenging the propriety of the settlement.
See also: David Marks & Gabriel Moss, Rowlatt on Principal and Surety, 6th ed. (London: Sweet & Maxwell, 2011), at p. 180.

[35] This is because a guarantee is a secondary and contingent obligation. It is secondary to a primary obligation and it is contingent on the default of the obligor under the primary obligation: McGuinness, at p. 49. By stepping in and paying the obligation, the surety exposes the debtor, and any co-surety, to a liability they may have been able to avoid. In light of the trial judge’s conclusion that Can-Win Truck was salvageable, this is a crucial point.

[36] Stewart v. Braun, reflex, [1925] 2 D.L.R. 423 (Man. K.B.), is an example of a situation in which one group of co-sureties were held to have exercised appropriate consideration for another group of co-sureties. There, some sureties settled with the creditor and looked to the other sureties for indemnity for their proportionate shares. The court found, at p. 431, they had acted reasonably:
I cannot accede to defendants’ contention that the plaintiffs cannot enforce contribution on the basis of any amount unless that amount is agreed to by all the guarantors or fixed by a judgment. The plaintiffs had a right to protect their credit by preventing action; they had a right to call upon their co-guarantors—the defendants—to come forward and assist in arranging some settlement. The defendants had no right to sit back under the supposed cover of their financial insignificance, or safety, and say to their co-sureties, if you do anything with this account before judgment is obtained against you, you do so at your peril. I do not think they should be heard to state that. I hold that they have by their silence estopped themselves from disputing the amount at which the plaintiffs settled this claim: See Marshall v. Houghton (1923), 33 Man. L.R. 166, at p. 177.
[37] In that case, however, the bank had called on the sureties to make payment and the defendants, although invited by the plaintiff co-sureties to discuss the issue, refused to co-operate and did nothing.

[38] The purpose of the demand is to inform the surety that there has been default by the principal debtor. In the case of a guarantee payable on demand, a demand is a condition-precedent to the obligation: see Bank of Nova Scotia v. Williamson, 2009 ONCA 754 (CanLII), 97 O.R. (3d) 561, at para. 13. In Stewart v. Braun, it was significant that the bank had made a demand on the sureties.

[39] In the case before us, the guarantees were payable on demand, but the bank had made no demand. However, that does not end the analysis. The question is whether this is one of those cases in which the primary obligor’s default is so imminent that the surety is entitled to take unilateral action.

[40] Stimpson v. Smith, [1999] 2 All E.R. 833 (C.A.) is a good example of such a case. There, although the bank had not made a written demand, it made an oral demand on one of the sureties, who proceeded to negotiate and pay a settlement to the bank. The circumstances were not entirely dissimilar to this case, but one significant difference is that the bank was requiring a substantial reduction in the overdraft and was threatening to appoint a receiver. Lord Justice Gibson said, at p. 839, that the right to contribution arose, notwithstanding the absence of a written demand, given the “reality of the commercial position” facing the primary debtor. Lord Justice Judge concluded, at p. 842, that where there is “imminent” threat of loss, or where the surety is in immediate “jeopardy” and a demand can “realistically be anticipated” in the absence of a settlement, “the surety who reaches an arrangement with the creditor which is not disadvantageous to the co-surety is not thereafter deprived of his entitlement to contribution” (emphasis added).

[41] Generally, however, the absence of a demand on the surety is evidence that the primary debtor is not in default. The voluntary payment of the obligation by the surety may put the onus on the surety to show that he or she was not acting officiously.

[42] Can-Win Leasing relies upon Manu v. Shasha (1983), 1983 CanLII 1733 (ON CA), 41 O.R. (2d) 685, [1983] O.J. No. 3027 (C.A.). That case is distinguishable. There, the trial judge had dismissed the co-surety’s claim for contribution on the ground of his “unclean hands” in deliberately and recklessly precipitating the demise of the business. This resulted in the bank calling its loan and realizing on the security provided by the appellant, who then sought contribution from the respondent, his business partner and co-surety.

[43] This court, at pp. 687-88, described the appellant’s claim as:
[F]ounded on the long established proposition that where a co-surety has paid the debt of a principal debtor, or more than his proportionate share, and is unable to recover against the principal debtor, the co-surety is entitled to contribution from his fellow co-sureties to equalize the burden. Contribution does not depend upon agreement, but upon an equity arising from the fact of the existence of co-sureties for the same debt owed to the same creditor. The underlying principle of equity is that the creditor’s remedies against the co-sureties should be applied so as to apportion the burden rateably, and if the remedies have been applied otherwise the court will correct the inequity between the co-sureties…. [Citations omitted.]
[44] In reversing the trial decision, this court rejected the “clean hands” argument, holding, at p. 688 that:
[T]he mutual rights of the sureties in this case are not to be determined simply by resort to the maxim that a plaintiff in equity must approach the court with clean hands. In our opinion, the surety here who was compelled to pay more than his proportionate share of a common liability is not to be debarred on that ground alone from obtaining contribution from his co-surety. [Emphasis added.]
[45] Manu v. Shasha was not a case of a co-surety voluntarily discharging the principal obligation without any antecedent demand by the creditor and, in my view, it has no application to this case.

[46] In light of these authorities, the question is whether this is one of those cases in which a surety, Can-Win Leasing, was justified in making a payment absent a demand by the creditor because default was imminent. If so, the payment did not prejudice its co-surety, Mr. Moncayo. If not, the payment was voluntary and discharged the co-sureties’ obligations.

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