Loan Amendments: Enforceability of Existing Guarantee

On June 20, 2012, Justice B.A. Glass of the Ontario Superior Court granted summary judgment in favour of Cheryl Cusack (the “Guarantor”), discharging a continuing guarantee she made in favour of Royal Bank of Canada (“RBC”) for the benefit of Samson Management &Solutions Ltd. (the “Borrower”), whose principal (the “Principal”) is the Guarantor’s spouse. The decision in Royal Bank of Canada v. Samson Management &Solutions Ltd. (“Samson”)1 has far-reaching legal and practical implications. RBC’s appeal was heard on January 9, 2013, but a decision has yet to be released.

Facts

The Guarantor signed a continuing guarantee in favour of RBC covering the Borrower’s indebtedness to the extent of $150,000 (the “2005 Guarantee”). A year later, the Guarantor executed a new guarantee covering the Borrower’s indebtedness to the extent of $250,000 (the “2006 Guarantee” and together with the 2005 Guarantee, collectively, the “Guarantees”). The Guarantees were not tied to any particular loan agreement between RBC and the Borrower (being, what is generally referred to as “all obligations” guarantees), and the Guarantor received independent legal advice upon signing both Guarantees.

At the time of the 2005 Guarantee, the underlying loan agreement between RBC and the Borrower provided for credit facilities of $150,000. New loan agreements were executed in 2006, 2008 and 2009 increasing the credit facilities to $250,000, $500,000 and $750,000, respectively. Each such loan agreement cancelled and superseded the previous one. Each of the 2008 and 2009 loan agreements also imposed increasingly more stringent compulsory reporting conditions and performance ratio requirements on the Borrower.

RBC never had any contact with the Guarantor, but dealt with her through the Principal. RBC did not request a new guarantee from the Guarantor at any time subsequent to the 2006 loan agreement, and acknowledged during trial that it would have been prudent to obtain a new guarantee upon the execution of each new loan agreement.

Reasons

Judge Glass held that the 2006 Guarantee (limited to $250,000) was unenforceable on two main grounds. First, there were “material changes” to the underlying loan arrangements following the execution of the 2006 Guarantee that were never agreed to by the Guarantor2. Specifically, the Supreme Court of Canada has held that a material change in the terms of a contract between a creditor and a principal debtor without the consent of the guarantor will relieve the guarantor from liability3. RBC had an obligation to notify the Guarantor of the increased credit facilities and stricter reporting requirements, and its failure to do so rendered the 2006 Guarantee unenforceable. Second, the facts of Samson could be distinguished from previous case law holding that a continuing guarantee is enforceable despite material changes to the underlying loan agreement insofar as each new loan agreement in this case cancelled and replaced, rather than amended, the previous loan agreement4.

Conclusion

As it stands, the Samson case has significant implications for lenders and their legal counsel. First, when the underlying loan agreement is amended, amended and restated or cancelled and replaced, the decision in Samson underscores the importance of having an existing guarantee confirmed by its signatory as continuing to guarantee the payment and performance by the principal debtor of the indebtedness owing under such amended, amended and restated or new loan agreement. Second, in addition to having a guarantor execute a confirmation agreement regarding existing security arrangements, it is prudent for the guarantor to be made a party to the loan agreement such that it is required to sign and acknowledge all amendments, amendments and restatements or replacements, as applicable. Finally, it is also wise to draft any revision to a loan agreement as an amendment or an amendment and restatement, as opposed to terminating and replacing the existing loan agreement with a new one, in order to avoid the new loan agreement potentially falling outside the ambit of a continuing guarantee.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.

1Royal Bank of Canada v. Samson Management &Solutions Ltd., 2012 ONSC 3612, 219 A.C.W.S. (3d) 89 [Samson].

2Ibid. at para. 40.

3Ibid. at para. 31.