Bank of Montreal v. Wilder, [1986] 2 S.C.R. 551
Bank of Montreal Appellant
v.
Earl A. Wilder, Terrance Wilder a.k.a. Tara Wilder, Dara M. Wilder, Earl E. Wilder, Cecilia Melrose and Tara Wilder Respondents
and between
Bank of Montreal Appellant
v.
Earl A. Wilder and Minnie Pearl Wilder Respondents
indexed as: bank of montreal v. wilder
File No.: 18010.
1985: November 5; 1986: November 27.
Present: McIntyre, Chouinard, Wilson, Le Dain and La Forest JJ.
on appeal from the court of appeal for british columbia
Guarantee ‑‑ Discharge of surety ‑‑ Umbrella loan agreement for financing of company business ‑‑ Subsequent agreement to extend credit for specific projects ‑‑ Agreement breached by creditor ‑‑ Whether guarantors entitled to total or partial discharge.
The credit extended by appellant bank to a family company was personally guaranteed by several members of the family and secured by the company's debenture. Although the bank periodically increased the credit limit as the company's business expanded, the company's credit draws for most of 1975 exceeded its credit limits. A meeting in June of that year between two family members and the bank's representatives was precipitated when the bank dishonoured two of the company's cheques. The bank agreed that if additional capital was injected into the company and further guarantees were given by the family the bank would continue to finance the company until completion of certain road projects. The bank, notwithstanding the injection of capital and the giving of a guarantee by one of the family members, proceeded almost immediately to dishonour the company's cheques. After a review of the financial position of the company it decided to make a precipitous demand under the debenture. When the company was unable to meet the demand, a receiver manager was appointed. It refused the company's request to complete the road projects, thereby forcing their completion by other means at a loss. The company went into bankruptcy. The bank sued the guarantors on their personal guarantees. The trial judge found that the bank had breached the agreement made with the family at the June meeting. The Court of Appeal agreed. The question before this Court was whether the guarantors were entitled to a total or only a partial discharge.
Held: The appeal should be dismissed.
An umbrella loan agreement was in effect here, general in nature and under which the bank agreed to finance the company's business on an ongoing basis. This general agreement was guaranteed by the Wilders' earlier guarantees. The June agreement varied the loan agreement with the consent of the guarantors and the Wilders' earlier guarantees "attached" to it. The bank, under the umbrella agreement, could have decided to make the business decision to stop financing the company at any time prior to the June agreement but that option was closed to it after that agreement. It made a firm commitment to the company and the guarantors to finance the company until the road projects were completed. It breached the June agreement and that breach was analogous to a variation of a principal contract between creditor and debtor without the guarantor's consent. The bank's breach not only increased the guarantors' risk in a substantial way and impaired their security; it also put the principal debtor out of business and into bankruptcy. The guarantors were therefore entitled to a total discharge.
Cases Cited
Considered: Watts v. Shuttleworth (1860), 5 H. & N. 235, 157 E.R. 1171, affirmed (1861), 7 H. & N. 354, 158 E.R. 510; Bank of India v. Trans Continental Commodity Merchants Ltd., [1982] 1 Lloyd's Rep. 506; referred to: Seaboard Loan Corporation v. McCall, 7 S.E.2d 318 (1940); Rose v. Aftenberger (1969), 9 D.L.R. (3d) 42.
Authors Cited
Rowlatt, Sir Sydney Arthur Taylor. Rowlatt on the Law of Principal and Surety, 4th ed. By David G. M. Marks and Gabriel S. Moss. London: Sweet & Maxwell, 1982.
APPEAL from a judgment of the British Columbia Court of Appeal (1983), 149 D.L.R. (3d) 193, 47 B.C.L.R. 9, allowing in part and dismissing in part the appeal of E. A. Wilder and M. P. Wilder and allowing the cross appeal as against the Bank of Montreal by E. A. Wilder and M. P. Wilder and allowing the cross appeal as against the Bank of Montreal by E. A. Wilder, T. Wilder and C. Melrose, from a judgment of Monroe J. (1980), 19 B.C.L.R. 77, sustaining in part and dismissing in part an action as against defendants E. A. Wilder and M. P. Wilder and sustaining an action as against C. Melrose, T. Wilder and E. A. Wilder. Appeal dismissed.
