Ontario court upholds choice for guarantees signed by Alberta guarantors

In a recent decision of the Ontario Superior Court of Justice, the Court addressed whether or not it could assume jurisdiction over two guarantors in Alberta who had signed guarantees in favour of an Ontario lender company.

TFS RT Inc.[1] involved an action for payment of guarantees by an Ontario lender company, TFS RT Inc. The borrower was an Albertan company, Green Patch Environmental Consulting Ltd., and the two individual guarantors, Kenneth and Shaun Dyck, were residents of Alberta. The parties had agreed that their credit agreement, guarantees, and security documents would all be subject to Ontario law.

In cross-provincial transactions like this one, it is common for lenders to include a clause in such documents providing that they will be governed by Ontario law and that the jurisdiction for any disputes will similarly be Ontario.

However, the guarantors in this case argued that, even though they signed guarantees with a governing law clause, an Ontario court lacked jurisdiction to hear their proceeding. They also argued that even if an Ontario court could hear their proceeding, it should not do so because an Alberta court would be a more appropriate forum.

The Court disagreed on both counts. In reaching its decision, the Court applied the two-stage test from the Supreme Court of Canada's judgment in Van Breda,[2] which governs when an Ontario court can assume jurisdiction over a foreign, or extra-provincial, party.

The Court first considered the fact that the lender received the guarantors' signed guarantees in Ontario, via email. Under contract law, this means that the guarantees had, for all purposes, been 'made' in Ontario-even though the guarantors had signed them in Alberta. The Court found that this connection between the guarantees and Ontario created a presumption that the proceeding was properly before it in Ontario. Though the guarantors attempted to demonstrate that the connection between the guarantees and the province was a weak one, they were unsuccessful.

The Court then established that Alberta was not a more appropriate forum for this action. In cases such as this one, where there is a clause in the contract providing that Ontario law will govern, Ontario courts will generally enforce the clause. However, the guarantors argued that the Court should not enforce the clause because:

• It was not brought to their attention before they signed the guarantees; and
• In Alberta, the guarantees would have no effect because the guarantors had not signed the documents in the presence of a lawyer-a requirement under Alberta's Guarantees Acknowledgment Act

The Court found that the guarantors were sophisticated businesspeople who had been given ample opportunity to seek legal advice prior to signing the guarantees. The lenders, therefore, had no obligation to bring the clause to their attention; in the circumstances, the guarantors were taken to have read the guarantees and to have agreed to their terms.

The Court also held that the guarantors could not take advantage of beneficial Alberta provisions after the fact. The clause in the guarantees selecting Ontario law and courts governed.

TFS RT Inc. underlines that parties should give the choice of governing law some careful thought in cross-provincial transactions. Lenders should make themselves aware of any laws that exist in an extra-provincial borrower's or guarantor's jurisdiction that could be contentious if the contract falls into dispute. Lenders should also consider the location in which they intend to receive those other parties' acceptance of the contract.

It is advisable to seek legal counsel when making these decisions and when drafting a forum selection clause in a contract. The wrong choice could mean the difference between the validity and invalidity of that contract in Ontario.

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