Faced with an “absurd result”, the Ontario Court of Appeal recently held in Sicotte v 2399153 Ontario Ltd., 2021 ONCA 912 that in the absence of clear evidence to the contrary, the liabilities of guarantors are not affected by a postponement agreement executed by the lender seeking to enforce the guarantee.
The appeal concerned the enforcement of a guarantee by the appellant, Joanne Sicotte. In 2014, Ms. Sicotte loaned $800,000 to 2399153 Ontario Inc. (“239 Ontario”) in exchange for a mortgage over the company’s real property. The three individual respondents were all officers, directors, and shareholders of 239 Ontario. Under a separate guarantee agreement, they agreed to guarantee the debts and liabilities of 239 Ontario “at any time owing” to Ms. Sicotte.
In 2018, 239 Ontario required further funding. It obtained a loan from the Business Development Bank of Canada (“BDC”) in exchange for a mortgage over the same real property as Ms. Sicotte. As part of the loan agreement, 239 Ontario, BDC, and Ms. Sicotte executed a postponement of debt agreement providing in part that Ms. Sicotte would not demand repayment of her loan so long as 239 Ontario was indebted to BDC. At the same time, Ms. Sicotte and 239 Ontario amended the 2014 mortgage to extend the term one year and implement new monthly interest payments.
By 2019, 239 Ontario had ceased making monthly interest payments to Ms. Sicotte, and the 2014 mortgage was due. However, BDC advised Ms. Sicotte she could not enforce her mortgage until its loan was repaid in full. The due date on the BDC loan was not until 2043, so instead of waiting over two decades to pursue 239 Ontario, Ms. Sicotte sued the respondents on their guarantee.
Ms. Sicotte brought a motion for summary judgment in the Superior Court of Justice seeking judgment for the unpaid amounts on the loan under the guarantee agreement. The motion judge dismissed the motion and granted an order dismissing the entire action. The motion judge reasoned that because Ms. Sicotte was unable to enforce the mortgage with 239 Ontario, there were no amounts “owing”. Consequently, the respondents’ obligations under the guarantee were not triggered.
In a unanimous decision, the Court of Appeal set aside the motion judge’s order and granted summary judgment against the respondents in accordance with the terms of the guarantee. Writing for the Court, Nordheimer J.A. provided four reasons for allowing the appeal.
- First, the motion judge fundamentally erred by conflating Ms. Sicotte’s rights under the guarantee with those relating to the debt owed by 239 Ontario. The respondents were not parties to the postponement agreement and nothing in that agreement purported to, or did, alter Ms. Sicotte’s rights under the guarantee agreement.
- Second, there is a distinction between whether a debt is owing and whether it is enforceable. The postponement agreement prevented Ms. Sicotte from enforcing her mortgage, but did not change the fact money was due and owing.
- Third, the terms of the guarantee provided that the respondents’ liability would be unaffected by the validity or enforceability of any agreement between Ms. Sicotte and 239 Ontario.
- Fourth, the respondents’ position would render the amendments to the mortgage held by Ms. Sicotte moot. If Ms. Sicotte had no enforcement mechanism, then there would have been no practical purpose for extending the term of the mortgage and implementing new monthly interest payments.
Nordheimer J.A. emphasized that the motion judge’s decision would, in effect, preclude Ms. Sicotte from receiving not only the loan amount, but also interest payments on the loan for over two decades. This would be an “absurd result,” and the Supreme Court of Canada has recognized that “the more unreasonable the result, the more unlikely it is that the parties can have intended it”.
This decision serves as a reminder to carefully consider the purpose, intent, and effect of all relevant contractual documents. Parties seeking to alter their legal obligations should ensure the documents are express and intentional about the changes they are seeking to put in place as well as how those may interplay with existing obligations and rights from other agreements between the parties.