David Roberts, Q.C., for the appellant.
Glen Nicholson, for the respondents.
The judgment of the Court was delivered by
1. Wilson J.‑‑This appeal involves the law of guarantee and suretyship. The essential question to be answered is in what circumstances a guarantor or other surety will be discharged absolutely or partially from liability on his guarantee because of improper conduct on the part of the creditor. The question arises out of three related actions brought by the appellant upon seven personal guarantees given to it by the respondents. The actions were tried together and the Court of Appeal for British Columbia dealt with them as a single appeal. I propose to do the same.
1. The Facts
2. The respondents (the "Wilders") are all members of the Wilder family which was headed by Earl Wilder, Sr. and his wife Minnie. By 1971 the Wilders were active in ranching, park maintenance, ski hill development and other businesses in British Columbia. The family enterprises were operated through companies controlled by the Wilders. This appeal concerns only one of those companies, E. A. Wilder Enterprises Ltd. (the "Company").
3. Late in 1971 Mr. and Mrs. Wilder took stock of the loans which they had from their banker, the Canadian Imperial Bank of Commerce. These had started out as fixed interest loans but had been converted by the Bank into fluctuating interest loans and were now all at different interest rates. The total amount owing was approximately $225,000. The Wilders decided that the time had come to move their banking business elsewhere. They were particularly interested in obtaining a fixed interest rate. They approached the Industrial Development Bank in Cranbrook and reached a tentative agreement with it for a $200,000 loan repayable in instalments over twenty years at a fixed interest rate of 8¾%. However, on the way home from Cranbrook they decided to check with the Bank of Montreal in Kimberly to see if they could do better. They were interviewed by the bank manager, Mr. Jeffrey, and a lot of evidence was adduced at trial concerning alleged misrepresentations made by him as to the interest rate on the loan of $330,000 which was negotiated at that meeting. The issues relating to alleged misrepresentation were dealt with in the courts below, and since no appeal has been taken to this Court from the disposition made in the Court of Appeal, this Court need not deal with them.
4. On February 16, 1972 Mr. and Mrs. Wilder gave their joint guarantee to the Bank for the $330,000 loan made to the Company. On April 28, 1972 the Company executed a demand debenture in the same principal amount. This debenture created a floating charge on the assets and undertaking of the Company and a fixed charge on its real property. By May of 1972 the debenture was registered in British Columbia.
5. The Bank and the Company apparently enjoyed an amicable relationship during the following two years. By the end of 1974 the Company had become quite heavily involved in road construction. This resulted in an increase in its operating capital requirements. In particular, the Company had bid successfully on two road‑building projects for the Alberta government, the Priddis and High Prairie projects in Northern Alberta. With the need for increased operating capital the Company began to exceed its authorized credit limits. The credit limits were adjusted by the Bank with periodic increases. Nevertheless, the credit draws exceeded the credit limits during most of 1975.
6. By the beginning of 1975 the Bank had a new manager in Kimberly, a Mr. Smith. Mr. Smith was anxious to improve the Bank's security against Company borrowings. On March 26, 1975 he wrote to the Company and enclosed standard form guarantees to be executed by the Wilders. The letter also noted that there was a need to "reach accord on future loan limits". The requested guarantees were given to the Bank by various members of the Wilder family. I set out the particulars of all the outstanding guarantees below.
Guarantor
Relationship
Limit
Date
1.
E.A. Wilder
Father
$330,000
16 February 1972
M.P. Wilder
Mother
2.
E.A. Wilder
Father
105,000
2 April 1974
3.
E.E. Wilder
Son
300,000
2 April 1975
4.
Dara Wilder
Daughter
300,000
9 June 1975
5.
Tara Wilder
Daughter
300,000
19 June 1975
6.
