Canada: Security Enforceable Despite Technical Errors In The Documents

Loan and security documents frequently contain a series of defined terms and acronyms to simplify references to the parties and to facilitate the drafting of the operative covenants. There is obviously a great potential for inadvertent errors to occur in the use of some of those defined terms and acronyms.

Fortunately, in the recent case of Great Eagle Resources¹, the British Columbia Supreme Court rejected several very technical defences raised by a borrower to the enforcement of certain security documents supporting a legitimate loan transaction, and raised by a related secured creditor seeking to avoid a postponement it had granted. The borrower and the postponing creditor party had attempted to have the documents declared invalid solely by reason of technical errors contained in them.

The Great Eagle Resources case involved the financing of mining claims and other related mining operation assets of Great Eagle Resources Ltd. ("Great Eagle") by a non-institutional lender ("5240"). The loan was documented with a formal loan agreement and supported by a general security agreement. 5240 also arranged for a prior registered secured creditor ("MortonCo") of the borrower to execute a postponement agreement in favour of 5240. The development of the mine did not proceed as well as the parties had intended, and Great Eagle stopped providing the required financial reports. When 5240 learned that Great Eagle had attempted to transfer the mining claims to another related party, 5240 made demand on its loan and proceeded to enforce its security.

The loan agreement formally created the defined term of "Borrower" to describe Great Eagle. However, in some sections of the loan agreement including the paragraph requiring the delivery of the general security agreement, the undefined term "Company" was also used where "Borrower" should technically have been used. Great Eagle suggested that the agreement was imprecise and failed to adequately identify a contracting party.² Mr Justice Greyell took a very practical approach in dismissing that technical argument. He found that notwithstanding the error, in a bilateral agreement between 5240 and Great Eagle, the use of the term "Company" obviously referred to Great Eagle and that there was no further company or general security agreement contemplated by the parties.³

The postponement agreement provided by MortonCo had been prepared for signature with the corporate name shown on the personal property register as the party holding the prior registered secured claim. However, MortonCo had changed its name prior to signing the postponement agreement, and had not bothered to reflect its new name on the PPR. It also did not advise 5240 of the name change at the time it executed and delivered the postponement agreement. MortonCo argued that it was not bound by the postponement, as it referred to a non-existent corporation. Mr Justice Greyell refused to allow this technical error to defeat the clear intentions of the parties, and ordered a rectification of the postponement so that it referred to the current legal name of MortonCo. In reaching his decision, Mr. Justice Greyell expressly applied the fundamental principle of contract law that courts should avoid an interpretation of a contract that produces a result that is unreasonable.⁴

Great Eagle also argued that the general security agreement was not valid as 5240 had not actually paid to Great Eagle the $10.00 consideration referenced in its introductory paragraph. The Court held that the $10.00 consideration was a symbolic amount, which was not intended by the parties to be paid. The agreement did not fail for a lack of consideration as each party derived substantive benefits under the terms of the contract.⁵ A similar finding was made in respect of the postponement agreement which also contained a reference to the $10.00 consideration.

In the end result, the Court held that the loan and security documents were enforceable by 5240 against Great Eagle and MortonCo as the parties had intended. It is encouraging to have a case like Great Eagle Resources where the Court recognized the clear intent of the contracting parties, applied a common sense interpretation to the applicable contracts, and refused to entertain frivolous defences advanced by the borrower and related parties.⁶

Footnotes

1. 5240 Investments Ltd v Great Eagle Resources Ltd, 2013 BCSC 35 [Great Eagle Resources].

2. Great Eagle Resources, at para. 114.

3. Great Eagle Resources, at para. 119.

4. Great Eagle Resources, at paras. 159 and 160.

5. Great Eagle Resources, at paras. 104 and 112.

6. The Court also granted a subsequent application by 5240 for special costs against those related parties based upon their frivolous defences and their conduct in participating in certain fraudulent conveyances of secured assets in 5240 Investments Ltd v Great Eagle Resources Ltd, 2013 BCSC 778.

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