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Contracts - Guarantees (2)

. Hazout v. The Attorney General of Ontario

In Hazout v. The Attorney General of Ontario (Div Court, 2023) the Divisional Court considers whether Ontario, which is not normally subject to a limitation period [under s.16(1)(j) and s.16(2) Limitations Act] nonetheless is subject to the standard s.4 two-year limitation where it takes assignment or has direct standing as a guarantor (which was also found) of a debt:
[4] Mr. Hazout submits that Ontario was not a party to the loan agreement and only gained its standing to bring the action as an assignee. He emphasizes that an assignee to an agreement stands in the shoes of an assignor and is subject to the benefits and burdens of the underlying agreement. In his submission, this means that, on assigning the loan, Ontario remained subject to the burden of the two-year limitation period that would have applied to the bank.

[5] I do not accept these submissions. At the outset, I have some concern about addressing these arguments on appeal. They were not directly raised before the Deputy Judge. The Deputy Judge found that Ontario was exempt from a statutory limitation period, but Mr. Hazout did not specifically argue that Ontario was bringing the action as an assignee. Therefore, the Deputy Judge did not have an opportunity to rule on the nature of Ontario’s standing to bring the action.

[6] If it is appropriate to reach a determination on this point by review of the documents, I would dismiss Mr. Hazout’s arguments. By way of background, Ontario is not subject to the general two-year limitation period set out in s.4 of the Limitations Act, 2002, S.O. 2002, c. 24, Schedule B (the “Act”). Paragraph 16(1)(j) of the Act, read together with s. 16(2), provide that “[t]here is no limitation period in respect of” a proceeding brought by the Crown in respect of claims relating to “the administration of social, health or economic programs.” There is no dispute that the New Ventures Program constitutes such a program.

[7] Contrary to Mr. Hazout’s submission, Ontario was not limited to starting the action as an assignee of the loan agreement. Instead, Ontario was also a guarantor of the loan. Section 4 of the loan agreement, signed by Mr. Hazout, provides that the loan is guaranteed by the Province of Ontario. In consideration of that guarantee, Mr. Hazout agreed “to indemnify the Province of Ontario upon demand for all payments made by the Province of Ontario pursuant to the Guarantee.”

[8] As a guarantor, Ontario had an independent right to be indemnified for the loan. As Hunt J.A. explained (in concurring reasons) in Canada (A.G.) v. Becker, 1998 ABCA 283, 223 AR 59, at paras. 32-39, the right to indemnity is different from a subrogated in that it permits the guarantor to sue in its own name. See also Ormston v. Manchester, 2019 ONSC 6529, at para. 14.
. Kemeny v. Callidus Capital Corporation

In Kemeny v. Callidus Capital Corporation (Ont CA, 2023) the Court of Appeal considered the difference between a contractual 'irrevocable direction' and a guarantee:
[18] These arguments raise issues of the interpretation of the Irrevocable Direction. To succeed, the appellant must establish either a palpable and overriding error of fact or an extricable error of law: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50-55.

[19] I do not agree that the trial judge treated the Irrevocable Direction as a guarantee by the appellant that it would pay the respondent’s fee. The trial judge interpreted the Irrevocable Direction, and found that it placed a contractual obligation on the appellant to pay the respondent’s fee out of the first advance of loan funds to Esco. She did not find it to be a guarantee by the appellant of the respondent’s fee.

[20] The appellant relies on the decision of Bridgepoint Financial Services Limited Partnership I v. Galamini, 2021 ONSC 6979, in support of its argument that the trial judge treated the Irrevocable Direction as a guarantee by the appellant of the respondent’s fee. Bridgepoint involved a covenant by a lawyer to abide by an irrevocable direction to pay proceeds of any settlement received by the lawyer on behalf of a particular client to the plaintiff in order to repay a loan by the plaintiff to the lawyer’s client.

