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Guarantees - Material Alteration of Underlying Contract

Posocco v. Battista (Ont CA, 2016)

In this case the Court of Appeal set out principles applicable to the determination of when a guarantee is still binding, in the face of subsequent changes to the underlying contract which is being guaranteed:
[24] In his reasons, the application judge correctly identified the basic principles concerning how a material alteration of the terms of the underlying contract of debt affects a guarantor’s continuing liability under a guarantee: (i) at common law and equity, a guarantor will be released from liability on a guarantee in circumstances where the creditor and the principal debtor agree to a material alteration of the terms of the contract of debt without the consent of the guarantor; however, (ii) it is open to the parties to make their own arrangements, so a guarantor can contract out of the protection afforded by the common law or equity: Manulife Bank of Canada v. Conlin, 1996 CanLII 182 (SCC), [1996] 3 S.C.R. 415, at paras. 2 and 4.

[25] The application judge also correctly recognized that determining the continuing liability of a guarantor requires determining the intention of the parties as demonstrated by the words of the guarantee, as well as the events and circumstances surrounding the transaction as a whole: Conlin, at para. 6.

[26] The Conlin decision summarizes several additional principles of interpretation applicable to guarantees:
(i) any contracting out of a guarantor’s protection against a material alteration of the terms of the contract of debt without his consent must be clear;

(ii) whether the guarantor contracted out of those protections must be determined by an interpretation of the clauses of the agreement, through a consideration of the transaction as a whole, and the application of the appropriate rules of construction;

(iii) any ambiguity in the terms used in the guarantee should be construed against the party which drew it by applying the contra proferentem rule;

(iv) if there is a doubt or ambiguity as to the construction or meaning of the clauses binding the guarantor, they must be strictly interpreted and resolved in favour of the guarantor; and

(v) the clauses binding guarantors must be strictly construed: Conlin, at paras. 4, 8, 15 and 22.

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