Canada: The Alberta Anomaly (No. 2)

Last Updated: July 12 2011
Article by Bryan Haynes

Alberta is the only jurisdiction in Canada (and in most, if not all, other common law jurisdictions) to have a guarantees acknowledgment act. Although its purpose is laudable, its application has created headaches for practitioners, uncertainty for clients and injustices for many.

The Guarantees Acknowledgment Act (Alberta) was first enacted in 1939 and remains largely intact today. The Act was implemented to protect ordinary individuals from unwittingly subjecting themselves to onerous liabilities. The Act provides that a guarantee provided by an individual has no effect unless the guarantor acknowledges the execution of the guarantee before a notary public who certifies that he has satisfied himself by examination that the guarantor is aware of the contents of the guarantee and understands it (all of this for a prescribed maximum fee of $5). The Act supplements the Statute of Frauds (1677) which requires that guarantees be in writing.

The courts have generally applied the Act strictly - no notarial certificate, no enforcement. This has resulted in some guarantors evading, on technical grounds, the obligations they undertook with full knowledge. In some multijurisdictional disputes however, courts have jumped through hoops to apply the laws of other jurisdictions - by all appearances to give effect to guarantees that would otherwise have failed under Alberta law.

In Bharwani v. Chengkalath, the plaintiff sold his accounting practice to the defendant. The plaintiff agreed to finance a portion of the purchase price in exchange for a personal guarantee and collateral mortgage. The plaintiff's solicitor prepared the necessary documents, complete with a notarial certificate in prescribed form. The defendant's wife (in whose name title to the residence was registered), who is a lawyer and was acting for her husband on the sale, refused to sign the guarantee as she did not want to be personally responsible for the debts of her husband apart from the equity in their home. Accordingly, in place of the guarantee and collateral mortgage, she drafted an acknowledgment of indebtedness whereby "the undersigned grants to..., without any personal liability, as security for the repayment of ..., a charge on lands legally described as...", which the plaintiff's solicitor accepted.

The transaction soured and the plaintiff sought to enforce the charge on land. The defendant's wife claimed that the acknowledgment of indebtedness (yes, the one she drafted on the basis that she was not prepared to sign a personal guarantee) was in fact a personal guarantee and was unenforceable since it failed to comply with the Act. Remarkably, both the Master and the chambers judge on appeal agreed. On its face, the acknowledgment merely granted a charge on land and did not create a personal obligation to answer for a default of another. Assuming it did create such an obligation, it was arguably given on the sale of an interest in goods or chattels (an exception from the definition of "guarantee" under the Act).

Regrettably, no appeal was taken from the order of the chambers judge. The Court of Queen's Bench of Alberta and the Alberta Court of Appeal therefore only dealt with the issue of whether the principle of estoppel precluded the defendant from raising the defence of non-compliance with the Act (which both courts held did not). In her reasons for judgment, Madam Justice B.E. Romaine of the Court of Queen's Bench of Alberta acknowledged "There is no doubt that the equities of the situation make this an unattractive conclusion." In its judgment, the Alberta Court of Appeal emphasized "We are obliged, for purposes of this judgment, to accept the finding of the chambers judge that the Acknowledgment of Indebtedness prepared and executed by the respondent is a guarantee within the meaning of the Act. We reiterate that this determination was not appealed."

The Act has been examined twice by the Institute of Law Research and Reform (Alberta). The first report (tabled in 1970) recommended that the Act be retained but reformed to inter alia permit a court to grant relief in those cases where it is obvious that the spirit of the Act has been complied with. In its second report tabled in 1985, the Institute's board was divided as to whether the Act should be repealed and recommend similar reforms assuming the Act was retained. To date, none of the recommended reforms in either report have been adopted.

With or without reform, the Act has outlived its useful life and should be repealed. This Alberta anomaly should be eliminated and Alberta brought in-step with other common law jurisdictions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Bryan Haynes
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