Guarantee THIS! How to Correctly Enforce a Guarantee

I’m sure at some stage in our lives, we have all either been or needed a guarantor. Mother or father standing in for our lack of financial security. But what happens when you are the person receiving the guarantee from someone and the party defaults. How do you enforce that guarantee?

First, let’s start off with the basics:

A guarantee is essentially a separate contract that is designed to safeguard a creditor in the event that a debtor fails to meet the payment obligations contained in the original contract. In essence, the guarantee contract is collateral to the principal contract. Its enforceability arises when the contingency is met. The contingency, of course, is that the principal debtor has defaulted.

Interpreting Personal Guarantees:

The Supreme Court of Canada dealt with the interpretation and enforcement of personal guarantees in Manulife Bank of Canada v. Conlin[1]. The court held:

  • There is no special rule of construction for guarantees. 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.
  • When interpreting guarantees, like other contracts, the court may apply the contra proferentem rule where the wording of the guarantee supports more than one meaning. According to this rule, the ambiguity will be resolved in favour of the party who did not draft the contract. This is an interpretive rule of last resort, to be used only when all other means of ascertaining the intentions of the parties, as expressed by their written contract, have failed

Enforcing a Guarantee:

The recent decision of the BC Court of Appeal in 0867740 BC Limited v. Quails View Farm[2] is instructive. In that case, the plaintiff had contracted to build a trailer park for the corporate defendant, whose obligation to pay the plaintiff was guaranteed by the individual defendants.

After default by the corporate defendant, the plaintiff sued the sureties without making a separate prior demand for payment. The guarantee was payable on demand. The sureties defended on the basis that no demand had been given. The plaintiff argued that their pleading itself was the demand.

The BC Court of Appeal held that in the absence of a formal demand to the sureties, the claim against them was premature. In coming to this conclusion, the Court noted that the defendants were accommodation sureties who are entitled to the strict benefit of the protections available to them.

The failure to make a demand to an accommodation surety will normally be fatal to the enforceability of a guarantee that is payable on demand. The situation is different, however, for professional sureties.

In Citadel Insurance v. Johns-Manville Canada[3], the Supreme Court of Canada has held that professional sureties are not entitled to the strict protections that are afforded to accommodation sureties. A failure to give demand, or to observe other conditions of the guarantee, will only defeat a claim against a professional surety if the latter has suffered actual prejudice as a consequence.

Conclusion

Although the courts look at the type of guarantee and the context in which it is being provided, the rule of thumb is to provide the guarantor with a reasonable amount of notice before pursuing a claim. If you are unsure what a reasonable amount of time is, first consult the guarantee agreement and see if a notice period is specified. If there is no notice period prescribed, offer a minimum of 30 days’ notice or undertake several demands. Give them the opportunity to deal with the matter. If they do, you may have just saved yourself a lot in legal fees and needless litigation stress. Patience can be a virtue.

[1] 1996 CanLII 182 (SCC), [1996] 3 S.C.R. 415; 203 N.R. 81; 94 O.A.C. 161; 6 R.P.R.(3d) 1; 30 O.R.(3d) 577; 139 D.L.R.(4th) 426; 30 B.L.R.(2d), as affirmed in Saskatchewan Wheat Pool v. Strait Crossing Group Ltd., 2002 SKQB 515. [2] 2014 BCCA 252 [3] [1983] 1 S.C.R. 513