Guarantors Cannot Escape Their Obligations to Lenders Through Separate Agreements if the Result Is Unfair

Published on: March 2022 | What's Trending

GUARANTOR text on paper with gavel on the wooden background

In a recent decision, the Ontario Court of Appeal confirmed that when guarantors are contractually on the hook for a guarantee, their liability will not be affected by a separate postponement agreement, unless that was clearly the intentions of the parties. To find otherwise, the Court stated, would lead to a result that is not only unfair, but also “absurd”.

In, Sicotte v 239153 Ontario Ltd., Joanne Sicotte loaned $800,000 to 2399153 Ontario Ltd. (the “Company”) in 2014 in exchange for a mortgage over a commercial property held by the Company. Pursuant to a separate guarantee agreement, three officers, directors, and shareholders of the Company (the “Guarantors”) agreed to guarantee the debts and liabilities of the Company “at any time owing” to Ms. Sicotte.

In 2018, matters became complicated as the Business Development Bank (“BDC”) loaned another $3.9 million to the Company in exchange for a mortgage over the same property as Ms. Sicotte. As part of the BDC loan agreement, a Postponement of Debt Agreement (the “Postponement Agreement”) was entered into by Ms. Sicotte, the Company, and BDC, which provided that so long as the Company was indebted to BDC in respect of the loan, Ms. Sicotte would not demand payment from the Company of her loan. At the same time, the 2014 mortgage was amended in significant respects by, among other things, increasing its principal amount, monthly interest rate and payment amounts, and extending its term for one year.

After paying Ms. Sicotte the monthly interest in July, August, and September 2018, the Company ceased making payments completely. By 2019, the mortgage had matured and was due and payable in full. Relying on the Postponement Agreement, BDC advised Ms. Sicotte that until BDC was paid for its loan, Ms. Sicotte could not demand payment from the Company or enforce her mortgage against the property. BDC’s loan was not due until August 2043, or possibly even later, through an extension.

Ms. Sicotte commenced an action against the Company and the Guarantors to enforce the guarantee and brought a motion for summary judgment. The motion judge dismissed the motion and granted an order dismissing Ms. Sicotte’s action entirely. It was stated that, based on a plain reading of the Postponement Agreement, Ms. Sicotte had agreed that the repayment of the BDC loan would take precedence and be fully paid in priority to hers. While the Company remained indebted to Ms. Sicotte, the Postponement Agreement made it so that no amounts were presently “owing” by the Company to Ms. Sicotte. She therefore had no right to insist on payment. As a result, the Guarantors’ obligations were not triggered.

The Ontario Court of Appeal overturned the motion judge’s order, holding that its conclusion had “the effect of precluding Ms. Sicotte, not only from being repaid the monies that were borrowed from her for the next twenty-two years, but also from receiving any interest payments to her on those same funds”. The Court noted that the time for repayment could go beyond that period, since BDC had the right to extend its financing. The reasons were broken-down as follows:

  • the motion judge improperly conflated Ms. Sicotte’s rights as to the Company’s underlying debt with her rights as to the guarantee – these were two separate and distinct contractual obligations. The Guarantors were not parties to the Postponement Agreement – it was made between Ms. Sicotte, the Company and the BDC. Further, nothing in the Postponement Agreement addressed or affected Ms. Sicotte’s rights as they related to the Guarantors;
  • the motion judge confused the question of whether a debt itself is due and owing and whether a lender can enforce payment of a debt that is due and owing. While Ms. Sicotte disentitled herself from enforcing payment of the debt by the Company because of her contractual agreement with the BDC, this did not mean that moneys were not due and owing;
  • the terms of the guarantee made it clear that the obligations of the Guarantors were independent and distinct of the obligations of the Company;
  • it was evident, based on the circumstances surrounding the entering into of the Postponement Agreement, that Ms. Sicotte never agreed to have her rights against the Guarantors postponed. In particular, the mortgage was amended in four specific respects; and
  • if Ms. Sicotte’s rights were to be entirely postponed by the BDC financing, then there would have been no need for the one-year extension of the mortgage or for the addition of new interest payments, as Ms. Sicotte would not have any enforcement remedy until 2043, more than two decades later.

In the end, the Court made it clear that the motion judge’s decision would mean that Ms. Sicotte would have to “wait more than two decades, not only to be repaid the monies that she lent, but even to receive any return on those monies”. This, the Court stated would be an “absurd result”.

While this case is an important decision insofar as it indicates that the Court will likely not accept the interpretation of a contract that leads to an outcome that is nonsensical, patently unfair, and inconsistent with the parties’ intentions, it is a reminder that guarantee agreements and postponement agreements are separate and distinct contractual obligations. As such, guarantors will still be liable for their obligations, despite the actions of lenders and borrowers.

Author: Daniel Waldman, Lawyer

The author would like to thank Saghi Khalili, Student-at-Law, for her assistance with this blog.