When I first started practicing in the mid eighties, Ontario was entering a recession and there was little Continuing Legal Education. I remember one of the most popular programs at the time was called the “Mysteries of Guarantees”. Almost 30 years later, the mysteries continue, although there has certainly been a trend towards commercial certainty and conservatism in the Ontario Courts.
Throughout history, the common law courts were said to be involved in a love affair with debtors – particularly guarantors and mortgagors – particularly when they were spouses. The courts were clogged with debtor-creditor cases involving spouses signing documents, which they never reviewed, containing onerous commercial clauses. Since that time, the financial institutions have made great headway in simplifying the wording of commercial documents such as guarantees, however, the fear remains that a spouse performs only a cursory review of legal documents and really does not appreciate how a guarantee can lead to financial ruin in the future.Another step taken by the financial institutions was to shore up their position by requiring independent legal advice on guarantees. That’s fine but the reality remains that the advice is usually given in a hurried fashion and merely represents just another document in the pile.The Court of Appeal recently revisited the spousal guarantee issue in relation in the decision of Royal Bank of Canada v. Samson Management and Solutions Ltd. Unfortunately, the spousal guarantee was upheld despite the fact that there had been a material change in the lending arrangements between the bank and the borrower. In this case, the bank had advanced funds well beyond in the amount originally contemplated under the guarantee. The Court of Appeal accepted that there had been a material change (which usually would have resulted in voiding the guarantee) but then found that the over-funding had been contemplated by the guarantor and was covered by the wording of the document.That’s not to say the next case might not go the other way based on the wording of the document and the Court’s sympathies.A working knowledge of the mysteries of guarantees is essential for anyone involved in commercial work and it can also arise in the context of estates and estate litigation. The takeaway is that it will take very strong facts indeed in order to set aside a guarantee; the message bears repeating – “Spouses Beware”.