Making Demands on a Guarantee?

Originally published on LinkedIn by litigator Sepideh Nassabi on January 19, 2017.

If you are a lender or someone who has guaranteed a loan, you should pay attention to a recent decision released by the Court of Appeal.

In The Toronto-Dominion Bank v. Konga, the appellant guaranteed a loan made by The Toronto-Dominion Bank (“TD”) to Vertamin Inc. TD alleged that Vertamin Inc. breached the terms of the loan agreement and demanded payment of the loan from both Vertamin Inc. and from the appellant as guarantor.

TD was successful on its summary judgment motion against the guarantor for payment based on the guarantee. The motion judge found that Vertamin Inc. was in breach of the loan agreement by:  (i) being overdrawn on its line of credit; (ii) being in breach of the tangible net worth requirement; and (iii) not providing its accounts receivable listings.

On appeal, the guarantor claimed that the motion judge erred when he did not find that TD had failed to meet the preconditions to making a demand. The guarantor argued that (i) Vertamin Inc. was not given a reasonable time to repay the loan and (ii) a demand for payment under the guarantee was only available if Vertamin Inc. committed an act of default in relation to a monetary term.

The Court of Appeal dismissed the appeal on the following basis.

The determination of reasonable time to pay is fact-specific and dependent upon the conduct of the parties, both before and after the demand. A creditor cannot arbitrarily establish a timeframe for repayment. On the facts of this case, Vertamin Inc. was afforded a reasonable time to pay following the issuance of the demands. In fact, TD took no steps to enforce the demand for many months after issuing the demand letter.

Vertamin Inc. also failed to repeatedly meet its financial obligations under the loan agreement and had therefore defaulted on its monetary terms. More fundamentally, the Court of Appeal stated that this submission must fail because it amounted to an assertion that the motion judge erred in his interpretation of the guarantee, which the Court did not agree with.

Finally, the guarantor argued that he was entitled to a discharge based on TD’s conduct. To obtain a discharge, the guarantor had the onus of showing that TD’s demand somehow caused Vertamin Inc.’s default. There was no finding that TD played any role in this respect.

http://www.canlii.org/en/on/onca/doc/2016/2016onca976/2016onca976.html