Will a lack of independent legal advice invalidate a guarantee?
The plaintiff, Royal Bank of Canada, and three of the defendants brought competing summary judgment motions. RBC sought to enforce guarantees of RBC loans to a now-bankrupt Renfrew, Ontario glass manufacturer (the “Company”). The defendants sought summary judgment against RBC, discharging the guarantees on the basis that they are unenforceable.
The Company struggled financially and began to default on its obligations to RBC in the fall of 2012. In December 2013, the Company made an assignment in bankruptcy. RBC’s evidence was that as of June 15, 2016, the Company’s indebtedness was $3,465,369.87.
RBC and the Company entered into new loan agreements after guarantees were signed on October 10, 2007 and December 15, 2008, respectively. The guarantors argued that they should be released from their guarantees because RBC and the Company changed the terms of their loan agreements after the guarantees were signed, without notice to the guarantors. They further argued that their guarantees should be set aside on the grounds that the guarantors did not have independent legal advice. Specifically, the guarantors argued that they had very little involvement with the operations of the Company, and RBC—being aware of these dynamics—should have ensured that the guarantors received independent legal advice before they signed their guarantees.
The first guarantor signed her $300,000.00 guarantee on October 10, 2007. She was a shareholder of the Company at the time. She read the guarantee before she signed it. She understood that it was a $300,000.00 guarantee and that it meant that $300,000.00 might be owed to RBC. She believed it to be a joint and several guarantee. She thought that the rest of her partners would also be signing it.
The second guarantor signed a $600,000.00 guarantee on December 15, 2008. He was a director, but not an officer, of the Company. He said that he quickly looked over the guarantee before signing it. He said that no one prevented him from reading it and no one either recommended or recommended against obtaining independent legal advice. He agreed that he was not prevented from obtaining independent legal advice.
The third guarantor was a shareholder and director of the Company, but not an officer. She testified that she did not read the guarantee before she signed it, and no one prevented her from doing so. She understood that the guarantee was required to show that she had confidence in the Company and was willing to put some money behind it. She knew that she would have a payment obligation if the Company were to go down.
The lack of independent legal advice does not invalidate a guarantee in the absence of evidence of non est factum, unconscionability, fraud, misrepresentation or undue influence. There was no evidence to suggest that any of these circumstances existed in this case.
The guarantors all understood that they were signing guarantees and knew what a guarantee was—they all knew that they were potentially assuming personal liability for the Company’s debts. At the time that they signed their guarantees, they were all shareholders of the Company and current (or former) directors. The guarantors were all familiar with the Company and their interests were aligned with those of the Company. They were all free to obtain legal advice before signing the guarantees had they chosen to do so.
The fact that RBC did not recommend that the guarantors obtain legal advice and that the guarantors did not obtain legal advice had no bearing on the validity or the enforceability of the guarantees. Therefore, the issue raised by the guarantors concerning the lack of independent legal advice was not an issue requiring a trial. This issue had no effect on the validity or enforceability of the guarantees.
The Court held that the guarantees were valid and enforceable.
Counsel: J. Ross MacFarlane of Flett Beccario for the Plaintiff, Pavle Masic of DS Avocats for the Defendant/Moving Parties Patrick McHale and Beverly McHale and Jason Dutrizac of DS Avocats for the Defendant/Moving Party Lorraine MacDonald