When a Continuing Guarantee is Not So Continuous: Protecting the Enforceability of Guarantees for CreditorsRoyal Bank of Canada v. Sampson Management and Solutions, 2013 ONCA 313
In lending law, guarantors help to secure financing by becoming liable for the amount of the
loan if the original borrower defaults. This mechanism is extremely useful for borrowers and
lenders alike, especially in the context of continuing guarantees where the purpose is that one
guarantee for a borrower continues to apply to future advances and liabilities.
The common law position is that where there is any “material alteration”, a guarantor must be given notice of these changes, and consent to them, in order for a guarantee to continue to secure future advances and liabilities. However, this protection under common law can be contracted out of, and a recent Ontario decision shows the tension between protecting guarantors from material changes in the loan agreement, and allowing lenders to enforce a continuous guarantee.
The facts of the case are that Ms. Cusack served as a guarantor in 2005 for a loan given by RBC to her husband’s company (“Sampson”). The guarantee covered all present and future liabilities of the company, and was not tied to any specific loan agreement – a so-called “continuing guarantee”. A second loan agreement was entered into in 2006 between RBC and Sampson. Again, Ms. Cusack gave a continuing guarantee to RBC. However, two new agreements were later negotiated between RBC and Sampson, one later in 2006, and one in 2008. Ms. Cusack did not sign a guarantee for either of these advances. The 2008 loan changed the conditions of the loan agreement, stipulating more stringent reporting and performance ratio requirements.
When Sampson defaulted on the loan, RBC sought to realize on the guarantee given by Ms. Cusack. Ms. Cusack challenged the enforceability of the continuing guarantee with regards to the latest loans, which RBC admitted superseded any previous loan agreements.
At trial, the Ontario Superior Court of Justice ruled in favour of Ms. Cusack. When RBC changed the conditions of the loan agreement, and doubled the amount given to Sampson, it constituted material changes to the principal contract. These changes would have increased the likelihood that Sampson would default and, thus, would have put a higher amount of risk on Ms. Cusack. At common law, she should have been given an opportunity to consent to such fundamental changes or, on the face of the guarantee, she did not contract out of it.
However, the Ontario Court of Appeal reversed the trial decision. The issue for the Court on appeal was whether there was sufficiently clear and unambiguous language in the original guarantee to show that Ms. Cusack contracted out of the protection provided to her under common law. The Court of Appeal agreed with the trial judge that the changes in the guarantee, being the credit extensions and the more onerous reporting clauses, increased the risk to Ms. Cusack, and she would have been protected under the common law rule. The Court of Appeal held, however, that the language of the contract signed by Ms. Cusack was clear on two points. First, it allowed an increase in the amount loaned to Sampson. Second, it clearly and unambiguously contracted out of the protections afforded at common law. Especially in light of the fact that Ms. Cusack signed the guarantee with independent legal advice, the Court held that Ms. Cusack is liable under the guarantee.
This decision by the Ontario Court of Appeal is key for lenders, as it provides guidance on how to ensure that a continuing guarantee remains enforceable through subsequent advances on the loan and changes in the loan agreement.