Manulife Bank of Canada v. Conlin

Manulife Bank of Canada v. Conlin
Collection
Supreme Court Judgments
Date
1996-10-31
Report
[1996] 3 SCR 415
Case number
24499
Judges
La Forest, Gérard V.; L'Heureux-Dubé, Claire; Sopinka, John; Gonthier, Charles Doherty; Cory, Peter deCarteret; Iacobucci, Frank; Major, John C.
On appeal from
Ontario
Subjects
Courts
Priorities and hypothecs
Notes
SCC Case Information: 24499
Decision Content
Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415
Manulife Bank of Canada Appellant
v.
John Joseph Conlin Respondent
Indexed as: Manulife Bank of Canada v. Conlin
File No.: 24499.
1996: May 30; 1996: October 31.
Present: La Forest, L’Heureux‑Dubé, Sopinka, Gonthier, Cory, Iacobucci and Major JJ.
on appeal from the court of appeal for ontario
Mortgages ‑‑ Guarantee ‑‑ Renewal agreement ‑‑ Release of guarantor from liability ‑‑ Mortgagor’s husband guaranteeing mortgage ‑‑ Mortgage clause providing that guarantors liable “as principal debtors and not as sureties”‑‑ Guarantee to remain binding “notwithstanding the giving of time for payment . . . or the varying of the terms of payment”‑‑ Mortgagor renewing mortgage at different interest rate ‑‑ Renewal agreement not signed by guarantor ‑‑ Whether guarantor waived equitable right to be released when principal loan renewed.
Courts ‑‑ Jurisdiction ‑‑ Mortgagor defaulting on mortgage ‑‑ Bank obtaining summary judgment against mortgagor and guarantor ‑‑ Whether Court of Appeal exceeded its jurisdiction in setting aside judgment and dismissing action against guarantor.
The respondent guaranteed a mortgage for a three‑year term with an interest rate of 11.5 percent per annum which his wife had provided as security for a loan from the appellant bank. In clause 34 of the mortgage agreement, the guarantors promised, as “principal debtors and not as sureties”, to pay the money secured by the mortgage. The guarantee was to remain binding “notwithstanding the giving of time for payment of this mortgage or the varying of the terms of payment hereof or the rate of interest hereon”. Shortly before the mortgage was to mature, the mortgagor and the bank executed an agreement which renewed the mortgage for a further three‑year term at a yearly interest rate of 13 percent. The renewal forms provided spaces for the signature of the “registered owner” and the “guarantor”, but the agreement was signed only by the mortgagor. The mortgagor defaulted on the mortgage, and the bank obtained a summary judgment against the mortgagor and the guarantors for the principal owing under the mortgage with interest at 13 percent per annum. The Court of Appeal, in a majority decision, set aside the judgment and dismissed the action against the respondent guarantor. This appeal is to determine (1) whether the Court of Appeal exceeded its jurisdiction in allowing the appeal and dismissing the action, rather than sending the matter back to trial, and (2) whether under the terms of the loan agreement, the respondent was released from his promise to pay the principal sum and other moneys secured by the mortgage when the term of the mortgage was extended and the rate of interest increased, without notice to him.
Held (L’Heureux‑Dubé, Gonthier and Iacobucci JJ. dissenting): The appeal should be dismissed.
(1) Jurisdiction
The Court of Appeal has jurisdiction to make any order or decision that ought to or could have been made by the court or tribunal appealed from. Considered in light of Rule 1.04(1), which provides that the rules are to be liberally construed, Rules 20.04(2) and (4) of the Rules of Civil Procedure gave the motions court judge the jurisdiction to dismiss the action against the respondent. The judge could either have found that there was no genuine issue for trial or he could have found that the only genuine issue was an issue of law. In either case, it would have been within his jurisdiction and, by extension, within the jurisdiction of the Court of Appeal, to dispose of the matter by dismissing the appellant’s claim. The appellant was not deprived of its right to have its case fully heard and to test all of the respondent’s evidence. Under Rule 39.02(1), a party to a motion may cross‑examine the deponent of any affidavit served by a party who is adverse in interest on the motion. The appellant chose not to exercise this right and left the respondent’s evidence unchallenged.
