A recent decision from the Court of Appeal for Ontario (the
"Court of Appeal") in Royal Bank of Canada v. Samson
Management & Solutions Ltd. ("Samson")
highlights enforceability issues that can arise with guarantees
when an underlying loan document is altered without a
guarantor's consent. The facts in Samson are all too common and
should give lenders pause when amending loan documentation.
Ultimately, the Court of Appeal did find the subject guarantee was
enforceable, but the decision underscores important practices to
employ in these circumstances.
In 2005, Royal Bank of Canada ("RBC") provided a
credit facility in the amount of $150,000 to Samson Management and
Solutions Ltd. (the "Borrower"). The loan was secured by,
among other things, a $150,000 guarantee of all of the
Borrower's obligations to RBC from the spouse of the
Borrower's principal, Cheryl Cusack ("Cusack"), who
was not involved in the day-to-day operations of the Borrower.
Cusack's guarantee was in RBC's standard form and was
bolstered by a certificate of independent legal advice provided by
In 2006, RBC agreed to increase the loan amount to $250,000.
Cusack gave a new $250,000 guarantee in favour of RBC (the
"2006 Guarantee"), on the same terms as her earlier
guarantee. Once again, Cusack received independent legal advice.
RBC and Samson then later agreed to increase the loan amount on two
separate occasions, first to $500,000, and then to $750,000. At the
time of both increases, RBC had no contact with, and did not
request a new guarantee from, Cusack. The Borrower's business
failed in 2011. RBC made demand on Cusack for the amount of the
2006 Guarantee, and brought a motion for summary judgment. Cusack
brought a cross-motion for summary judgment seeking to have the
2006 Guarantee declared unenforceable because the increase of the
underlying obligations was a material alteration to which she did
The Ontario Superior Court of Justice (the "Superior
Court") found in favour of Cusack, on the basis that the
increase of the Borrower's debt carried considerably greater
risk to Cusack, she had not consented to such a material change and
common law principles dictate that, where a guarantor has not
consented to material alterations to a loan document, the guarantor
will be released from liability.
The Court of Appeal agreed that the loan increases were a
material change to the underlying obligations without Cusack's
consent, and that, at common law, the change would have released
Cusack from liability under the 2006 Guarantee. However, the Court
of Appeal noted that there is a circumstance where the common law
release of liability will not operate: if the guarantee contains
clear language permitting a debtor and lender to make changes to
the underlying loan document without the guarantor's consent.
The underlying principle is that a guarantor can contract out of
the protection provided by the common law, provided that the
language is clear.
It was here that the Court of Appeal found the Superior
Court's analysis deficient. When there is a material change in
the underlying obligations without a guarantor's consent, the
analysis must extend further to examine if, in the language of the
guarantee and the context in which it was given, the guarantor
contracted out of the right to the common law release of
In this instance, the 2006 Guarantee contained broad provisions
allowing RBC to make alterations to the amount, interest rate and
other terms of the Borrower's debt and required that Cusack
would pay, on demand, all debts and liabilities of the Borrower to
RBC, present or future, subject to the limitations contained
therein. In the Court of Appeal's view, the language of the
2006 Guarantee was clear and the fact that Cusack received
independent legal advice pointed to a clear and unequivocal waiver
of the right to common law protection. As a result, the Court of
Appeal reversed the Superior Court decision, found that Cusack had
contracted out of her right to be notified of material alterations
and granted summary judgment to RBC.
There are a few lessons for lenders to take from Samson. First,
always ensure that your forms of guarantee include clear,
unequivocal language whereby a guarantor contracts out of the right
to consent to future changes to terms in a loan document. Second,
where an individual guarantor is not involved in the day-to-day
operations of a debtor, it is wise to have that guarantor seek
independent legal advice on his/her guarantee. Finally, when
amending loan documentation, the best practice, whenever possible,
is to have guarantors acknowledge the new terms or provide a new
guarantee confirmed by the guarantor.
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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