[21] The appellant relies on paragraph 15 of Bridgepoint, which draws a distinction between a direction and a guarantee:
It is true that there are circumstances in which Mr. Grillone might have been unable to comply with the direction. He might, for example, have seen his retainer terminated. The direction did not bind Mr. Grillone to pay the claimed sum from his own pocket. It was no guarantee. It merely obliged him to cause the settlement funds to be so directed. If he ceased to represent the Borrower, then the direction would have no further object. That prospect does not make the direction given void or unenforceable – it merely recognizes the potential for future events to occur which might, were they to occur, have rendered it without object. As a matter of fact, the Plaintiff Loan Agreement specifically provided for the sequence of events that would unfold in the event of an abandonment of the claim or a change of counsel.
[22] This paragraph of Bridgepoint is simply an acknowledgment that, in some cases, the event which would trigger a party’s obligation under an irrevocable direction may not come to pass. In Bridgepoint, the lawyer’s obligation was to direct any settlement funds received by him to the plaintiff. If the lawyer were discharged before receiving any settlement funds, the obligation would not be triggered because the lawyer would not receive settlement funds.

[23] However, the appellant’s reliance on Bridgepoint founders on the very next paragraph of the decision, where the motion judge held that the lawyer was bound to follow the direction he had accepted, and liable for not directing settlement funds he received as he had agreed:
There can be no question that Mr. Grillone was bound by the covenant he gave to honour the irrevocable direction of his client. There can be no question that he received the referenced Settlement Funds on November 13, 2012 and failed to honour that covenant in fact. That such failure was the result of oversight or carelessness on his part is of no moment. Mr. Grillone is liable to the plaintiff for breach of his covenant.
[24] Similarly, in this case, the appellant agreed in the Irrevocable Direction to follow the direction from Esco and pay the amount of the respondent’s fee to him from the first advance of its loan to Esco. The trial judge found that the Irrevocable Direction was an agreement that the appellant would pay the respondent’s fee to him from the first advance of loan funds to Esco. As the trial judge found, the appellant’s obligation under the Irrevocable Direction was that if loan proceeds were advanced, it was obliged to pay the respondent’s fee directly to him out of the first advance of funds. The Irrevocable Direction was not a guarantee by the appellant of the respondent’s fee. The appellant was not required to pay the respondent’s fee out of its own pocket. The funds were part of the loan to Esco. Had loan funds not been advanced, the appellant would not have had any obligation. But as loan funds were advanced, the appellant was obliged to comply with its agreement in the Irrevocable Direction to pay the respondent his fee directly from the first advance of the loan funds.

[25] Nor am I persuaded that the trial judge failed to consider the factual matrix surrounding the Irrevocable Direction. At the outset of her analysis, the trial judge correctly instructed herself that in addition to considering the text, a contract should be interpreted in accordance with sound commercial principles and in the context of the factual matrix at the time the contract is executed.

[26] Further, the trial judge’s reasons show that she considered the factual matrix in interpreting the Irrevocable Direction, including the loan agreement between Esco and the appellant. Her reasons consider in some detail the negotiations leading up to the signing of the Irrevocable Direction, as well as subsequent negotiations in relation to the respondent offering to accept a reduced fee (the latter issue is discussed further in relation to the appellant’s ground of appeal based on the respondent being estopped from enforcing the Irrevocable Direction).

[27] The appellant argues that the trial judge did not consider the terms of the later-finalized loan agreement between itself and Esco in interpreting the Irrevocable Direction. But the trial judge’s reasons show that the appellant is incorrect in this assertion. The trial judge considered the appellant’s argument that the full amount of the loan funds advanced had been designated to pay off all of Esco’s secured creditors in order to place the appellant in sole first-priority secured position. However, she rejected the appellant’s argument that the subsequently negotiated terms of the loan agreement between Esco and the appellant relieved the appellant of its obligation to direct the payment of the respondent’s fee to him out of the first loan funds advanced to Esco. I am not persuaded by the appellant’s argument that the trial judge failed to consider the factual matrix in her interpretation of the Irrevocable Direction.

[28] The substance of the appellant’s argument is that the loan agreement between Esco and itself, executed after the Irrevocable Direction and to which the respondent was not a party, effectively altered the agreement contained in the Irrevocable Direction. The trial judge rejected that proposition. I see no error in that conclusion.
. Toronto-Dominion Bank v. Overland R.N.C. Inc.