Cecilia Melrose
Daughter
300,000
19 June 1975
7.
E.A. Wilder
Father
250,000
14 August 1975
7. Company drawings on its loan account continued to exceed credit limits to some degree and in early June 1975 the Bank dishonoured two of the Company's cheques. This upset the Wilders and Mrs. Wilder asked for a meeting with Bank representatives in Vancouver. The meeting was held on June 23, 1975 and Mrs. Wilder's son, Earl Wilder, Jr., attended the meeting with her. Present on behalf of the Bank were Mr. Smith, the Branch Manager, Mr. Munzel, the Credit Manager, and Mr. Campbell, the Assistant Credit Manager. Mr. Campbell was responsible for the Company's account. The trial judge found as a fact that Mrs. Wilder represented both the Company and the individual members of the family at the meeting as their "authorized agent". This proved to be a very significant finding.
8. There was conflicting evidence at trial as to whether or not an agreement was reached at the meeting. The trial judge evidently preferred the evidence of Mrs. Wilder and her son because he found that an agreement was entered into ("the June agreement") in the terms alleged by the Wilders. He found that the Bank had agreed to continue to finance the Company at least until it had completed the Alberta road projects. It was to extend the necessary line of credit to complete these projects estimated at a maximum of $1,100,000. In return, the Wilders were to inject $250,000 into the Company account from related family companies. Individual family members were to provide further guarantees of the Company loans and the Company was to provide the Bank with a new debenture for $550,000.
9. The $250,000 was paid into the Company by the Wilders as agreed and on August 14, 1975 Mr. Wilder gave the Bank his guarantee for $250,000. Unfolding events overtook the giving of the guarantees by the other family members. The new debenture was never presented to the Company for execution for the same reason.
10. As noted by Lambert J.A., almost immediately after the Wilders' injection of fresh capital into the Company the Bank again began to dishonour Company cheques including payroll cheques for the Alberta road projects. Beginning in August 1975 the Bank honoured no more cheques. The trial judge found that this was a breach of the June agreement and the Court of Appeal agreed.
11. Some time in the early part of August 1975, Mrs. Wilder had discovered what seemed to be an error in the audited financial statements of the Company. The error resulted in an inaccurate picture of the Company's financial position. It improved it by some $250,000. Before notifying the Bank of the error Mrs. Wilder asked the Company's chartered accountants to verify whether it was in fact an error or not. It is not clear on the evidence exactly when the Bank learned of the error since there is a conflict in the testimony of the parties. Mr. Smith testified that in a telephone conversation with Mrs. Wilder on or about August 15, 1975 she told him of the error. Mrs. Wilder denied speaking with Mr. Smith until August 22, 1975 when she says she told him about it. In any event, the Bank appears to have learned of the error through the auditors, possibly in a telephone call on August 21, 1975 to the Kimberly branch, but certainly on August 22, 1975 when the auditors withdrew the financial statements. The Bank demanded payment of its loan before noon on August 22, 1975.
12. By way of further explanation for the Bank's sudden calling of the loan Mr. Smith testified as to other things Mrs. Wilder had said to him in the telephone conversation he alleged took place on or about August 15, 1975. In addition to the alleged advice as to the error in the Company's financial statements, Mr. Smith testified that Mrs. Wilder told him that no further Bank documents would be executed by the Company. He also claimed that Mrs. Wilder told him that the Company might even shut down. Mrs. Wilder, as earlier mentioned, denied that any such conversation ever took place. Mr. Smith also alleged that Mrs. Wilder had told him that the Company was depositing its money elsewhere. In cross‑examination Mr. Smith admitted that it could well have been Earl Wilder, Jr. who told him this. Earl Wilder, Jr. testified that at no time did any of the Company principals contemplate shutting the Company down for any period. The trial judge made no specific findings of fact on this conflicting testimony because in the view he took of the case the reasons for the precipitous demand were irrelevant. It was, in any event, a clear breach of the June agreement.