(2) Release from liability
Per La Forest, Sopinka, Cory and Major JJ.: It has long been clear that a guarantor will be released from liability on the guarantee in circumstances where the creditor and the principal debtor agree to a material alteration of the terms of the contract of debt without the consent of the guarantor. A surety can contract out of the protection provided to a guarantor by the common law or equity, but any contracting out of the equitable principle must be clear. The issue as to whether a surety remains liable will be determined by interpreting the contract between the parties and determining the intention of the parties as demonstrated by the words of the contract and the events and circumstances surrounding the transaction as a whole. If there is any ambiguity in the terms used in the guarantee, the words of the documents should be construed against the party which drew it, by applying the contra proferentem rule. As well, this Court has stated that the surety is a favoured creditor in the eyes of the law whose obligation should be strictly examined and strictly enforced. The guarantor in this case comes within the class of accommodation sureties, or those who enter into the guarantee in the expectation of little or no remuneration. The law has protected such guarantors by strictly construing their obligations and limiting them to the precise terms of the contract of surety.
Clause 34 and clause 7, dealing with renewal or extension of time, unambiguously indicate that the respondent was not bound by the renewal agreement. If the guarantor is to be treated as a principal debtor and not as a guarantor, then the failure of the bank to notify the respondent of the renewal agreement and the new terms of the contract must release him from his obligations since he is not a party to the renewal. Moreover, even if it were thought that the principal debtor clause does not convert the guarantor into a principal debtor, the equitable or common law rules relieving the surety from liability where the contract has been materially altered by the creditor and the principal debtor without notice to the surety would apply, in the absence of an express agreement to the contrary. Two aspects of the renewal agreement itself lead to the conclusion that the guarantor is not to be bound. First, the renewal agreement is once again a standard form prepared and used by the bank and it calls for the signature of the guarantor. Secondly, the renewal agreement states that the terms of the old mortgage will form part of the agreement, and by doing so indicates that this is a new agreement rather than merely an extension of an old agreement. Further, clause 7 of the original mortgage specifically distinguishes between extensions and renewals both in its heading and in its text. The failure to refer to a renewal agreement or even to a renewal in clause 34 strongly suggests that it has no application to a renewal. The words used in clauses 34 and 7 are sufficiently clear to conclude that the guarantor did not waive his equitable and common law rights either as a principal debtor or as a guarantor. If the wording of the two clauses should be found to be ambiguous, the contra proferentem rule must be applied against the bank. The wording of clause 34 binding the guarantor to variations in the event of an extension of the mortgage should not be applied to bind the guarantor to a renewal without notice since there is ambiguity as to whether clause 34 applies to renewals at all. In these circumstances as well, the guarantor should be relieved of liability.
Per Gonthier and Iacobucci JJ. (dissenting): Clause 34 amounts to a waiver of the respondent’s right to be discharged as a result of a material variation of the principal contract. Guarantee contracts are basically contracts, like any others, and should be construed according to the ordinary rules of contractual interpretation. The cardinal interpretive rule of contracts is that the court should give effect to the intentions of parties as expressed in their written document. The court will deviate from the plain meaning of the words only if a literal interpretation of the contractual language would lead either to an absurd result or to a result which is plainly repugnant to the intention of the parties. By clause 34, the guarantors agree to remain bound by the guarantee contract notwithstanding the giving of time for payment of the mortgage or the varying of the rate of interest. While clause 34 does not refer to “renewal” agreements by name, it does contain a clear waiver of the guarantors’ right to be discharged in the event of an extension of time or an increase in the rate of interest. The plain ordinary meaning of the words “the giving of time for payment . . . or the varying of the terms of payment” encompasses the renewal agreement. While the parties used a renewal agreement, at bottom, that renewal agreement extended the time for payment and increased the interest rate, events that are expressly covered in clause 34. Under clause 34, the bank did not have to notify the guarantors of the renewal agreement. The language of the clause is clear, and it would be odd to infer a condition of notice when the undertaking is so clear and unambiguous. As “principal debtors”, the guarantors would not be expected to sign the renewal agreement. The evident intention of the parties, in using this kind of language, was to preserve the liability of the surety even in circumstances where the principal obligation was no longer enforceable. The space for the guarantors’ signature on the renewal agreement is not helpful in trying to interpret the guarantee contract, since the wording or form of another subsequent contract, entered into three years later, cannot change the meaning of the original agreement. The respondent promised to guarantee the payment of the money secured by the original mortgage, and the terms of that mortgage thus determine the extent of his liability. The respondent is not liable for interest at the increased rate of 13 percent, but simply to repay the balance owing on the principal sum with interest charged at 11.5 percent per annum.
