• Supreme Court of Canada Provides Comfort on the Law of Guarantees
  • November 21, 2013 | Authors: Jenna Grant; Stephen J. Redican
  • Law Firm: Borden Ladner Gervais LLP - Toronto Office
  • Last week, the Supreme Court of Canada dismissed the leave to appeal application in Royal Bank of Canada v. Samson Management & Solutions, a case regarding the enforceability of a standard form bank guarantee. Ms. Cheryl Cusack, the guarantor, was appealing the May 2013 Ontario Court of Appeal decision that overturned the original Ontario Superior Court’s 2012 decision. In that original decision, the Ontario Superior Court granted summary judgement in favour of Ms. Cusack, finding that  the guarantee was unenforceable. The Ontario Court of Appeal’s overturning of that original decision left the well-established law of guarantees unaffected - a welcome decision after of period of uncertainty and unease for lenders sparked by the lower court’s initial finding. A summary of the facts and the lower court’s and court of appeal’s analysis is set out in our previous client updates entitled Unenforceable Guarantees: Lenders Take Note, Unenforceable Guarantees: Decision Under Appeal and Lenders Can Breathe a Sigh of Relief as the Law of Guarantees Remains Unchanged.

    While the dismissal by the Supreme Court of Canada of the guarantor’s leave to appeal application provides comfort that the case law protecting the validity and enforceability of continuing guarantees to future liabilities remains intact, as highlighted in our earlier client updates, there are a number of lessons and best practices to take from the development of this case.

    In particular, lenders should:

    • Review the form of guarantee currently being used to ensure that the language contracting out of the protections provided by common law, is clear and unambiguous; and

    • When increasing the available amount of facilities or changing or implementing new conditions or requirements under a loan agreement, lenders should:

      • not terminate the old loan agreement and replace it with a new one (instead, revisions should be drafted as an amendment or an amendment and restatement, with all facilities previously existing being continued under the new documentation);

      • always have a new guarantee provided or the old guarantee confirmed by the signatory; and

      • consider having the guarantor be a party to the loan agreement (as a guarantor or restricted party), such that it is required to sign all documents in connection with an amendment to the loan agreement.