13. Mr. Smith also testified that by early August, 1975, the Bank was anxious to get the new debenture in place. While he acknowledged that the Bank wanted to shore up its security he denied that it was planning to call the loan as soon as it accomplished this.
14. By August 1975 the Bank had a new Assistant Credit Manager in its Vancouver office, a Mr. McPhee. Mr. McPhee had not been present at the meeting when the June agreement was entered into. On August 12, 1975 Mr. McPhee prepared an internal memorandum that made several recommendations concerning the Company account. One was that the Company be given two weeks to seek financing elsewhere. There is no evidence that the Company was ever given this opportunity. Another was the appointment of a receiver‑manager to "look after our interests" and yet another the placing of a chattel mortgage on Company equipment "to delay call of loan".
15. On August 22, 1975 the Bank demanded payment of its loan by letter served on the Company by the Bank's Alberta solicitors. This demand was made under the debenture given by the Company in 1972. The amount claimed due including accrued interest was $860,920.30. The demand was made in Calgary at 11:40 a.m. for payment to be made in Kimberly by noon of the same day. Not surprisingly, it was not possible for the Company to meet such a precipitous demand and later the same day the receiver‑manager took possession under the debenture.
16. The receiver‑manager refused to complete the road‑building projects when Earl Wilder, Jr. asked him to do so on August 22, 1975 and they were completed at a loss under the auspices of the Company's bonding company. On December 2, 1975 the Company was declared bankrupt.
17. In an action by the Bank against the Company on the debenture, the trustee in bankruptcy eventually consented to judgment for the Bank in January 1978. The Company's counterclaim for damages for wrongful appointment of the receiver was dismissed by consent in April 1979. There is no evidence as to whether or not the Wilders ever consented to this dismissal. The receiver‑manager was ordered discharged in April 1979. The Bank sued several of the Wilders on their personal guarantees and it is that litigation which gives rise to the issues before us.
2. The Courts Below
18. Munroe J. found that the Bank breached the June agreement by failing to provide the Company with the financing it had undertaken to provide, by dishonouring the Company's cheques, by calling the Company loans and by causing a receiver‑manager to be appointed under the debenture. As a result the Company was unable to complete the road‑building projects and the bonding company was called upon to do so. This could result in the Wilders, being, sued by the bonding company on an indemnity agreement they had signed with the bonding company. The trial judge also found that, apart from its breach of the June agreement, the Bank also violated the terms of the debenture by failing to give the Company a reasonable time to comply with its demand.
19. Nevertheless, the trial judge did not accept the Wilders' submission that they were entitled to a discharge of their obligations under all their personal guarantees. He released Mr. and Mrs. Wilder from liability on guarantee 1 because of misrepresentations by the Bank as to the interest rate on the loan guaranteed. He released Mr. Wilder from liability on guarantee 7 because it had been given "pursuant to an agreement made on June 23, 1975 and later breached by the plaintiff". But he found that the Wilders "had no meritorious defence" to the Bank's claim on guarantees 2, 5 and 6. He did not elaborate on why this was so. He did, however, grant the Wilders the right to set off $74,000 against their liability under these guarantees for damages caused by the Bank's breach of the June agreement and its unreasonable demand under the debenture. The Bank's claim on guarantee 3 was stayed by the personal bankruptcy of E. E. Wilder before trial and the Bank's action on guarantee 4 was discontinued.
20. The Bank appealed the trial judgment on guarantees 1 and 7 to the British Columbia Court of Appeal and the Wilders cross‑appealed the disposition on guarantees 2, 5 and 6. Each judge of the Court of Appeal gave separate reasons for judgment. Lambert J.A., with whom Anderson J.A. concurred, held that the Bank was not entitled to succeed on any of the guarantees. It could not succeed on guarantees 2, 5, 6 and 7 because of its breach of the June agreement. Seaton J.A., dissenting, distinguished between the guarantees which preceded the June agreement and its breach and guarantee 7 which post‑dated the agreement and was given on the faith of it. He saw no reason why the Bank should not succeed on the earlier guarantees. Lambert J.A. agreed with the trial judge that guarantee 1 was unenforceable because of the Bank's misrepresentation. Anderson J.A. disagreed that there had been any misrepresentation but found guarantee 1 unenforceable for the same reason that guarantees 2, 5 and 6 were unenforceable, i.e., breach of the June agreement. Seaton J.A. also found no misrepresentation but found guarantee 1 enforceable for the same reason that in his mind guarantees 2, 5 and 6 were enforceable.