In Toronto-Dominion Bank v. Overland R.N.C. Inc. (Ont CA, 2022) the Court of Appeal considered a situation of release from a guarantee:
[12] We agree with the appellants that they provided the respondent with clear and unequivocal notice that they no longer wished to be liable under the Guarantee. A plain reading of the November 30, 2018 email supports the appellants’ contention. Brian Sack wrote in his email that he wanted to “confirm that Myself, Dan, and Sax Construction have no obligation for Overland RNC? Please confirm.” In other words, Brian Sack sought confirmation that he and his brother were not liable under the Guarantee. The motion judge erred in holding that Brian Sack was merely inquiring about the extent of his obligation.

[13] We would distinguish the current case from Dickson v. Royal Bank of Canada, 1975 CanLII 148 (SCC), [1976] 2 S.C.R. 834, upon which the motion judge relied to find that the November 30, 2018 email did not constitute clear and unequivocal written notice. The central concern for the court in Dickson was that the bank should not be left with any doubt as to whether the guarantor was terminating his liability under the Guarantee. In the current case, however, the respondent bank had no doubt that the appellants no longer wished to be held liable under the Guarantee. Moreover, in Dickson, the bank continued to advance funds to the debtor after the letter in question. In contrast, the respondent in the current case did not take any action that the appellants might have understood to indicate a continuing relationship.
. Intercap Equity Inc. v. Bellman

In Intercap Equity Inc. v. Bellman (Ont CA, 2021) the Court of Appeal considered hallmarks of guarantee law:
[38] The appellants claim the motion judge failed to consider that continuing guarantees have the following hallmarks:
a. Future advances are covered by continuing guarantees even after existing obligations have been satisfied and the consent of guarantors to enable a lender to provide future advances is not generally required: Kevin McGuinness, The Law of Guarantee, 3rd ed. (Markham, Ontario: LexisNexis Canada Inc., 2013), at para. 15.44; see also Royal Bank of Canada v. Samson Management & Solutions Ltd., 2013 ONCA 313, 115 O.R. (3d) 380, at paras. 24-32, leave to appeal refused, [2013] S.C.C.A. No. 301; Royal Bank v. Poisson (1977), 1977 CanLII 1129 (ON SC), 26 O.R. (2d) 717 (H.C.), at pp. 718-719; and Granata Family Trust (Trustee of) v. Royal Bank, [2000] O.J. No. 4239 (Ont. S.C.), at paras. 12-16;

b. The time for a continuing guarantee is usually indefinite, in which case the guarantor has a right to provide notice of cancellation for future liability which freezes the liability at the amount outstanding at the end of the notice period: McGuinness, at paras. 15.57, 15.62; and

c. Continuing guarantees do not contain a reference to a specific loan agreement and cover future debts without qualification: see Samson, at para. 24; Poisson, at pp. 718-719; Granata, at paras. 12-16.

[41] There are no hard and fast rules to determine whether a guarantee is a continuing guarantee: McGuinness, at para. 15.55.

[42] Moreover, to support their submission that a hallmark of a continuing guarantee is that it does not reference a specific loan agreement, the appellants rely on authorities that feature “continuing all accounts” guarantees. An “all accounts” guarantee extends to all debts owing or that may become owing to the creditor, whereas a continuing guarantee covers a series of transactions: McGuinness, at paras. 7.5, 15.43-15.44. While most continuing guarantees are also all accounts guarantees, this is not necessarily always the case: McGuinness, at para. 15.40.


[44] In any event, while hallmarks may be of some assistance, what is most important is to look at the language of the agreements, giving the words their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of contract formation: Sattva, at para. 47.
. 7636156 Canada Inc. (Re)

In 7636156 Canada Inc. (Re) (Ont CA, 2020) the Court of Appeal explains the role of a letter of credit (LOC) as guarantee, here to satisfy a tenant's obligations under a commercial lease:
[36] The LOC is a standby letter of credit, which consists of an undertaking by the issuing bank, BNS, to honour drafts or other demands for payment by the beneficiary Landlord upon compliance with the conditions specified in the credit: Kevin McGuinness, The Law of Guarantee, 3rd ed. (Toronto: LexisNexis, 2013), at §16.4.

[37] By its terms, the LOC was subject to the version of the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits (“UCP”) in effect on the date it was issued by BNS, which was the 2007 Revision, ICC Publication no. 600 (“UCP 600”). Under article 1 of UCP 600, the rules for documentary credits apply to any standby letter of credit.