Per L’Heureux‑Dubé J. (dissenting): Subject to the following comment, Iacobucci J.’s reasons are substantially agreed with. Courts should generally use the “modern contextual approach” as the standard, normative approach to judicial interpretation, and may exceptionally resort to the old “plain meaning” rule in appropriate circumstances. To determine the appropriate definition of the phrase “the giving of time for payment . . . or the varying of the terms of payment” in the present context, Iacobucci J. reviewed the provisions in their immediate context, the contract as a whole, the consequences of proposed interpretations, the applicable presumptions and rules of interpretation, and admissible external aids. This process is not an application of the “plain meaning” approach but rather an application of the “modern contextual approach” to judicial interpretation. The rules which govern the interpretation of deeds and contracts generally are essentially the same as the rules for statutory interpretation. The “modern contextual approach” for statutory interpretation, with appropriate adaptations, is equally applicable to contractual interpretation. Statutory interpretation and contractual interpretation are but two species of the general category of judicial interpretation. Here, the resulting interpretation did not come from the “plain meaning” of the words, but from their “meaning in law”, because they are “legal terms of art”. Where an instrument uses a legal term of art, there is a presumption that the term of art is used in its correct legal sense, and this is the presumption that is resorted to by Iacobucci J. when he makes use of admissible external aids in determining the correct meaning of the phrase “to give time”.
Cases Cited
By Cory J.
Referred to: Holme v. Brunskill (1878), 3 Q.B.D. 495; Bank of Montreal v. Wilder, [1986] 2 S.C.R. 551; Bauer v. Bank of Montreal, [1980] 2 S.C.R. 102; First City Capital Ltd. v. Hall (1993), 11 O.R. (3d) 792; Holland‑Canada Mortgage Co. v. Hutchings, [1936] S.C.R. 165; Alberta Opportunity Co. v. Schinnour, [1991] 2 W.W.R. 624; Citadel General Assurance Co. v. Johns‑Manville Canada Inc., [1983] 1 S.C.R. 513; Canadian Imperial Bank of Commerce v. Patel (1990), 72 O.R. (2d) 109; Co‑operative Trust Co. of Canada v. Kirkby, [1986] 6 W.W.R. 90; Royal Trust Corp. of Canada v. Reid (1985), 40 R.P.R. 287; Veteran Appliance Service Co. v. 109272 Development Ltd. (1985), 67 A.R. 117.
By Iacobucci J. (dissenting)
Holme v. Brunskill (1878), 3 Q.B.D. 495; Re Rotenberg and Borough of York (No. 2) (1976), 13 O.R. (2d) 101; Keltic Leasing Corp. v. Curtis (1993), 133 N.B.R. (2d) 73; Bank of Montreal v. Wilder, [1986] 2 S.C.R. 551; Bauer v. Bank of Montreal, [1980] 2 S.C.R. 102; Consolidated‑Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888; Stevenson v. Reliance Petroleum Ltd., [1956] S.C.R. 936; Cornish v. Accident Insurance Co. (1889), 23 Q.B.D. 453; Citadel General Assurance Co. v. Johns‑Manville Canada Inc., [1983] 1 S.C.R. 513.
By L’Heureux‑Dubé J. (dissenting)
River Wear Commissioners v. Adamson (1877), 2 App. Cas. 743; Sydall v. Castings Ltd., [1967] 1 Q.B. 302; Inland Revenue Commissioners v. Williams, [1969] 1 W.L.R. 1197.