21. The Bank, pursuant to leave granted on February 16, 1984, appealed to this Court the judgment of the Court of Appeal discharging the Wilders from liability on guarantees 1, 2, 5 and 6.
3. The Issues
22. There are three issues before us, namely:
(1) Are the Wilders entitled to be discharged from their liability under guarantees 1, 2, 5 and 6 because of the Bank's breach of the June agreement?
(2) If not, are the Wilders entitled to set off against their liability under the guarantees the damages suffered by the Company as a result of the Bank's breach?
(3) If they did have a right of set off, are the Wilders precluded from asserting it because the Company's counter‑claim against the Bank for damages for the wrongful appointment of the receiver was dismissed on consent? In other words, is the set off claim res judicata?
23. Because of the conclusion I have reached on the first issue it is not necessary to deal with the second and third issues.
4. The Guarantees
24. All of the guarantees executed by the Wilders were in the Bank's standard form. In them the guarantors guaranteed:
...payment to said Bank of all present and future debts and liabilities direct or indirect or otherwise, now or at any time and from time to time hereafter due or owing to said Bank from or by the Customer . . . .
The guarantees were expressed to be "continuing" guarantees subject to the guarantor's right to terminate further liability on ninety days written notice to the Bank. They contained the following clause which is relevant to the issue before us:
it is further agreed that said Bank, without exonerating in whole or in part the undersigned, or any of them (if more than one), may grant time, renewals, extensions, indulgences, releases and discharges to, may take securities from and give the same and any or all existing securities up to, may abstain from taking securities from, or from perfecting securities of, may accept compositions from, and may otherwise deal with the Customer and all other persons (including the undersigned, or any one of them, and any other guarantor) and securities, as said Bank may see fit . . . .
(Emphasis added.)
5. Discharge of the Guarantors
25. Counsel for the Bank submits that a distinction must be made between a guarantee of a specific contract and a general guarantee of present and future debts or liabilities. Only, he submits, where a specific contract has been guaranteed will breach of that contract by the creditor entitle the guarantor to an absolute discharge. Guarantees 2, 5 and 6 were general guarantees of the Company's continuing obligations to the Bank. The Bank could therefore stop financing the Company at any time without affecting the enforceability of the guarantees. Counsel did, however, concede that the Wilders are entitled to a partial discharge from their guarantees because of the Bank's breach of the June agreement on the basis that the breach impaired the value of security held by the Bank. He submits that the figure of $20,000 arrived at by Seaton J.A. was the appropriate measure of this relief from their liability.
26. It is trite law that any material variation of the terms of the contract between the creditor and the principal debtor to the prejudice of the guarantor without the guarantor's consent will discharge the guarantor. Seaton J.A. in his dissenting reasons says that is not this case. The variation, if it is properly so‑called, was made in this case with the consent and active participation of the guarantors and in fact constituted a binding agreement, so the trial judge found, to which the creditor, the principal debtor and the guarantors were all parties. Herein lies the point of divergence between the view of the majority and the view of the minority on the Court of Appeal. Lambert J.A. approached the case on the basis that if a variation of the principal contract without the guarantor's consent discharges the guarantor, so also should a breach of a variation made with the guarantor's consent. In other words, Lambert J.A. would apply the law of guarantee and suretyship to that situation. Seaton J.A., on the other hand, saw no reason to stretch the law of guarantee and suretyship to cover a case involving a straight breach of contract. The following excerpt from his reasons sets out Seaton J.A.'s position:
The case law provides that guarantors will be discharged if a creditor unilaterally varies a term of the principal contract guaranteed. These cases may be rationalized on the basis that a guarantor is entitled to some relief where his risk is materially altered and where there are no remedies available to him in contract. In these circumstances, the guarantor is on his own and must look to equity because the principal debtor has suffered no loss upon which the guarantor could rely in counterclaim or set‑off. I see no merit in extending the reasoning in these cases to the situation of a breach of a contract by a creditor where adequate contractual remedies lie. If a guarantor's interests can be protected in contract, there is no reason to extend the application of equitable principles.
