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Guarantees - Contribution Between Co-Guarantors

Can-Win Leasing (Toronto) Limited v. Moncayo (Ont CA, 2014)

In this case the Court of Appeal considered the contribution rights of one (paying) co-guarantor against others, where there was an issue as to whether the duty to honour the guarantee had yet to arise:
[31] A demand by the creditor is not a prerequisite to the surety’s right to pay the creditor and to seek contribution from its co-surety. The issue is in what circumstances a surety is entitled to do so in the absence of default by the principal debtor, and whether those circumstances existed here.


The Applicable Principles

[32] The trial judge analyzed the issues in terms of the voluntary payment by one party of another party’s debts. He referred to Re Korex Don Valley ULC, above, and Owen v. Tate, reflex, [1975] 2 All E.R. 129 (C.A.). While the principles are similar, in my view the appeal should be addressed on the basis of rights between co-sureties.[1]

[33] Having paid more than its rateable share of Can-Win Truck’s debt, Can-Win Leasing had an equitable right, independent of contract, to recover contribution from its co-sureties. However, “[t]o give rise to a right of contribution, payment must have been made by the surety in a situation where [the surety] was legally obliged to pay”: Kevin McGuinness, The Law of Guarantee, 3rd ed. (Markham: LexisNexis Canada, 2013), at p. 785. The surety is entitled to pay as soon as his or her liability arises under the terms of the guarantee: McGuinness, at p. 786. However, as McGuinness notes, doing so is “risky” because co-sureties may argue that the payment was imprudent or unnecessary.

[34] In such circumstances, McGuinness suggests at p. 786:
[A] surety will often wish to settle a potential claim against him[self], yet at the same time will be unwilling to prejudice any right which he may have to recover part of the payment which he is to make from his co-sureties. If a surety wishes to make a payment in settlement, he should give notice to his co-sureties of his intention to negotiate a settlement. Should the co-sureties then refuse to take part in the negotiation, a claim for contribution may then be made without fear that the co-sureties will successfully defend by challenging the propriety of the settlement.
See also: David Marks & Gabriel Moss, Rowlatt on Principal and Surety, 6th ed. (London: Sweet & Maxwell, 2011), at p. 180.

[35] This is because a guarantee is a secondary and contingent obligation. It is secondary to a primary obligation and it is contingent on the default of the obligor under the primary obligation: McGuinness, at p. 49. By stepping in and paying the obligation, the surety exposes the debtor, and any co-surety, to a liability they may have been able to avoid. In light of the trial judge’s conclusion that Can-Win Truck was salvageable, this is a crucial point.

[36] Stewart v. Braun, reflex, [1925] 2 D.L.R. 423 (Man. K.B.), is an example of a situation in which one group of co-sureties were held to have exercised appropriate consideration for another group of co-sureties. There, some sureties settled with the creditor and looked to the other sureties for indemnity for their proportionate shares. The court found, at p. 431, they had acted reasonably:
I cannot accede to defendants’ contention that the plaintiffs cannot enforce contribution on the basis of any amount unless that amount is agreed to by all the guarantors or fixed by a judgment. The plaintiffs had a right to protect their credit by preventing action; they had a right to call upon their co-guarantors—the defendants—to come forward and assist in arranging some settlement. The defendants had no right to sit back under the supposed cover of their financial insignificance, or safety, and say to their co-sureties, if you do anything with this account before judgment is obtained against you, you do so at your peril. I do not think they should be heard to state that. I hold that they have by their silence estopped themselves from disputing the amount at which the plaintiffs settled this claim: See Marshall v. Houghton (1923), 33 Man. L.R. 166, at p. 177.
[37] In that case, however, the bank had called on the sureties to make payment and the defendants, although invited by the plaintiff co-sureties to discuss the issue, refused to co-operate and did nothing.

[38] The purpose of the demand is to inform the surety that there has been default by the principal debtor. In the case of a guarantee payable on demand, a demand is a condition-precedent to the obligation: see Bank of Nova Scotia v. Williamson, 2009 ONCA 754 (CanLII), 97 O.R. (3d) 561, at para. 13. In Stewart v. Braun, it was significant that the bank had made a demand on the sureties.

[39] In the case before us, the guarantees were payable on demand, but the bank had made no demand. However, that does not end the analysis. The question is whether this is one of those cases in which the primary obligor’s default is so imminent that the surety is entitled to take unilateral action.

[40] Stimpson v. Smith, [1999] 2 All E.R. 833 (C.A.) is a good example of such a case. There, although the bank had not made a written demand, it made an oral demand on one of the sureties, who proceeded to negotiate and pay a settlement to the bank. The circumstances were not entirely dissimilar to this case, but one significant difference is that the bank was requiring a substantial reduction in the overdraft and was threatening to appoint a receiver. Lord Justice Gibson said, at p. 839, that the right to contribution arose, notwithstanding the absence of a written demand, given the “reality of the commercial position” facing the primary debtor. Lord Justice Judge concluded, at p. 842, that where there is “imminent” threat of loss, or where the surety is in immediate “jeopardy” and a demand can “realistically be anticipated” in the absence of a settlement, “the surety who reaches an arrangement with the creditor which is not disadvantageous to the co-surety is not thereafter deprived of his entitlement to contribution” (emphasis added).

[41] Generally, however, the absence of a demand on the surety is evidence that the primary debtor is not in default. The voluntary payment of the obligation by the surety may put the onus on the surety to show that he or she was not acting officiously.

[42] Can-Win Leasing relies upon Manu v. Shasha (1983), 1983 CanLII 1733 (ON CA), 41 O.R. (2d) 685, [1983] O.J. No. 3027 (C.A.). That case is distinguishable. There, the trial judge had dismissed the co-surety’s claim for contribution on the ground of his “unclean hands” in deliberately and recklessly precipitating the demise of the business. This resulted in the bank calling its loan and realizing on the security provided by the appellant, who then sought contribution from the respondent, his business partner and co-surety.

[43] This court, at pp. 687-88, described the appellant’s claim as:
[F]ounded on the long established proposition that where a co-surety has paid the debt of a principal debtor, or more than his proportionate share, and is unable to recover against the principal debtor, the co-surety is entitled to contribution from his fellow co-sureties to equalize the burden. Contribution does not depend upon agreement, but upon an equity arising from the fact of the existence of co-sureties for the same debt owed to the same creditor. The underlying principle of equity is that the creditor’s remedies against the co-sureties should be applied so as to apportion the burden rateably, and if the remedies have been applied otherwise the court will correct the inequity between the co-sureties…. [Citations omitted.]
[44] In reversing the trial decision, this court rejected the “clean hands” argument, holding, at p. 688 that:
[T]he mutual rights of the sureties in this case are not to be determined simply by resort to the maxim that a plaintiff in equity must approach the court with clean hands. In our opinion, the surety here who was compelled to pay more than his proportionate share of a common liability is not to be debarred on that ground alone from obtaining contribution from his co-surety. [Emphasis added.]
[45] Manu v. Shasha was not a case of a co-surety voluntarily discharging the principal obligation without any antecedent demand by the creditor and, in my view, it has no application to this case.

[46] In light of these authorities, the question is whether this is one of those cases in which a surety, Can-Win Leasing, was justified in making a payment absent a demand by the creditor because default was imminent. If so, the payment did not prejudice its co-surety, Mr. Moncayo. If not, the payment was voluntary and discharged the co-sureties’ obligations.
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