Statutes and Regulations Cited
Courts of Justice Act, R.S.O. 1990, c. C.43, s. 134(1).
Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rules 1.04(1), 20.04(2), (4), 39.02(1).
Authors Cited
Black’s Law Dictionary, 5th ed. St. Paul, Minn.: West Publishing, 1979, “renewal”, “extension”.
Concise Oxford Dictionary of Current English, 9th ed. Oxford: Clarendon Press, 1995, “extend”, “renew”.
Côté, Pierre‑André. The Interpretation of Legislation in Canada, 2nd ed. Cowansville: Yvon Blais, 1991.
Driedger on the Construction of Statutes, 3rd ed. By Ruth Sullivan. Toronto: Butterworths, 1994.
Fridman, G. H. L. The Law of Contract in Canada, 3rd ed. Scarborough, Ont.: Carswell, 1994.
McGuinness, Kevin Patrick. The Law of Guarantee, 2nd ed. Scarborough, Ont.: Carswell, 1996.
APPEAL from a judgment of the Ontario Court of Appeal (1994), 20 O.R. (3d) 499, 120 D.L.R. (4th) 234, 41 R.P.R. (2d) 283, 75 O.A.C. 117, 17 B.L.R. (2d) 143, reversing a decision of the Ontario Court (General Division) finding the respondent liable to pay under a mortgage. Appeal dismissed, L’Heureux‑Dubé, Gonthier and Iacobucci JJ. dissenting.
H. Stephen Lee, for the appellant.
Raymond F. Leach and Barbara F. Fischer, for the respondent.
//Cory J.//
The judgment of La Forest, Sopinka, Cory and Major JJ. was delivered by
1 Cory J. -- I have read with great interest the clear and concise reasons of Justice Iacobucci. I am in agreement with his finding that the Court of Appeal had jurisdiction to make the order dismissing the action against the respondent. However, I must differ with his conclusion that by the terms of the guarantee, the respondent waived the equitable right of a guarantor to be released upon renewal of the mortgage loan with a different term and interest rates to which the guarantor did not consent.
The Position of a Guarantor as Defined by Equity and the Common Law
2 It has long been clear that a guarantor will be released from liability on the guarantee in circumstances where the creditor and the principal debtor agree to a material alteration of the terms of the contract of debt without the consent of the guarantor. The principle was enunciated by Cotton L.J. in Holme v. Brunskill (1878), 3 Q.B.D. 495 (C.A.), at pp. 505-6, in this way:
The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court . . . will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.
This rule has been adopted in a number of Canadian cases. See for example Bank of Montreal v. Wilder, [1986] 2 S.C.R. 551, at p. 562.
3 The basis for the rule is that any material alteration of the principal contract will result in a change of the terms upon which the surety was to become liable, which will, in turn, result in a change in the surety’s risk. The rationale was set out in The Law of Guarantee (2nd ed. 1996) by Professor K. P. McGuinness in this way, at p. 534:
The foundation of the rule in equity is certainly consistent with traditional thinking, but it is a fair question whether it is necessary to invoke the aid of equity at all in order to conclude that in a case where the principal contract is varied materially without the surety’s consent, the surety is not liable for any subsequent default. Essentially, a specific or discrete guarantee (as opposed to an all accounts guarantee) is an undertaking by the surety against the risks arising from a particular contract with the principal. If that contract is varied so as to change the nature or extent of the risks arising under it, then the effect of the variation is not so much to cancel the liability of the surety as to remove the creditor from the scope of the protection that the guarantee affords. When so viewed, the foundation of the surety’s defence appears in law rather than equity: it is not that the surety is no longer liable for the original contract as it is that the original contract for which the surety assumed liability has ceased to apply. In varying the principal contract without the consent of the surety, the creditor embarks upon a frolic of his own, and if misfortune occurs it occurs at the sole risk of the creditor. A law based approach to the defence is in certain respects attractive, because it moves the surety’s right of defence in the case of material variation from the discretionary and therefore relatively unsettled realm of equity into the more absolute and certain realm of law. In any event, it is clear quite certainly in equity and quite probably in law as well, that the material variation of the principal contract without the surety’s consent (unless subsequently ratified by the surety) will result in the discharge of the surety from liability under the guarantee.