[38] The formation of a standby letter of credit involves three parties: the account customer of the issuing bank who applies for the credit, in this case the Tenant; the issuing bank, BNS; and the beneficiary of the credit, the Landlord. A standby letter of credit is a performance-securing mechanism in that it constitutes an obligation of the issuer to the beneficiary to make payment on account of any default by the applicant customer in the performance of an obligation upon certification by the beneficiary that the applicant has failed to fulfil its obligations to the beneficiary: McGuinness, at §16.45. As such, the starting point in any standby letter of credit transaction is the formation of an underlying contract between the applicant customer of the issuing bank and the beneficiary of the credit.

[39] Nevertheless, a fundamental characteristic of standby letters of credit is their autonomy from the underlying transaction between the applicant and the beneficiary. This critical characteristic was explained by the Supreme Court of Canada in Bank of Nova Scotia v. Angelica‑Whitewear Ltd., 1987 CanLII 78 (SCC), [1987] 1 S.C.R. 59, at pp. 70 and 103:
The fundamental principle governing documentary letters of credit and the characteristic which gives them their international commercial utility and efficacy is that the obligation of the issuing bank to honour a draft on a credit when it is accompanied by documents which appear on their face to be in accordance with the terms and conditions of the credit is independent of the performance of the underlying contract for which the credit was issued. Disputes between the parties to the underlying contract concerning its performance cannot as a general rule justify a refusal by an issuing bank to honour a draft which is accompanied by apparently conforming documents. This principle is referred to as the autonomy of documentary credits.

[I]t is essential that [the issuing bank’s] obligation to pay should not be subject to determination after the event by what actually transpired in the performance of the underlying contract. That is the other side of the principle of autonomy. The obligation of the issuing bank to the beneficiary of a credit must at all times be independent of the actual performance of the underlying contract. [Emphasis added.]
[40] Article 4(a) of UCP 600 elaborates on the autonomy of the obligation arising between the issuing bank and the beneficiary:
A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such a contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary. [Emphasis added.]
Article 5 reinforces the autonomous character of a letter of credit by stating that “[b]anks deal with documents and not with goods, services or performance to which the documents may relate.”

[41] The autonomous nature of letters of credit is essential for their commercial risk-minimization function. As described by McGuinness, at §16.47:
The beneficiary of a letter of credit obtains a gold standard of payment assurance for the underlying commercial transaction. Stand-by letters of credit create a potential obligation for the issuer that is completely independent of the business arrangement for which it was an inducement.
[42] A standby letter of credit is drafted to define the scope and terms of the issuer’s undertaking so that the issuer need only examine the terms of the letter of credit and the documents presented by the beneficiary to determine whether there is a liability to pay: McGuinness, at §16.44. When the documents specified under a letter of credit are delivered, or “presented”, to an issuing bank, the bank must examine the presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a “complying presentation”: UCP 600, arts. 2 and 14(a). When an issuing bank determines that a presentation is complying, it must honour: UCP 600, arts. 7(a) and 15(a). When an issuing bank determines that a presentation does not comply, it may refuse to honour, in which case it must give a single notice to that effect to the presenter: UCP 600, arts. 16(a) and 16(c).

The fraud exception to the principle of autonomy of letters of credit

[43] An exception exists to the general rule that an issuing bank is obliged to honour a draft under a documentary credit when the tendered documents appear on their face to be regular and in conformity with the terms and conditions of the credit. The exception arises in the case of fraud by the beneficiary which has been (a) sufficiently brought to the knowledge of the bank before payment of the draft, or (b) demonstrated to a court called on by the customer of the bank to issue an interlocutory injunction to restrain the bank from honouring the draft: Angelica-Whitewear, at p. 71.

