Release of guarantor by material alteration of underlying loan

Turfpro Investments Inc. v. Heinrichs, 2014 ONCA 502:

[13]       A guarantor will be released from liability where the creditor and the principal debtor agree to a material alteration of the loan agreement without the consent of the guarantor: Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415, at para. 2.  In that decision, Cory J. adopted the oft-quoted description of the rule by Cotton L.J. from Holme v. Brunskill (1878), 3 Q.B.D. 495 (C.A.), at pp. 505-6:

   The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court… will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.

[14]       This court recently addressed the material alteration test in GMAC Leaseco Corporation v. Jaroszynski, 2013 ONCA 765, 118 O.R. (3d) 264, at paras. 76 - 77:

In Manulife at para. 10, Cory J. approves of Lord Westbury's formulation inBlest v. Brown (1862), 4 De G.F. & J. 367, at p. 376: apart from any express stipulation to the contrary, a surety will be discharged where the contract has been changed, without his or her consent, unless the change is in respect of a matter that cannot "plainly be seen without inquiry to be unsubstantial or necessarily beneficial to the surety".

Or, as this court put it in Royal Bank of Canada v. Bruce Industrial Sales Limited (1998), 40 O.R. (3d) 307, at p. 320, relying on Manulife, "alterations to the principal contract will be held to be material unless they are plainly unsubstantial or necessarily beneficial to the guarantor."

[15]       The basis for the rule relating to material alterations arises from the guarantor's agreement to guarantee the risk arising from the contract between the creditor and the principal debtor.  Fairness dictates that this risk not be altered unilaterally by the parties to that contract. Accordingly, a guarantor will be relieved from liability unless an exception applies.

[16]       Applicable jurisprudence appears to recognize four exceptions to the rule. First, relief will be denied if the alteration is plainly unsubstantial.  Secondly, relief will also be denied if the alteration is necessarily beneficial to the guarantor; that is, it cannot be prejudicial to the guarantor or otherwise than beneficial to the guarantor. 

[17]       An example of a material alteration that may discharge a guarantor from liability is described by Kevin P. McGuinness in The Law of Guarantee, 3d ed. (Markham, Ont.: LexisNexis, 2013) at para. 11.265:

A binding agreement made by a creditor with the principal debtor to allow the principal further time in which to pay or perform the guaranteed debt or obligation will discharge the surety from liability, where the length of time so granted is not trivial.  This principle of law is of great antiquity.  Two justifications may be advanced for the rule.  The first is that any binding agreement to extend time is prejudicial to the surety, since the effect of such an agreement is to prevent the surety from claiming against the principal, in the event that the creditor calls upon the surety to pay or perform at the time originally contemplated.  If the surety were able to so claim, then the practical effect would be to nullify the agreement between the principal and creditor as to the extension of time.  If on the other hand the surety were precluded from claiming against the principal by virtue of the extension of time, then the principal would be in a better position than the debtor (which would be inconsistent with the secondary nature of the surety's liability).  [Citations omitted.]

[18]       Thirdly, as noted by Cory J. in Manulife, at para. 4, a guarantor may contract out of protections provided by the common law or equity. For instance, typically, an institutional lender's standard form guarantee will contain provisions allowing for time extensions for repayment, renewal, and forbearance.

[19]       Lastly, alteration of the risk assumed by the guarantor may be addressed by obtaining a guarantor's consent to the proposed or actual alteration.