Archive for the ‘commercial litigation’ Category

In Life and Love, There Are No Guarantees; But In Law, Consent Is Required

January 6, 2014

There are no guarantees. From the viewpoint of fear, none are strong enough. From the viewpoint of love, none are necessary. ~Emmanuel Teney

Teney is mostly right, but when it comes to the law of guarantee, the key question is whether you are liable under the guarantee if the underlying contract is changed materially without your consent.

Recall the Supreme Court of Canada decision in Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415 ["Manulife"] where Cory J. held that:

“It has long been clear that a guarantor will be released from liability on the 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.  The principle was enunciated by Cotton L.J. in Holme v. Brunskill(1878), 3 Q.B.D. 495 (C.A.), at pp. 505-6, in this way:

                   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.

This rule has been adopted in a number of Canadian cases.  See for example Bank of Montreal v. Wilder, [1986] 2 S.C.R. 551, at p. 562. [and citing The Law of Guarantee (2nd ed. 1996) by Professor K. P. McGuinness  at pp. 534 and 541].

In a lucid and straightforward application of the Manulife decision, the Court of Appeal for Ontario in GMAC Leaseco Corporation v. Jaroszynski, 2013 ONCA 765, ["GMAC"] recently considered whether a guarantor is liable for the truck’s residual value  in lieu of the guarantor’s consent to an lease extension agreement between the principal debtor and creditor.

In GMAC,  Dr. Jaroszynski agreed to co-sign a lease for a truck for his then girlfriend’s father and brother (the “Micielis”). He never had possession or control of the truck; albeit he made all of the lease payments. The lease, assigned by the dealership to GMAC, stipulated that its terms could not be changed without the written consent of both the Micielis and the doctor, as co-lessee. When the lease term expired, the lessor entered into two lease extension agreements with the Micielis.  The truck was apparently stolen and never returned to GMAC.

Dr. Jaroszynski was neither aware nor consented to the extension agreements, and was equally unaware that the truck had not been returned at the end of the lease term.

The Court of Appeal asks: Is Dr. Jaroszynski liable for the truck’s residual value?

At first glance, the case militates towards a finding of liability based upon an entire agreement clause.  Gillese J.A. observes:

CLAUSE 21 OF THE LEASE

[28]       As will be seen, clause 21(b) of the Lease plays a significant role in this case.  Clause 21(b) is an “entire agreement” provision, which stipulates that any changes to the Lease terms must be in writing and signed by both lessee and co-lessee.  The relevant parts of the preamble to the Lease and clause 21 read as follows:

This is an agreement to lease the vehicle described above with any attachments or accessories (the “Vehicle”).  This is not a purchase agreement and You do not own the Vehicle and do not have title to it.  “You” and “Your” refer to Lessee and any Co-Lessee,  jointly and severally with the Lessee.   “We”, “Us and “Our”, refer to the Lessor named above, and after assignment, refer to GMAC Leaseco Corporation (GMAC) or any other assignee, which may include General Motors of Canada Limited (“GM”).  “Lease” refers to this Lease Agreement.

                                      …

21. GENERAL

You agree that (a) The Lease shall be governed by the laws of the province or territory in which it is signed by You.  (b) It is the entire agreement between You and Us relating to the lease of the Vehicle.  Any change to the terms of this Lease must be in writing and signed by You and any Assignee. …  [Emphasis added.]

In fact, the Court of Appeal agreed with the Divisional Court that Dr. Jaroszynski was a lessee and not a surety, as the trial judge had found, and further,

 I also agree with the Divisional Court’s reasons for arriving at that conclusion, which can be summarized as follows.  The Lease is a comprehensive document.  Under its terms, Dr. Jaroszynski is unambiguously defined as a co-lessee and given the same responsibilities as the lessee.  The trial judge erred in law by failing to properly apply basic principles of contractual interpretation, including a failure to consider the words of the Lease itself.  As the language of the Lease was unambiguous, it was an error to construe it based on the Appellant’s subjective intention and evidence extraneous to the Lease.

[39]       I further agree with the Divisional Court that Dr. Jaroszynski was not liable for Lease payments in the period covered by the extension agreements.  He did not sign the extensions agreements, thus, they were not binding on him.

[40]       However, in my view, the Divisional Court erred in finding that Dr. Jaroszynski remained liable for the truck’s return or its residual value after the extension agreements were entered into.  In my view, Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415 dictates that he be excused from that liability.

