A recent Ontario Court of Appeal decision highlights the risks
facing lenders that rely on standard form security agreements to
enforce the obligations of defaulting borrowers. In Royal Bank of
Canada v. El-Bris Limited,1 the Court applied the remedy of
rectification to the plaintiff bank's (the "Bank")
standard personal guarantee and collateral mortgage forms, allowing
the Bank to enforce only on the collateral mortgage, even though
the personal guarantee was a separate obligation.
The Bank extended a $700,000 line of credit to El-Bris Limited,
obtaining security for the loan from James Ellis, El-Bris's
president and sole shareholder. Ellis personally guaranteed the
loan for $700,000 and also pledged a $700,000 collateral mortgage
on property that he owned. The collateral mortgage was in the
Bank's standard form providing that its charge was in addition
to any other security held by the Bank.
By the time El-Bris became insolvent and defaulted, the
company's debt under the line of credit had increased to $3.5
million. The Bank called the loan and claimed against Ellis, who
paid $700,000 to the Bank and requested a release from the personal
guarantee and a discharge of the collateral mortgage. The Bank
discharged the collateral mortgage but demanded an additional
$700,000 under the guarantee on the basis that it constituted a
separate obligation. The Bank sued Ellis and El-Bris when Ellis
refused to pay.
At trial, the court granted judgment against the insolvent
El-Bris but dismissed the action against Ellis. The trial judge
acknowledged that the terms of the Bank's standard form
security documents would ordinarily create separate obligations
under the mortgage and guarantee. Nevertheless, he concluded that
the documentary and oral evidence demonstrated a common intention
that the collateral mortgage was to act merely as security for
Ellis' personal guarantee. The court therefore granted a
declaration that Ellis's guarantee obligation was extinguished
by the payment of $700,000 to the Bank under the collateral
The Court of Appeal affirmed the trial decision, agreeing that
the standard forms did not reflect the parties' intentions. In
such a case, permitting the Bank to collect $1,400,000 on what was
intended to be a $700,000 security would amount to unfair dealing
and would unjustly enrich the Bank. The court therefore applied the
remedy of rectification to essentially rewrite the standard forms
to reflect the parties' intentions that the collateral mortgage
stand as security for the guarantee.
Although the Court emphasized that this case turned narrowly on
the facts and would not "open the floodgates" to
rectification claims, El-Bris demonstrates the potential for courts
to rectify standard form security documents at the expense of
financial institutions. Its holding provides compelling reasons for
lenders to consult with counsel on whether their standard forms
require transaction-specific modifications to avoid the risk of
court rectification. The case may also prove to be an unhelpful
precedent for financial institutions seeking to enforce terms in
standard form documents, particularly on motions for summary
judgment. Bank customers will no doubt rely on this case to allege
that terms in standard form agreements ought not to bind them, or
that such terms should be rectified, in light of their particular
dealings with the bank or factual circumstances.
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
In Irwin v. Alberta Veterinary Medical Association, 2015 ABCA 396, the Alberta Court of Appeal found that the "ABVMA" failed to afford procedural fairness to a veterinarian undergoing an incapacity assessment.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).