At some point in your life, it is possible that you will be asked by a family member or friend, or a financial institution, to act as a guarantor in a loan or credit agreement. It is essential that you know exactly what you are agreeing to prior to providing the guarantee. In Alberta recent amendments to the Guarantees Acknowledgment Act, RSA 2000, c. G-11 (the "Act") will soon require individuals to retain and pay for legal advice, regardless of their knowledge and experience with guarantees, prior to granting a guarantee.
Alberta is currently the only province in Canada to have guarantees acknowledgment legislation that applies to all individuals. Although Saskatchewan's Farm Security Act has similar requirements, Saskatchewan has limited its legislation to guarantees provided by farmers in relation to farm land or other assets used in farming.
What is a guarantee?
A guarantee is a deed or written agreement in which a person, the guarantor, agrees to be responsible for the default or omission of another person in a credit agreement. Simply put, if the person whose debt is guaranteed does not pay, the guarantor will have to pay.
What is the purpose of the Act?
The Act is designed to ensure that individuals who agree to become guarantors understand the potentially onerous liabilities that may result from becoming a guarantor.
(Note that the Act does not apply to guarantees entered into by corporations, as well as a number of documents commonly considered guarantees including: a bill of exchange, cheque, promissory note, a partnership agreement, a bond or recognizance given to the Crown or to a court or pursuant to a statute, or a guarantee given on the sale of an interest in land or an interest in goods or chattels.)
Current Requirements under the Act
Under the current Act, for an individual to give a guarantee the following must occur:
- the person must appear before a Notary Public1;
- the person must acknowledge that he or she executed the guarantee;
- the Notary Public must ensure that the person is aware of the contents of the guarantee;
- the person must sign the prescribed notary form in the presence of the Notary Public (the "Notary Form");
- the Notary Public must state on the Notary From that based upon his or her examination of the person entering into the guarantee, the guarantor is aware of the contents of the guarantee and understands it; and
- the Notary Public must issue a notary certificate in the prescribed form, which must be attached or noted on the guarantee. The individual guarantee is not valid if it is not accompanied by the certificate (the "Certificate").
Interestingly, the Act specifies that a Notary Public may only charge a maximum of $5.00 for this service.
If the requirements of the Act are not strictly adhered to, the guarantee will be unenforceable. The Courts have held that non-compliance with the Act cannot be remedied. Specifically, in Bharwani v. Chengkalath2, the Alberta Court of Appeal held that the performance of the required obligations under the Act cannot be waived , regardless of the guarantor's actual knowledge of the obligations undertaken in the guarantee.
Bill 44's amendments to the Act
On December 11, 2013, Bill 44: Notaries and Commissioners Act (the "Bill") received royal assent. The Bill, which will come into force upon proclamation, makes three significant changes to the Act:
- A guarantor must now appear and acknowledge the guarantee before a lawyer instead of a Notary Public, who must be satisfied the guarantor is aware of and understands the contents of the guarantee, and must issue a certificate to that effect;
- The lawyer must be independent, in that he or she cannot represent or be employed by a person or corporation who stands to benefit as a result of the guarantee; and
- There is no fee cap on what the lawyer may charge for this service.
The exact date these amendments will take effect has not yet been announced.
Effect of the Act and Bill 44's amendments
The unique requirements imposed on Alberta guarantors may cause confusion and uncertainty in cross-border transactions. A lack of awareness of the Act may result in unsuspecting lenders discovering that their guarantee is unenforceable due to a failure to comply with the technical requirements of the Act, irrespective of whether or not the guarantor actually understood the guarantee when it was signed.
Independent Legal Counsel
While many jurisdictions view guarantees as common commercial contracts, the Alberta government has decided that individuals must obtain advice from a lawyer before they can act as guarantors. This obligation to obtain legal advice applies regardless of the individual's legal knowledge, business savvy, or familiarity with guarantees.
This legal advice must be obtained from a lawyer who does not represent a party that stands to benefit from as a result of the guarantee. This means that the guarantor cannot receive legal advice from a lawyer who acts for either the lender or the borrower. While this ensures that the guarantor receives proper, independent advice, it also means that the guarantor must incur the inconvenience and cost of retaining an independent lawyer.
The government previously tried to ameliorate the problem inherent in requiring a person to secure legal advice by placing a nominal fee limit of $5.00 on the service provided by the Notary Public . Bill 44's amendments now require a lawyer to perform the Act's specified requirements. In many cases, the guarantee contract will be a complex document, and even scanning it for an unusual provision will take a fair amount of time. It is highly unlikely that a lawyer will be able to perform this service and recover his or her time-cost for only a $5.00 fee. To ensure that lawyers are not forced to perform this service at their own cost, Bill 44 permits lawyers to charge whatever they deem appropriate for the service, which will likely be significantly more than $5.00.
While other jurisdictions do not recognize the need for guarantees acknowledgment legislation, the recent amendments to the Act demonstrate that the Alberta government continues to view the protection of individuals from the potentially onerous effects of guarantees to be a matter of public importance.
These new amendments will likely make it less convenient and more expensive for guarantors to deliver a legally enforceable guarantee. It remains to be seen whether these amendments will produce sufficient benefit to individuals to justify their enactment.
1 Note that in Alberta, a Notary Public may be, but does not have to be, a lawyer.
2 2008 ABCA 148
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.