It is clear that a creditor is not required to make demand of a guarantor of a loan before commencing legal proceedings, unless the plain wording of the guarantee requires that this be done:1 However, if the guarantee requires that a demand be made before action is commenced, an issue arises as to whether the guarantor actually has to receive a copy of the demand before the creditor can commence legal proceedings to enforce the guarantee. This issue was considered in Business Development Bank of Canada v. Michelle Gahagan2.
In the Gahagan case, the guarantor guaranteed two loans made by the bank to a company in which the guarantor was a minority shareholder. A demand letter for each loan was sent by the bank to an address at which the guarantor had not lived for approximately four years. Consequently, the guarantor never received the demand letters.
The bank then sent an email to the guarantor advising her that demands had been sent to her last known address and stating that it "would be pleased to provide copies to your current address if you wish". In reply, the solicitor for the guarantor wrote to the bank requesting copies of the demand letters, the guarantees and other documents from the bank. The bank failed to provide these documents and went ahead and commenced actions seeking judgment against the guarantor. The solicitor for the guarantor argued that the bank had failed to prove that it made demand on the guarantor as required by the guarantee and that such failure was fatal to the bank’s claim. The bank argued that it had complied with the guarantee by sending the demand letters to the last known address for the guarantor.
Clause 7 of the guarantee provided that "a demand is effectually made when a letter is posted to the address of the guarantor last known to the bank." Mr. Justice Cole found that the purpose of a formal demand "is no more than to advise the surety that there has been default, so as to bring the guarantee into play" and quoted Kevin P. McGuinness, The Law of Guarantee:
"….if the creditor follows the prescribed method of serving the demand set out in the guarantee, the demand is sufficiently made once the procedure is followed, irrespective of whether the surety ever actually receives the demand for payment."3
His Lordship held that there "was no onus on the plaintiff to ascertain the current address of the defendant. What was agreed to was that the demand be sent to the address of the defendant that was last known to the bank." In addition, citing Royal Bank of Canada v. W. Got Associates Electric Ltd 4., Cole J. held that the term "effectual" in Clause 7 of the guarantee merely meant that mailing the demand letter would be sufficient, not that it was the only way to make an imperative demand on the guarantor. His Lordship found that the email sent to the guarantor also constituted a sufficient demand.
This decision is of assistance to creditors in that it confirms that the onus is on the guarantor to keep its creditor advised of any changes of address. This prevents a guarantor from moving without notice to the creditor and attempting to avoid liability as a result. It also establishes that, depending on the wording of the guarantee, an email demand may be sufficient notice to a guarantor to found an action on the guarantee.
1. Bank of Montreal v. MacGregor (1980) 21 B.C.L.R. 83 (BCSC)
2. (2006) B.C.S.C. 788
3. (2nd ed. Scarborough, Carswell 1996), at p. 333
4. (1994), 150 A.R. 93 (Q.B.)
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