In a September 2012 British Columbia Supreme Court
decision1, a guarantor was fully relieved from liability
under a conditional guarantee which it had granted in favour of a
lender due to the lender's inadvertent breach of the underlying
The principal of the corporate guarantor was a friend and
business associate of the principal of the corporate
borrower. The borrower was in the business of road building
and the guarantor was a small hauling company.
The borrower applied to its existing lender for an advance of
additional sums in the amount of $950,000. The lender agreed
to advance the additional loan on the condition that it receive
adequate security. The guarantor agreed to guarantee the
additional loan at the request of the borrower.
The terms of the guarantee in question provided that the
guarantor would guarantee payment of the indebtedness of the
borrower to the lender "irrevocably and unconditionally",
but "subject to the terms of [the]
[g]uarantee". Elsewhere in the document, the guarantor
agreed that it would execute a mortgage in favour of the lender as
security collateral to the guarantee, on the condition that the
lender not register the mortgage until 5 days after default by the
borrower and demand for repayment by the lender.
The guarantor duly executed and delivered each of the guarantee
and the mortgage, but the lender registered the mortgage the same
day that the documents were signed. The borrower subsequently
defaulted under its loan and the lender initiated legal proceedings
against the borrower, the guarantor and related parties.
At issue during the trial was whether the inclusion of the terms
relating to delayed registration of the mortgage was attributed to
a mistake made by the parties during the negotiation of the
guarantee. Based on the evidence, the Court concluded that the
guarantee, as signed (including the delayed registration
condition), reflected the agreement between the parties. Based
on the dealings between the guarantor and the borrower, the Court
also concluded that the guarantor was an accommodation surety, for
whom in law obligations under guarantees would be strictly
construed and any material breach thereunder would discharge such a
surety from liability.
In registering the mortgage prior to default and demand, the
lender was found in breach of a material term of the guarantee (the
condition), even though the guarantor did not prove actual
prejudice as a result of early registration. Therefore, the
effect of such breach was that the guarantor obtained a release
from liability under the guarantee.
As conditions can be easily overlooked or forgotten in the steps
leading towards enforcement, lenders should avoid attaching
conditions or provisos in guarantees or related documents if at all
possible. Whenever conditions are attached, lenders should
take great care to satisfy them, as a failure to do so may result
in the unfortunate outcome that a guarantor is inadvertently
released from liability under its guarantee.
1Coast Mountain Aviation Inc. v. M. Brooks
Enterprises Ltd., 2012 BCSC 1440.
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