And further at p. 541, he wrote:
Where the risk to which the surety is exposed is changed, the rationale for the complete release of the surety is easily explained. To change the principal contract is to change the basis upon which the surety agreed to become liable. A surety’s liability extends only to the contract which he has agreed to guarantee. If the terms of that contract (and consequently the terms of the surety’s risk) are varied then the creditor should no longer be entitled to hold the surety to his obligation under the guarantee. To require a surety to maintain a guarantee in such a situation would be to allow the creditor and the principal to impose a guarantee upon the surety in respect of a new transaction. Such a power in the hands of the principal and creditor would amount to a radical departure from the principles of consensus and voluntary assumption of duty that form the basis of the law of contract.
The Right of a Guarantor to Contract Out of the Protection Provided by the Common Law
4 Generally, it is open to parties to make their own arrangements. It follows that a surety can contract out of the protection provided to a guarantor by the common law or equity. See for example Bauer v. Bank of Montreal, [1980] 2 S.C.R. 102, at p. 107. The Ontario Court of Appeal, correctly in my view, added that any contracting out of the equitable principle must be clear. See First City Capital Ltd. v. Hall (1993), 11 O.R. (3d) 792 (C.A.), at p. 796.
5 The principle was explained by Professor McGuinness in The Law of Guarantee, supra, at p. 546, in these words:
There are certain types of amendment that may be made to the terms of a principal contract (or departures from the terms of the principal contract) that will not have the effect of discharging the surety under that contract, even though those changes may be of a material nature. For instance, where the changes that have been made to the principal contract were specifically authorized by the surety or were otherwise within the contemplation of the contract, the surety will not be discharged. Similarly, changes which are authorized within the guarantee will not relieve the surety from liability.
It is a question of interpretation whether such changes are authorized or contemplated.
The author added at p. 547 the following sage advice to lending institutions:
Since the courts have tended to give a narrow construction to provisions in standard form guarantees which authorize such changes, it would be most unwise for a creditor to agree to changes without first obtaining the consent of the surety, except where there is clear authorization for him to act solely upon his own initiative. Where the creditor seeks to show that the guarantee agreement provides a blanket authorization to make material alterations to the principal contract, the wording must be very clear that such a right was intended. [Emphasis added.]
6 The issue as to whether a surety remains liable will be determined by interpreting the contract between the parties and determining the intention of the parties as demonstrated by the words of the contract and the events and circumstances surrounding the transaction as a whole.
Principles of Interpretation
7 In many if not most cases of guarantees a contract of adhesion is involved. That is to say the document is drawn by the lending institution on a standard form. The borrower and the guarantor have little or no part in the negotiation of the agreement. They have no choice but to comply with its terms if the loan is to be granted. Often the guarantors are family members with limited commercial experience. As a matter of accommodation for a family member or friend they sign the guarantee. Many guarantors are unsophisticated and vulnerable. Yet the guarantee extended as a favour may result in a financial tragedy for the guarantor. If the submissions of the bank are accepted, it will mean in effect that a guarantor, without the benefit of notice or any further consideration, will be bound indefinitely to further mortgages signed by the mortgagor at varying rates of interest and terms. The guarantor is without any control over the situation. The position adopted by the bank, if it is correct, could in the long run have serious consequences. Guarantors, once they become aware of the extent of their liability, will inevitably drop out of the picture with the result that many simple and straightforward loans will not proceed since they could not be secured by guarantors.
8 In my view, it is eminently fair that if there is any ambiguity in the terms used in the guarantee, the words of the documents should be construed against the party which drew it, by applying the contra proferentem rule. This is a sensible and satisfactory way of approaching the situation since the lending institutions that normally draft these agreements can readily amend their documents to ensure that they are free from ambiguity. The principle is supported by academic writers.
9 G. H. L. Fridman, in his text The Law of Contract in Canada (3rd ed. 1994), at pp. 470-71, puts the position in this way:
The contra proferentem rule is of great importance, especially where the clause being construed creates an exemption, exclusion or limitation of liability. . . .
