It is well established that having a personal guarantor obtain independent legal advice before signing a guarantee is not an essential element to the enforceability of a guarantee by a lender. However, a recent decision of the Ontario Superior Court of Justice serves as a helpful reminder of some of the benefits of obtaining independent legal advice to support a guarantee.
In 2240094 Ontario 1, a motion for summary judgment was brought by the bank against the loan guarantors. The loan guarantors had previously signed a guarantee under which they agreed to be jointly and severally liable for a corporation’s indebtedness. When the corporation defaulted on its loan from the bank, the guarantors did not make payment.
In reaching his decision, Justice Perell revisited earlier case law2 confirming that (i) a bank is under no obligation to ensure that a guarantor obtains independent legal advice, and (ii) a bank has no obligation to advise the guarantor of the legal risks associated with the particular transaction.3
Justice Perell specifically referred to the Featherstone case,4 where the court stated that the primary purpose for a bank requesting a certificate of independent legal advice is to avoid, if possible, the guarantor later raising defences such as non est factum, unconscionability, fraud, misrepresentation or undue influence. Further, as the burden of proving each of these defences rests on the guarantor, requiring independent legal advice can serve to significantly restrict the availability of those defences.5
Upon a review of the evidentiary record, Justice Perell determined that the guarantors in 2240094 Ontario would not be able to establish non est factum, however, there was enough evidence to require a trial for misrepresentation. The bank's motion for summary judgment was dismissed, however, this was not a dismissal of the bank's claim against the guarantors.
What is interesting about this case is that the guarantors were both very young (19 and 21 years old) and guaranteed a small loan of $29,325. Additionally, the guarantors were the sons of the principal owner of the borrower. While they apparently appreciated the liability that they were taking on, there is question as to whether they understood the full extent of that liability and the nature of the legal risk that they were assuming. In assuming this liability, the guarantors solely relied upon the information that they had received from the bank’s representative.
Justice Perell stated that, in his opinion, had the guarantors received independent legal advice, it is arguable that they would have been advised to refuse to sign the guarantee and this case would not have been before him.6 In his view, a competent lawyer would have warned them about the danger of relying on any advice or assurances from the bank alone. Based on his comments, it appears that Justice Perell was motivated to help the guarantors because of their young age and lack of sophistication. The fact that the guarantors were in a potentially vulnerable family position (signing guarantees for a loan to their father’s business) may have also played a role.
Although the final outcome of this case is currently unknown (as it awaits trial), what is apparent is that, while not mandatory, independent legal advice is a useful litigation avoidance tool. There will of course be cases where the dollar value of the loans guaranteed does not justify the costs involved in having a guarantor obtain independent legal advice. However, where loan values warrant it or the guarantor appears to be a vulnerable relationship with the borrower or its principals, requiring that a guarantor receive independent legal advice is recommended.
1 Royal Bank of Canada v. 2240094 Ontario Inc., 2013 ONSC 2947. [2240094 Ontario]
2 Bank of Montreal v. Featherstone (1989), 68 OR (2d) 541 (Ont CA); Royal Bank v. Poisson (1977), 26 OR (2d) 717 (Ont HC); Bertolo v. Bank of Montreal (1986), 57 OR (2d) 577 (Ont CA); Royal Bank v. Hussain (1997), 37 OR (3d) 85 (Ont Gen Div); Royal Bank v. 966566 Ontario Inc.,  OJ No 606 (Ont SCJ).
3 2240094 Ontario at para. 15.
4 Bank of Montreal v. Featherstone (1989), 68 OR (2d) 541 (Ont CA) [Featherstone]
5 2240094 Ontario at para. 16.
6 2240094 Ontario at para. 25.