Following a thorough analysis of the majority and dissenting reasons in Manulife, Justice Gillese notes Cory J.’s conclusion that “a principal debtor clause converts a guarantor into a full-fledged principal debtor. The bank’s failure to notify Mr. Conlin, as a principal debtor, of the renewal agreements “must release him from his obligations since he is not a party to the renewal.” (GMAC, per Gillese J.A. at para. 52, citing Cory J. in Manulife at para. 19).

Justice Gillese concludes:

[78]       As we have seen, in Manulife, Cory J. extended to principal debtors the protection historically given to guarantors.  Therefore, in my view, the same test for what constitutes a material change applies to a principal debtor.

[79]       On this test, it is plain that the changes effected by the extension agreements were material.  The extension agreements increased Dr. Jaroszynski’s financial burden and the length of his contractual obligations to GMAC by four months.  This amounts to an increase of approximately 11% (the 4 month extension divided by the original 36 month term).  Extending a person’s financial exposure by an additional 11% is not plainly “unsubstantial” and clearly is not “necessarily beneficial” to him.  On the contrary, it was to Dr. Jaroszynski’s detriment.

[80]       Moreover and very importantly, the extension agreements had the effect of giving the lessee the right to possession of the truck for an additional four months, thus exposing Dr. Jaroszynski to an extra four months of risk that the truck might be damaged or stolen.  Dr. Jaroszynski agreed to assume that risk for thirty-six months – not forty months.  To paraphrase from para. 3 of Manulife, by varying the Lease without Dr. Jaroszynski’s consent, GMAC went off on a frolic of its own and when misfortune occurred, it was at GMAC’s sole risk.  As a result, Dr. Jaroszynski is relieved of liability under the Lease.  To again paraphrase, it is not so much a matter of saying that Dr. Jaroszynski is no longer liable on the Lease as, rather, that the Lease under which he assumed liability ceased to apply to him.

[81]       I would add this comment.  In Manulife, Cory J. observed that the requirement of the guarantor’s signature on the bank’s standard form renewal agreement led to the conclusion that without his consent he would not be bound.  So too in the present case.  GMAC’s standard form extension agreement had a place for the co-lessee’s signature, leading to the conclusion that the co-lessee would not be bound absent his or her consent.

[82]       In conclusion, Dr. Jaroszynski did not consent to the extension agreements, which changed in a material way his obligations under the Lease.  He did not waive the protection afforded a principal debtor.  Indeed, the Lease affirmed that any changes would be in writing and signed by him.  Manulife dictates that he be relieved of his obligations under the Lease.

A sensible result.

Privity of Contract: Not Yet Dead, But On Life Support

March 14, 2013

BellcoFormula

In Brown v. Belleville (City)2013 ONCA 148 (Ont. C.A.), the Court of Appeal for Ontario has signalled that the common law doctrine of privity of contract, while not yet pronounced dead, struggles on life support. (more…)

Court of Appeal for Ontario finds restrictive covenants a bit too tight

February 5, 2013

Today’s decision of the Court of Appeal in Ontario in Martin v. ConCreate USL Limited Partnership, 2013 ONCA 72 (“ConCreate”) confirms that restrictive covenants in commercial agreements without a fixed term are unenforceable.

The tl;dr version: Restrictive covenants of indefinite duration and subject to consent of indeterminate third parties are unenforceable. (more…)

Regional Senior Justice Edward Then: Case Management Masters will begin to hear bankruptcy matters in Toronto

February 3, 2012

Via the Section Executives of Civil Litigation and Insolvency for the Ontario Bar Association:

My New Article in the Canadian International Lawyer

October 21, 2011

I have published a new article in the latest issue of the Canadian Bar Association’s Canadian International Lawyer journal entitled, “Adjudicating International Human Rights Claims in Canada”, (2011), 8(3) Cdn. Int. Lawyer 117-133. Here is the abstract:

This article addresses the issue of the privatization of justice and whether a social contract model is appropriate in disputes affecting the public interest, if one accepts the premise that international human rights claims fall under the rubric of “public order” or public interest. The article then explores the implications of promoting a social contract model for advancing and adjudicating international human rights claims in Canada against corporate and state actors, both from the perspective of litigation and arbitration. It concludes with an overview of recent federal legislative reforms relating to state-sponsored terrorism and international human rights standards.

A pdf copy of the article is available for download here.


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