[44] In Angelica-Whitewear, the Supreme Court described the scope of the fraud exception at p. 83:
In my opinion the fraud exception to the autonomy of documentary letters of credit should not be confined to cases of fraud in the tendered documents but should include fraud in the underlying transaction of such a character as to make the demand for payment under the credit a fraudulent one … In my view the fraud exception to the autonomy of a documentary credit should extend to any act of the beneficiary of a credit the effect of which would be to permit the beneficiary to obtain the benefit of the credit as a result of fraud.
[45] The beneficiary under a letter of credit is not entitled to make a demand for payment under a letter of credit where there is no right to make such demand as between the beneficiary and the applicant under the terms of the underlying contract: McGuinness, at §17.338. However, given the principle of the autonomy of letters of credit, the fraud exception is carefully constrained to protect the commercial utility of the letter of credit: 430872 B.C. Ltd. v. KPMG Inc., 2004 BCCA 186, 26 B.C.L.R. (4th) 203, at paras. 30-31. The fraud exception does not encompass a demand for payment made in the face of a legitimate contractual dispute but requires some impropriety, dishonesty, or deceit, which would include instances where the demand can be said to be clearly untrue or false, utterly without justification, or made where it is apparent that there is no right of payment: Royal Bank v. Gentra Canada Investments Inc. (2001), 2001 CanLII 6996 (ON CA), 147 O.A.C. 96 (C.A.), at para. 8; Cineplex Odeon Corp. v. 100 Bloor West General Partner Inc., [1993] O.J. No. 112 (Gen. Div.), at paras. 31-32; McGuinness, at §17.343.

[46] In a case where no application is made for an injunction to restrain payment under a letter of credit and the issuing bank has to exercise its own judgment about whether to honour a draft, establishing the fraud exception requires showing that the “fraud was so established to the knowledge of the issuing bank before payment of the draft as to make the fraud clear or obvious to the bank”: Angelica-Whitewear, at p. 84. As Blair J. (as he then was) put the matter in Cineplex Odeon, “the exception is ‘fraud’, not something less than fraud”: at para. 29.

[47] When presented with documents that appear on their face to be regular, an issuing bank has no duty to satisfy itself by independent inquiry that the beneficiary has not engaged in fraud. It is only when the fraud appears on the face of the documents or when fraud has been brought to its attention by its customer or some other interested party that the bank must decide whether fraud has been established requiring it to refuse payment: Angelica-Whitewear, at p. 88.
The case continues to consider several LOC cases on the issue of a bankruptcy trustee's disclaimer of a commercial lease [para 60-108].

. Moodie v. Canada

In Moodie v. Canada (Fed CA, 2021) the Federal Court of Appeal identifies when limitations start to run when there has been a payment by a guararantor, thus invoking their subrogation rights:
[10] There are several reasons why the appellants’ interpretation of subsection 23(4) must be rejected. Firstly, it is contrary to the plain and ordinary meaning of the statute. The concept of subrogation is not contentious and the date upon which it occurs is generally accepted to be the date upon which the guarantor or surety pays the debt to the creditor, and in so doing acquires the creditor’s rights in respect of the debt. Black’s Law Dictionary defines subrogation as "“[t]he substitution of one party for another whose debt the party pays, entitling the paying party to rights, remedies, or securities that would otherwise belong to the debtor”": Bryan A. Garner, ed., Black’s Law Dictionary, 11th ed. (Thomson Reuters, 2019) [emphasis added]. The subrogated party must actually pay the debt to obtain the creditor’s rights through subrogation.
. Madison Joe Holdings Inc. v. Mill Street & Co. Inc.

In Madison Joe Holdings Inc. v. Mill Street & Co. Inc. (Ont CA, 2021) the Court of Appeal cites the 'Fair Protection Rule' of the law of guarantee:
[32] I agree with this clear and careful analysis and conclusion. Importantly, and at a minimum, the motion judge’s analysis and conclusion are far removed from being a palpable and overriding error. Indeed, the motion judge’s interpretation is the only interpretation consistent with what the leading scholar on guarantees describes as the Fair Protection Rule:
As a general principle, the courts always interpret a guarantee so that the protection or security which it affords to a creditor is rendered real rather than illusory. Alternatively stated, guarantees are read so as to give effect to the apparent intent of the parties, so as to afford fair protection to creditor in accordance with that apparent intent. This rule should be stated as the most basic principle of guarantee interpretation because it is clearly necessary to give a guarantee instrument an interpretation which is fully consistent with its apparent purpose.
See Kevin McGuinness, The Law of Guarantee, 3rd ed. (Toronto: Lexis Nexis Canada, 2013), at pp. 281-82.


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Last modified: 03-10-23
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