The Ontario Court of Appeal’s decision in Intercap Equity Inc. v. Bellman,[1] provides guidance as to the interpretation of a continuing guarantee and whether it survives amendments to an underlying loan agreement.
For context, a continuing guarantee provides that the guarantor will be liable for the obligations of a debtor to the extent of the guarantee provided, even if there are several different obligations that are made, renewed, or repaid over time.
The Underlying Decision
The respondent, Intercap Equity Inc., obtained summary judgment against the appellants pursuant to a personal guarantee that the appellants had provided for a loan given to a corporate entity.[2]
When it became clear that the corporation would not be able to pay back the loan, a second loan agreement was entered into, and the appellants provided a second guarantee (the “Guarantees”). There were two subsequent amendments to the second loan agreement, but the Guarantees were not amended.[3]
The motion judge found that the Guarantees were a continuing guarantee covering the liabilities arising from the amended loan agreement, and applied to the most recent loan agreement between the respondent and the debtor.[4]
The appellants appealed the decision, stating that the motion judge erred in his analysis that the Guarantees were continuing guarantees. The appellants submitted that the Guarantees did not have all of the hallmarks of a continuing guarantee, and alternatively, that the terms of the Guarantees were ambiguous. As such, the motion judge erred in not appreciating the ambiguity and misconstruing extrinsic evidence.[5]
The Court of Appeal’s Decision
The Court of Appeal dismissed the appeal. It first addressed the hallmarks argument. Looking to the case law, the court noted that continuing guarantees have the following hallmarks:
- 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;
- 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; and
- Continuing guarantees do not contain a reference to a specific loan agreement and cover future debts without qualification.[6]
However, the court noted that there are no ‘hard and fast’ rules to determining whether a guarantee is a continuing guarantee. While hallmarks may be of some assistance, the most important step is to look at the language of the agreement. Guarantees are contracts, and are to be interpreted pursuant to the established Sattva principles.[7]
The court found that this is what the motion judge had done. Looking to the factual background, the court noted that the parties were sophisticated business people who had negotiated the terms of the agreements.[8] Looking to the specific wording of the Guarantees, the court noted:
- the Guarantees covered all debts, liabilities, and obligations arising from the amended and restated loan agreement;
- the Guarantees were referred to as a ‘continuing guarantee’ that covered liabilities incurred before and after the date of the Guarantees; and
- the Guarantees applied to any ultimate unpaid balance of the obligations of the debtor.[9]
While the loan was further amended after the parties had entered into the Guarantees, the amount of the loan was not increased, negating the need for a new guarantee.[10] The court found that the wording in the Guarantees, specifically, ‘in connection with’, has an inherently broad meaning, and as such, the amended loan agreements fell within the consideration of the Guarantees.[11]
The court noted that there was no ambiguity within the wording of the Guarantees. However, even if there was ambiguity, the court found that the extrinsic evidence (affidavit evidence provided by the appellants) did not support the appellants’ position.[12]
Conclusion
Guarantees are contracts and are to be interpreted according to the established rules of contractual interpretation. While hallmarks may be helpful in identifying the type of guarantee before the court, inevitably, the wording of the guarantee will be paramount in the determination of whether a guarantee is a continuing guarantee.
As the subsequent loan amendments did not increase the loaned amount, the court found that a new guarantee was not required. However, had the loaned amount increased, it is likely that a new guarantee should have been entered into, or, at the very least, an acknowledgement that the old guarantee applied to the new liabilities.
Lenders and guarantors must ensure that the wording of the guarantee is reflective of the scope of liability the parties intend it to have. If the expectation is that a guarantee is specific to a certain loan agreement and not in connection with any liabilities arising from the loan as may be amended or restated, care should be taken to ensure that the language of the guarantee is reflective of such.
[1] 2022 ONCA 61
[2] para 2
[3] paras 10-25
[4] paras 4-6
[5] paras 26-34
[6] paras 38-39
[7] paras 41-44
[8] paras 8-9
[9] para 15
[10] para 25
[11] paras 46-58
[12] paras 67-77
