Simon's Megalomaniacal Legal Resources

Contract - Guarantee - Breach by Obligor

. Toronto-Dominion Bank v. Readymix Foods Corporation

In Toronto-Dominion Bank v. Readymix Foods Corporation (Ont CA, 2026) the Ontario Court of Appeal considers several appellant arguments to avoid a personal loan guarantee:

[2] The details of the signing of the loan guarantee are as follows: Mr. Mehrnia personally guaranteed the loan issued by TD Bank to Readymix as president and sole shareholder of Readymix. The loan went into default.

[3] TD sought judgment against Readymix and Mr. Mehrnia. Readymix consented to judgment. Mr. Mehrnia did not.

[4] During a summary trial, Mr. Mehrnia claimed he was not responsible for repaying the loan as, (1) there was no consideration given by TD Bank for the execution of his guarantee, (2) he did not understand what he was agreeing to, and (3) he did not receive independent legal advice before signing the guarantee. The trial judge rejected each of these arguments.

[5] While he advanced several arguments in his appeal factum, counsel for Mr. Mehrnia advised the court in oral submissions, that the only argument he was advancing on this appeal is that of the failure of consideration for the loan guarantee.

[6] We agree with the trial judge’s conclusion that there was consideration for the guarantee provided by Mr. Mehrnia.

[7] The trial judge accepted the evidence of TD Bank representative Mr. Santeramo who said that it was his practice to give a copy of the guarantee to the debtor at the first meeting and to inform them that a guarantee is a standard requirement of a loan from TD Bank.

[8] Although the guarantee section of the loan agreement signed by Mr. Mehrnia on September 11, 2007 was left blank, Mr. Mehrnia completed the guarantee section shortly thereafter on September 14, 2007. The signature line reads: “Signature of Guarantor” and above the signature line, the form reads: “Personal Guarantee”.

[9] Mr. Mehrnia was a sophisticated borrower. Moreover, on Mr. Mehrnia’s own evidence, he understood that he was providing a personal guarantee:

During that September 14, 2007 meeting, Santeramo only advised me that it was a loan guarantee and that it must be signed immediately if Readymix wished to have any credit facility with TD.

[10] We agree with the motion judge that this was “an admission on the part of Mr. Mehrnia that he was told on September 14 that he was being asked to sign a guarantee if he wished to have any credit facility with TD.”

[11] The trial judge also considered the portion of the loan agreement that enabled TD Bank to amend the agreement at any time at its discretion:

The combination of the demand nature of the loan and the bank’s ability to change the agreement in effect means that the bank was not committing to anything concrete by offering the demand facility on September 11, 2007. The bank retained the ability to change the terms of that lending agreement at any time. Changing those terms would have included asking for a guarantee. In the alternative, the bank could simply have cancelled the credit facility on September 14, before any funds were advanced, and have told Mr. Mehrnia that he had to apply for a new facility, which would have been associated with a personal guarantee on his part.

[12] Therefore, even if the guarantee was not contemplated as early as September 11, 2007, TD Bank could require the guarantee as a term of the loan thereafter. Mr. Mehrnia received notice of, and signed, the guarantee. Mr. Mehrnia was free not to agree to the guarantee, but conversely, TD was free not to advance any funds: TD Canada Trust v. B & B Enterprises (London) Ltd., 2008 ONCA 441, 237 O.A.C. 352, at para. 17.

[13] Moreover, as the trial judge noted, credit was not advanced until September 27, 2007, after the guarantee was signed, and the account went into overdraft. Additional advances were made in the ensuing years until 2022, in reliance on Mr. Mehrnia’s guarantee.

[14] There was therefore consideration.

[15] The appellant relied on Villeneuve v. Turner, [1990] O.J. No. 385 (Dis. Ct.), at para. 20, at trial and refers to it again on this appeal for the proposition that there is no consideration for a guarantee given by the borrower after the lender has already committed to a loan. However, as the trial judge held, the bank in Villeneuve had already advanced funds under the lending facility before it asked for the guarantee. Moreover, the guarantor was not told he was signing a guarantee; he was simply told he was signing a corporate document.

. 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.