Where the contract is ambiguous, the application of the contra proferentem rule ensures that the meaning least favourable to the author of the document prevails.
Professor McGuinness, in his work The Law of Guarantee, supra, at pp. 612-13, explains the application of the rule as follows:
. . . the contra proferentum rule of construction (under which the provisions of an agreement that were inserted by a party for his own protection are subjected to a strict interpretation) provides one method through which the courts can restrict the scope of extremely broad provisions which purport to eliminate the rights of the surety. The justification for giving such provisions a narrow construction is clear: it is one thing to say that a party may, if he so chooses, agree to assume an excessive burden, and to waive the rights which the law generally recognizes as existing for his protection. It is quite another thing to assume that parties necessarily intend to enter into such obligations. The more natural assumption is the exact opposite. Where the guarantee was drafted by the creditor, and there is any ambiguity or imprecision in the terms of a provision which purports to limit the rights of a surety, it is only fair that the ambiguity be resolved against the party who prepared the document. If the creditor wishes to take away a right belonging to the surety, he should use clear language in the document.
McGuinness further explains the principle and its justification in these words, at p. 244:
Where it is the creditor who drafted the terms of the contract, consistence of principle would call for the guarantee to be construed narrowly and thus in effect against the creditor. It is submitted that the correct rule is that where there is only one reasonable interpretation that the words used in a guarantee can bear, the guarantee should be given that interpretation. In such a case, the contra proferentum rule would not come into play. Where, however, the agreement is ambiguous in the sense that there are two or more interpretations that might reasonably be given to its terms, the guarantee should be construed against the party who prepared it or proposed its adoption, whether that be the creditor or the surety.
10 As well, this Court has stated that the surety is a favoured creditor in the eyes of the law whose obligation should be strictly examined and strictly enforced. This appears from the reasons of Davis J. in Holland-Canada Mortgage Co. v. Hutchings, [1936] S.C.R. 165, at p. 172:
A surety has always been a favoured creditor in the eyes of the law. His obligation is strictly examined and strictly enforced.
He goes on to say:
“It must always be recollected,” said Lord Westbury in Blest v. Brown (1862), 4 De G. F. & J. 367, at 376,
in what manner a surety is bound. You bind him to the letter of his engagement. Beyond the proper interpretation of that engagement you have no hold upon him. He receives no benefit and no consideration. He is bound, therefore, merely according to the proper meaning and effect of the written engagement that he entered into. If that written engagement is altered in a single line, no matter whether it be altered for his benefit, no matter whether the alteration be innocently made, he has a right to say, “The contract is no longer that for which I engaged to be surety; you have put an end to the contract that I guaranteed, and my obligation, therefore, is at an end.”
Apart from any express stipulation to the contrary, where the change is in respect of a matter that cannot “plainly be seen without inquiry to be unsubstantial or necessarily beneficial to the surety,” . . . the surety, if he has not consented to remain liable notwithstanding the alteration, will be discharged whether he is in fact prejudiced or not.
Those comments are as true today as they were at the time they were written.
11 The appellant contends that this principle of interpretation has been abandoned and for that proposition relies upon the reasons of this Court in Bauer, supra. I cannot agree with this submission. The issue in that case was whether a particular clause within the guarantee was an exemption clause and thus subject to the special rules of construction applying to those clauses. It was held that the clause in question was not, in fact, an exemption clause. The general question as to whether the scope of surety obligations should be construed strictly was not explicitly addressed by the Court. It is also significant that the Alberta Court of Appeal in Alberta Opportunity Co. v. Schinnour, [1991] 2 W.W.R. 624, found that the clause they were considering was analogous to that in issue in Bauer. Nonetheless they determined, correctly in my view, that it should be interpreted in accordance with the general rules of construction. Those rules should, in my view, include the contra proferentem rule and thus will be generally applicable to guarantee or surety clauses.