27. Lambert J.A. states the principle on which he relies as follows:
The principle on which I rely in reaching my conclusion on this point may be stated in this way. Where the creditor, by his own conduct, (a) causes the default of the principal debtor, (b) materially increases the risk to the guarantor, and (c) impairs the security that is available to the guarantor on payment of his guarantee obligation to the creditor, then the guarantor is discharged.
28. Lambert J.A. then went on to add that it was not necessary in this case to decide to what extent any one or any two of these three factors would have been sufficient to discharge the guarantees because in this case they were all present.
29. As already mentioned, Seaton J.A. was troubled by the fact that the guarantees in issue other than guarantee 7 were all given prior to the June agreement and its breach by the Bank. The trial judge found that there was no valid defence to guarantees 2, 5 and 6 presumably for this reason. Seaton J.A. pointed out that the guarantees were in standard form and guaranteed all present and future debts and liabilities and permitted the Bank to deal with the Company as it saw fit. The Company borrowed and the Bank advanced on the strength of the guarantees and any loss suffered by the guarantor as a result of a breach by the creditor of the principal contract could be adequately compensated by rights of set‑off and the right to be discharged pro tanto if securities were impaired.
30. Lambert J.A. appreciated the problem arising from the timing of the earlier guarantees. He resolved it by finding that the June agreement was a "modification agreement" to the original "umbrella loan agreement" pursuant to which financing arrangements between the parties were worked out. He states:
In my opinion there was eventually an overall agreement between the Bank and the company. The agreement covered the terms of the banking arrangements of the company, and the security to be given by the company to the Bank. That overall umbrella agreement is of the type usually called "the loan agreement". The agreement made on 23 June, 1975 was a "modification agreement" to the umbrella loan agreement.
And later he says:
The umbrella agreement coupled with the security documents and any subsidiary agreements must all be gathered together and considered together and interpreted and applied as a unified contract consisting of a total package of inter‑related rights and obligations.
Seaton J.A. accepts the concept of an "umbrella agreement" pursuant to which the Company became a customer of the Bank. He does not, however, subscribe to the view that the earlier guarantees attached to the June agreement.
31. It is apparent that the approach of Seaton J.A. would result in a partial discharge only; the approach of Lambert J.A. in a total discharge. The Bank does not deny that the Wilders are entitled to a partial discharge. It disputes only the amount. It is necessary therefore to determine whether the position taken by Lambert J.A. has any basis in the existing jurisprudence.
32. The first case relied on by Lambert J.A. is Watts v. Shuttleworth (1860), 5 H. & N. 235, 157 E.R. 1171. In that case the contractor had agreed with Watts to complete the fittings for a warehouse. Watts agreed to insure the fittings against fire. Shuttleworth agreed to guarantee the performance of the contractor's work. When the fittings were partly completed they were destroyed by fire. Watts had not insured and Pollock C.B. concluded that Shuttleworth was discharged from his guarantee by this failure on the part of Watts. Quoting from his reasons at p. 1176:
The substantial question in the case is, whether the omission to insure discharges the defendant, the surety. The rule upon the subject seems to be that if the person guaranteed does any act injurious to the surety, or inconsistent with his rights, or if he omits to do any act which his duty enjoins him to do, and the omission proves injurious to the surety, the latter will be discharged: Story's Equity Jurisprudence, sect. 325. The same principle is enunciated and exemplified by the Master of the Rolls in Pearl v. Deacon (24 Beav. 186, 191), where he cited with approbation the opinion of Lord Eldon, in Craythorne v. Swinburne (14 Vesey, 164, 169), that the rights of a surety depend rather on principles of equity than upon the actual contract; that there may be a quasi contract; but that the right of the surety arises out of the equitable relation of the parties.
