Ontario Court of Appeal confirms practice of concurrent demands upon borrowers and guarantors

26 June 2017


The Ontario Court of Appeal has once again confirmed that it will hold personal guarantors to the business deal they knowingly entered into, and will uphold the express terms of a clear and unambiguous guarantee.

In Konga[1], Mr. Konga was a director, the chief executive officer and the majority shareholder of the borrower. He executed a typical guarantee in respect of all indebtedness, liabilities and obligations of the borrower to The Toronto-Dominion Bank (the "Lender"), and was fully aware of all of the covenants and obligations of the borrower under the applicable loan agreement and its other terms and conditions. He was also fully aware of the numerous expressions of concern, cautions and notices of default sent to the borrower by the Lender over a nine month period prior to its issuance of formal demand upon the borrower.

Mr. Konga's guarantee contained a very familiar clause about the Lender's remedies, which read as follows:

"[The Lender] is not required to exhaust its recourse against [the corporation] or under any security before being entitled to demand payment from the Guarantor."

The Lender demanded immediate payment from Mr. Konga at the same time as the Lender issued formal demand for repayment of the borrower's debt and sent out enforcement notices. The motions judge granted summary judgment against Mr. Konga and he appealed.

On appeal, Mr. Konga argued that the long-standing principle established in Lister v. Dunlop[2] required that the Lender give the borrower a reasonable time to pay following demand upon the borrower, before any demand could be made upon him as a guarantor.[3] The Ontario Court of Appeal disagreed with the notion that there was a required order in which the demands were to be made, but nevertheless found that the Lender had in fact afforded the borrower a reasonable time to pay following the issuance of demand upon the borrower.

Mr. Konga also suggested that a demand for payment could only be made upon him if the borrower defaulted upon a monetary term of the loan agreement. He contended that although the borrower's failure to achieve financial ratios, failure to stay within its borrowing limits and failure to provide financial statements when required were sufficient to entitle the Lender to make demand upon the borrower, they were not appropriate triggers for demand upon his guarantee.[4]

The Court of Appeal approved of the motion judge's consideration of the surrounding circumstances and factual matrix in interpreting the guarantee. It concluded that no such restriction on enforcement based upon monetary defaults (as suggested by Mr. Konga) was established by the clear and unambiguous language of the guarantee. Rather, other provisions expressly stated that Mr. Konga was liable to pay the unlimited liability of the borrower, the Lender was not required to exhaust its recourse against the borrower, and he was required to make payment to the Lender immediately upon receipt of a written demand for payment.[5]

The last card played by Mr. Konga was a claim that he was entitled to an equitable discharge of his guarantee as contemplated by the long-standing Wilder[6] case. The Court of Appeal confirmed the motion judge's determination that there was simply no basis to support Mr. Konga's suggestion that the Lender's demand had somehow caused the borrower's default. In fact, the Court of Appeal expressly noted the motion judge's determination that the Lender had acted in good faith at all times.[7] Once again the Court of Appeal felt no reason to interfere with the motion judge's determination that Mr. Konga was not entitled to a discharge from his guarantee because he had failed to meet the onus of establishing that the actions of the Lender had caused the default of the borrower. [8]

It is not surprising that the Court of Appeal had little time for Mr. Konga's claims, having regard to his extensive involvement in the borrower and awareness of all of the careful and well-documented pre-enforcement and enforcement steps taken by the Lender. The Court of Appeal's decision reflects the reasonable expectations of the parties entering into this loan, and seeks to provide the contracting parties with some certainty in the interpretation of traditional loan documents.

[1] Toronto-Dominion Bank v. Konga, 2016 ONCA 976 [Konga]. An application for leave to appeal this decision made by the Guarantor to the Supreme Court of Canada was dismissed on June 8, 2017.

[2] R.E. Lister Limited v. Dunlop Canada, [1982] 1 S.C.R. 726.

[3] Konga at paragraph 17.

[4] Konga at paragraph 19.

[5] Konga at paragraphs 24 and 25.

[6] Bank of Montreal v. Wilder, [1986] 2 S. C. R. 551 [Wilder].

[7] Konga at paragraph 29.

[8] Konga at paragraph 30.

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