12 The position set out in Holland-Canada Mortgage Co., supra, was confirmed in Citadel General Assurance Co. v. Johns-Manville Canada Inc., [1983] 1 S.C.R. 513. At p. 521 of that case, it was said that “accommodation sureties” are those who entered into the guarantee “in the expectation of little or no remuneration and for the purpose of accommodating others or of assisting others in the accomplishment of their plans”. The protection offered to this class of guarantors was explained also at p. 521:
In respect of them, the law has been astute to protect them by strictly construing their obligations and limiting them to the precise terms of the contract of surety.
13 These sureties were contrasted with “compensated sureties” whose business consists of guaranteeing performance and payment in return for a premium. With respect to this latter class of sureties it was held at p. 524:
. . . in the case of the compensated surety it cannot be every variation in the guaranteed contract, however minor, or every failure of a claimant to meet the conditions imposed by the bond, however trivial, which will enable the surety to escape liability.
Although the primary issue in the case was the distinction between accommodation sureties and those who receive compensation, these words nonetheless represent the considered opinion of the Court. In my view, they are correct.
14 I would note in passing that the guarantor in this case comes within the class of accommodation sureties.
15 It follows that if there is a doubt or ambiguity as to the construction or meaning of the clauses binding the guarantor in this case, they must be strictly interpreted and resolved in favour of the guarantor. Further, as a result of the favoured position of guarantors, the clauses binding them must be strictly construed.
16 Finally, when the guarantee clause is interpreted, it must be considered in the context of the entire transaction. This flows logically from the bank’s position that the renewal agreement was an integral part of the original contract of guarantee. This position I believe is correct. It follows that fairness demands that the entire transaction be considered and this must include the terms and arrangements for the renewal agreement.
Application of the Principles of Interpretation to the Guarantee and Renewal Agreement Presented in this Case
17 It may be helpful to set out once again clauses 34 and 7 of the original guarantee agreement and recall that the renewal agreement called for the signature of the guarantor.
Clause 34: Guarantee and Indemnity
IT IS A CONDITION of the making of the loan secured by the within mortgage that the covenants set forth herein should be entered into by us, the Guarantors, namely John Joseph Conlin and Conlin Engineering & Planning Ltd. and now we the said Guarantors, and each of us, on behalf of ourselves, our respective heirs, executors, administrators and assigns, in consideration of the making of the said loan by the Mortgagee, do hereby jointly and severally covenant, promise and agree as principal debtors and not as sureties, that we and each of us shall and will well and truly pay or cause to be paid to the Mortgagee, the principal sum and all other moneys hereby secured, together with interest upon the same on the days and times and in the manner set forth in this mortgage, and will in all matters pertaining to this mortgage well and truly do, observe, fulfill and keep all and singular the covenants, provisos, conditions, agreements and stipulations contained in this mortgage, and do hereby agree to all the covenants, provisos, conditions, agreements and stipulations by this mortgage made binding upon the Mortgagor; and do further agree that this covenant shall bind us, and each of us notwithstanding the giving of time for payment of this mortgage or the varying of the terms of payment hereof or the rate of interest hereon or the giving of a release or partial release or covenant not to sue to any of us; and we and each of us agree that the Mortgagee may waive breaches and accept other covenants, sureties or securities without notice to us or any of us and without relieving us from our liability hereunder, which shall be a continuous liability and shall subsist until payment in full of the principal sum and all other moneys hereby secured.
Clause 7: Renewal or Extension of Time
PROVIDED that no extension of time given by the Mortgagee to the Mortgagor, or anyone claiming under it, or any other dealing by the Mortgagee with the owner of the equity of redemption of said lands, shall in any way affect or prejudice the rights of the Mortgagee against the Mortgagor or any other person liable for the payment of the monies hereby secured, and that this Mortgage may be renewed by an agreement in writing for any term with or without an increased rate of interest, or amended from time to time as to any of its terms including without limitation increasing the interest rate or principal amount notwithstanding that there may be subsequent encumbrances. And it shall not be necessary to register any such agreement in order to retain the priority of this Mortgage so altered over any instrument delivered or registered subsequent to this Mortgage.
