Equity remains an important tool in a litigator's arsenal. While it is often a submission of last resort, its value should not be overlooked as that is ultimately its purpose.
Equity operates to provide relief when there is a recognizable right, but no remedy exists under the common law or statute. Tracing its roots to the English Court of Chancery, equity has developed doctrines and maxims which provide flexible guidelines to assist courts in the exercise of their discretion to grant equitable relief. Ultimately, equity operates with the overriding objective of ensuring justice is met.
Equitable Exoneration
The doctrine of equitable exoneration holds that a person who has charged property jointly with another to secure the other's debt, stands in the position of a surety and is entitled to be indemnified, or "exonerated", by the principal debtor. By operation of the doctrine, the burden of the security is "shifted" to the principal debtor. Re Bankruptcy of Davies Wong, 2005 BCCA 574.
The doctrine:
- has archaic origins but continues to apply in Ontario, British Columbia and other Commonwealth jurisdictions such as Australia;
- began under matrimonial law but is not restricted to matrimonial cases;
- provides that the express intention of the parties is of some significance, but can be inferred in certain circumstances;
- is tied to the principles of marshalling and contribution in order to prevent unjust enrichment; and
- may not apply where a co-mortgagor and notional surety benefitted from the mortgage at issue.
Recent application of the doctrine of Equitable Exoneration
In Royal Bank of Canada v. Liu, 2025 BCSC 89 the Supreme Court of British Columbia confirmed that the doctrine of "equitable exoneration" remains alive and well.
Facts
The proceedings initially began as run-of-the-mill residential foreclosure proceedings initiated by the RBC. RBC's entitlement to payment of its mortgage from the sale proceeds following a court approved sale was not challenged. However, competing claims arose in respect to the sale proceeds (after payment to the RBC) between:
- the registered owner of the property;
- an individual who asserted that she had purchased an unregistered 50% beneficial interest in the property from the registered owner; and
- creditors of the registered owner, including the CRA, who had registered judgments against title to the property and wished to recover from the sale proceeds.
Although the registered owner denied it, the court found (following cross-examination) that a 50% beneficial interest in the property had been transferred and that the registered owner had received the exclusive benefit of the RBC loan.
The issue
The legal question ultimately engaged was whether the RBC loan should be exclusively "paid" from the registered owner's 50% beneficial interest or whether the division of the sale proceeds (on a 50-50 basis between the two beneficial owners) should occur after payment of the secured debt. In the event the latter occurred, the beneficial owner would have effectively been responsible for paying half of the RBC loan and the registered owner's share of the net sale proceeds (available for his creditors) would be significantly larger.
As a result, ultimately the dispute was between the creditors of the registered owner (represented by the CRA) and the beneficial owner. In finding in favour of the beneficial owner (that the RBC loan should be paid entirely from the registered owner's "share"), the court began by confirming a number of important principles including that the:
- judgments secured by the CRA and others (registered against title to the property) only charged the registered owner's beneficial interest in the property (see Court Order Enforcement Act, R.S.B.C. 1996, c. 78, s. 86 and Chichak v. Chichak, 2021 BCCA 286 at para. 24); and
- beneficial owner's unregistered interest in the property did not take priority over the RBC mortgage which charged the property as a whole. In the event that the registered owner's "share" was insufficient to pay out the RBC, it would have been entitled to recover from the beneficial owner's "share".
The court then considered and applied the doctrine of equitable exoneration in holding that the RBC loan should be paid (at least nominally) entirely from the registered owner's "share" of the sale proceeds. In doing so, the court found that where there is a charge on jointly owned property to secure a debt of only one of the joint owners, the other joint owner, being in the position of a surety, is entitled to have the secured indebtedness discharged, so far as possible, out of the interest of the other joint owner, provided that:
- it can be inferred, in all the circumstances, that was the intention of the joint owners; and
- the joint owner relying on the doctrine did not benefit from the granting of the charge.
The lesson
In closing submissions the beneficial owner initially relied on equity and fairness generally but the court was clearly troubled by the lack of a specifically identified principle or doctrine. As a result of further research (following closing submissions), leave was sought to file supplementary submissions to draw to the court's attention the doctrine of equitable exoneration. Ultimately the court found the doctrine to be a complete answer to the issue before it.
While equity can often be overlooked, where issues of fairness and justice arise, equity (and the principles and doctrines which arise) can provide a flexible tool to ensure that the interests of justice are met.
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.
