Borrowers and lenders negotiating payment directions on the closing of loan transactions should take heed of the recent decision of the Ontario Court of Appeal in Kemeny v. Callidus Capital Corporation, 2023 ONCA 76.


The decision in Kemeny arises out of the funding of a loan transaction involving a written authorization and direction pursuant to which the borrower requested that a consulting fee—payable to an intermediary as compensation for his efforts in arranging the loan—be paid directly by lender from the drawdown of the loan pursuant to a drawdown request from the borrower to the lender delivered on closing (the Irrevocable Direction). The Irrevocable Direction stipulated that the lender was required to pay the consultant for his services from the first drawdown on the loan by the borrower and (somewhat unusually in such a document) the lender counter-signed to acknowledge the Irrevocable Direction. However, when the first advance under the loan agreement was advanced, the lender did not wire those fees to the consultant out of the first advance. Shortly thereafter, the borrower was placed into insolvency in a U.S. court. Having received no fees, the consultant commenced a claim against the borrower in the Ontario Superior Court of Justice (2021 ONSC 8267).

At trial, the lender argued that it was not liable under the Irrevocable Direction to pay the consultant's fees because the loan agreement provided for advances under the loan to be used to pay off all secured creditors of the borrower, so as to place the lender in sole first priority position. Having done so, the lender would not have available funds to pay the consultant's fees out of the first advance of the loan. The trial judge rejected the lender's argument, finding the lender liable to the consultant for the amount of his fee as set out in the Irrevocable Direction—both in contract and as a trustee—and judgment was awarded in the amount of US$679,800 (the amount of the fee). In doing so, the trial judge also found that the Irrevocable Direction required the lender to hold the consultant's fee in trust for him and imposed the obligations of a trustee on the lender with respect to the amount of his fee: The lender was required to ensure the funds were paid to the consultant out of the first advance of the loan.

The Court of Appeal's Reasons

The Court of Appeal ultimately affirmed the lower court's decision that the lender had breached their contractual obligation and was liable to pay the consultant's fee as stipulated in the signed Irrevocable Direction. In doing so, the Court of Appeal rejected the lender's argument that the court of first instance had made three legal errors, summarized below:

  1. The lender argued that the trial judge misconstrued the Irrevocable Direction as a guarantee between the borrower and lender and that it should not be obligated to cover consultant fees incurred by the borrower as a result of the borrower's insolvency. The Court of Appeal rejected this argument, finding the Irrevocable Direction placed a contractual obligation on the lender in language that was quite clear: if the loan proceeds were advanced, the lender was obligated to pay the consultant's fee directly to him out of the first advance of funds; a failure to do so, as was the case here, constitutes a breach of contract. In rejecting this argument, the Court of Appeal also indicated a further basis on which to distinguish the Irrevocable Direction from a guarantee, in that it did not require the lender to pay the consultant's fees out of pocket. Had loan funds not been advanced, the lender would have had no obligation to pay; however, having advanced the funds, the lender was required to comply with its agreement in the Irrevocable Direction.

    At paragraph 26 of the reasons, the Court of Appeal also concluded that the trial judge had considered the factual matrix surrounding the Irrevocable Direction in its interpretation, including the loan agreement itself (the terms of which the lender unsuccessfully argued had altered the agreement contained in the Irrevocable Direction) and aspects of the negotiations leading up to its signature.
  2. The lender also argued that it had not breached its trust obligations under the Irrevocable Direction because no proceeds were available from the first drawdown of the loan to the borrower after its secured creditors (i.e., the lender) were paid from the loan proceeds. The Court of Appeal rejected this proposition, finding that there was no qualification in the Irrevocable Direction stating that there must be sufficient money available from the loan proceeds before the consultant could get paid. In fact, the factual context was such that the consultant, knowing the borrower's difficult financial circumstances, specifically sought assurance that he would be one of the first to be paid.
  3. Finally, the lender argued that even if it were bound by the Irrevocable Direction to pay the consultant's fee, the consultant's subsequent conduct estopped him from receiving his fee. The lender based this argument on statements purportedly made during subsequent negotiations that arose between the parties following the signing of the Irrevocable Direction. Specifically, the lender alleged that during the negotiations, the consultant had agreed that the Irrevocable Direction was of no force and effect during negotiations that occurred over several days in June 2014. In rejecting this argument, the Court of Appeal noted the record did not appear to support the lender's position that the consultant had agreed the Irrevocable Direction was of no force and effect, but in any event, noted the negotiations had been triggered by the lender taking the position that payment of the consultant's fees out of the first advance presented a threat to the closing of the loan agreement itself. In the course of the negotiations that followed, the consultant had offered to reduce his fee to US$400,000 if the fees were paid in full as part of the closing disbursement of the loan funds, but stated that a failure to pay the reduced fee on closing would result in the Irrevocable Direction remaining in full force and effect. The loan agreement ultimately closed, the first advance was made and no reduced fee was paid. The Court of Appeal rejected the appellant's argument that the trial judge had erred by enforcing the terms of the Irrevocable Direction to require the payment of the consultant's full fee.

Takeaways for Lenders and Borrowers:

The decision in Kemeny contains important lessons for borrowers and lenders negotiating payments by way of direction under flows of funds at closing:

  1. For lenders: The decision demonstrates clearly the risk that a lender assumes in not abiding by the terms of payment directions. In this case the lender was found liable for the payment of the consultant's fees from its own funds, even after all loan funds had been disbursed. A prudent lender should carefully review payment directions prior to closing in order to ensure the direction accurately reflects the payments it intends to make.
  2. For borrowers: Although the Court of Appeal upheld the enforceability of the Irrevocable Direction against the lender, one of the Court's reasons for doing so was that the Irrevocable Direction had been acknowledged and counter-signed by the lender, which is somewhat unusual. Prudent borrowers (and third parties receiving payment) may therefore seek to have payment directions counter-signed by the lender, particularly where there is a risk of insolvency.

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.