18 Counsel for the appellant contended that there was no ambiguity in these clauses and that they made it clear that the respondent’s obligations as guarantor continued in spite of the renewal agreement. Counsel for the respondent came to exactly the opposite conclusion. He submitted that on the plain meaning of the clauses, the guarantor was not bound. A somewhat cynical observer might conclude that it should not be unexpected that counsel for the opposing parties would take these positions. However, the same conclusion cannot possibly be reached with regard to the judges who have considered these clauses. The trial judge and the minority in the Court of Appeal came to the same conclusion as the appellant. The majority in the Court of Appeal came to the opposite conclusion. That skilled and experienced judges could come to opposite conclusions with regard to the clauses might well lead one to suspect that the meaning of the clauses is unclear; in a word, they are ambiguous. Of course, if that be the case, the contra proferentem rule should be applied. However, for the reasons set out above, my view is that the clauses unambiguously indicate that the respondent was not bound by the renewal agreement. If I am in error and if the contra proferentem rule were applied it would strengthen and support my conclusion as to the interpretation of the clauses.
The Effect of the “Principal Debtor Obligation” Set Out in Clause 34
19 In Canadian Imperial Bank of Commerce v. Patel (1990), 72 O.R. (2d) 109 (H.C.), at p. 119, it was held that a principal debtor clause converts a guarantor into a full-fledged principal debtor. I agree with this conclusion. If the guarantor is to be treated as a principal debtor and not as a guarantor, then the failure of the bank to notify the respondent of the renewal agreement and the new terms of the contract must release him from his obligations since he is not a party to the renewal. This conclusion does not require recourse to equitable rules regarding material variation of contracts of surety. It is simply apparent from the contract that a principal debtor must have notice of material changes and consent to them. Of course, a guarantor who, by virtue of a principal debtor clause, has a right to notice of material changes, may, by the terms of the contract, waive these rights. However, in the absence of a clear waiver of these rights, such a guarantor must be given notice of the material changes and, if he is to be bound, consent to them.
20 The appellant contended that the words in clause 34 which provide “the said guarantors . . . covenant, promise and agree as principal debtors and not as sureties” indicate that the respondent is bound as a principal debtor yet without any of the usual rights and benefits of a principal debtor such as notice with regard to renewal, and the opportunity to negotiate and consent to its terms. To take this position seems to me to be unfair and unreasonable.
21 The mortgagor as a principal debtor must be given notice of the renewal agreement. This is evident from the requirement that the mortgagor sign the renewal agreement. The principal debtor clause converts the guarantor into a full-fledged principal debtor with all the duties and obligations which that term implies. If the guarantor is to be responsible to the lending institution as a “full-fledged principal debtor” then he or she is entitled to the same notice of a renewal agreement as the principal debtor mortgagor. That is undoubtedly the reason the standard form of the renewal agreement provides a place for the guarantor to sign. Not just fairness and equity but the designation of the guarantor as a principal debtor leads to the conclusion that the guarantor must have notice of and agree to the renewal before he is bound by its terms. A guarantor reading clause 34 would be led to believe that as a principal debtor he would have the same notice of a renewal agreement as would the principal debtor mortgagor. If a lending institution wishes to have the guarantor obligated as a principal debtor, then the guarantor must be entitled to the same rights as the principal debtor which would include both notice and agreement as a party to a renewal.
22 Even if it were thought that the principal debtor clause does not convert the guarantor into a principal debtor, the equitable or common law rules relieving the surety from liability where the contract has been materially altered by the creditor and the principal debtor without notice to the surety would apply, in the absence of an express agreement to the contrary. The question is whether in this case, either as principal debtor or as surety, the guarantor has expressly contracted out of the normal protections accorded to him. This question must be determined as a matter of interpretation of the clauses of the agreement, through consideration of the transaction as a whole, and the application of the appropriate rules of construction.
Effect of the Renewal Agreement
23 In my view, the renewal agreement must be considered an integral part of the transaction. There are two aspects of the renewal agreement itself which lead to the conclusion that the guarantor is not to be bound. First, the renewal agreement is once again a standard form prepared and used by the bank and it calls for the signature of the guarantor. It must be assumed that all these standard