Monday, January 18, 2016

Breach of Guarantee Does NOT Lead to Voiding Thereof

Bank of Montreal v. Javed, 2016 ONCA 49:

[19]       What is the effect of the Bank’s breach of its contractual disclosure obligation? Mr. Shah argues that the guarantee must be discharged. I disagree.

[20]       A guarantee is a contract, and the ordinary principles of contract law apply to a creditor’s breach. Consequently, only the most serious misconduct on the part of the creditor will discharge a guarantee. Some examples from the cases  include: a creditor acting in bad faith toward the surety; the creditor concealing material information at the inception of the guarantee; where the creditor causes or connives the default of the principal debtor; or where there is a variation in the terms of the contract between the creditor and the principal debtor of a type that would prejudice the interests of the surety: Bank of India v. Trans Continental Commodity Merchants Ltd. & Patel, [1982] 1 Lloyd's Rep. 506 (Q.B. Com. Ct.), at p. 515, aff'd [1983] 2 Lloyd's Rep. 298 (C.A.) at p. 302; Bank of Montreal v. Wilder, [1986] 2 S.C.R. 551; Pax Management Ltd. v. Canadian Imperial Bank of Commerce, [1992] 2 S.C.R. 998; Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415.

[21]       In Pax Management, Iacobucci J. held, at para. 42, p. 1021:

A guarantor should not be discharged from the obligation which he or she has undertaken except by acts which have some impact on the magnitude or likelihood of the materialization of that risk. Other objectionable or wrongful conduct by the creditor towards the guarantor should be dealt with by causes of action that are otherwise appropriate such as the tort of deceit or breach of fiduciary duty.

[22]       Kevin McGuiness notes in The Law of Guarantee, 3d ed. (Markham, Ont.: LexisNexis Canada Inc., 2013) at s. 12.2 (p. 1001):

Usually, the measure of a surety’s damage where the creditor breaches the terms of the principal contract can be equated with a degree of prejudice suffered as a result of the breach in much of the same way as the prejudice suffered by the principal can be so quantified.  Where such quantification is practical, then in order to compensate the surety adequately for the breach – and also to deter creditors from committing such breaches – the surety should obtain a partial release from liability under the guarantee to the extent of the amounts so quantified.

[23]       In this case, as in Pax Management, the breach by the Bank of its contractual disclosure obligation to Mr. Shah was not sufficiently serious to give rise to a right of rescission in his favour. The breach then comes down to a question of damages based on proven prejudice to the guarantor.

[24]       The reasonableness of this approach is reinforced by the law’s expectation, in general terms, that the guarantor, not the creditor, is responsible for monitoring the debtor’s behaviour.  As McGuiness observes, at p. 948: “there is no general duty of active diligence imposed by law upon the creditor; as a person who has given the guarantee, it is the surety’s business, rather than the creditor’s to see that the principal performs the guaranteed obligation.” Further, at p. 363, he states: “[t]he assumption that has guided the courts is that in most cases, sureties have a superior ability to that of the creditor to monitor the performance of the principal.”

[25]       There is no evidence that Mr. Shah sought any information from the Company regarding the state of its indebtedness to the Bank and was refused. In his affidavit on the motion, Mr. Shah claims only that if he had been aware of the amount of the loan, he could have somehow saved the business or convinced his business partner to sell assets in order to repay the loan. These claims were entirely abstract and speculative. Mr. Shah adduced no evidence to substantiate them.

[26]       The appellants, therefore, did not discharge their positive obligation to prove damages for the Bank’s breach, and consequently are not entitled to any set-off against or reduction in the amount owed on the guarantee.

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