The decision of Pollock C.B. was upheld on appeal ((1861), 7 H. & N. 354, 158 E.R. 510), Williams J. stating at pp. 510‑11:
In this case the Court, at the close of the argument, was unanimous in thinking that the defendant, as surety, was discharged by the plaintiff's omission to insure. But some doubts were felt whether the discharge ought to be regarded as total, or only to the extent of the damage which could be shewn to have been sustained by the surety in respect of that omission. In support of the latter view, it was contended, on behalf of the plaintiff, that the present case is analogous to that of a creditor who has lost or given up to his debtor a security which he has in his hands, where the surety is held to be thereby discharged, because of the rule that a surety is entitled to the benefit of all the securities which the creditor has against the principal; not however in toto, but only to the extent of the security so lost or given up.
But on consideration we are all of opinion that, in the present instance, the discharge of the surety, being effected by reason of his position having been deteriorated in respect of having been made responsible for an uninsured principal, in lieu of an insured one, the case is analogous to those where a surety has been held discharged by time having been given to the debtor . . . .
33. In commenting on the judgment of Williams J. in Watts v. Shuttleworth Lambert J.A. expresses the view that the reasons in that case did not turn on any proposition that the contract to insure became incorporated as a term of the guarantee. However, it would appear that the case deals with the guarantee of a specific contract which was breached. In the case of a specific contract it is to be assumed that the guarantor gave his guarantee in contemplation of an ascertainable and clearly identified risk inherent in the contract. The guarantor in such a case is discharged because he is powerless to protect against variation of the principal contract by the parties to that contract. Once he has given his guarantee on the basis of that particular risk equity protects him against any variation of it to which he was not a party.
34. Lambert J.A. relied also upon Bank of India v. Trans Continental Commodity Merchants Ltd., [1982] 1 Lloyd's Rep. 506. The guarantor of the Bank's customer in that case argued amongst other things that he was not liable to the Bank because of irregular dealings between it and the customer on certain foreign exchange contracts. Bingham J. held that there had been no negligence by the Bank and no irregular or prejudicial dealings by it towards the guarantor. He cited the familiar principle that variation of the principal contract without the consent of the guarantor will discharge the guarantor. He rejected the submission that the guarantor should also be discharged where the creditor acts in a manner prejudicial to the interests of the guarantor. At page 515 of the report Bingham J. states:
Leaving aside what may be the special case of fidelity guarantees, I consider the true principle to be that while a surety is discharged if the creditor acts in bad faith towards him or is guilty of concealment amounting to misrepresentation or causes or connives at the default by the principal debtor in respect of which the guarantee is given or varies the terms of the contract between him and the principal debtor in a way which could prejudice the interests of the surety, other conduct on the part of the creditor, not having these features, even if irregular, and even if prejudicial to the interests of the surety in a general sense, does not discharge the surety.
(Emphasis added.)
Lambert J.A. relies on this passage for the proposition that a surety will be discharged when the creditor causes the debtor's default. He points out that the discharge occurs not because the obligation that was broken was made a part of the guarantee contract, but because the creditor's breach of his contract with the principal debtor increased the risk to the guarantor. For this proposition he relies also on the decision of Felton J. in Seaboard Loan Corporation v. McCall, 7 S.E.2d 318 (1940), at p. 319:
...the failure of the corporation to procure the insurance [on the debtor's life] increased the risk of the sureties and they were relieved, not because the corporation breached an agreement with them but because it breached an agreement with the maker whereby their risk was increased . . . .
Lambert J.A. concludes from these authorities:
In my opinion, the present case, where the creditor intentionally adopted a course of action that was in breach of its contract with the principal debtor, with the result that the risk to the guarantor was materially increased, and the guarantor's security was materially impaired, is a case where the guarantee is completely discharged and not a case where the liability of the guarantor should be reduced only by the extent to which the security was impaired.
He points out that in Rose v. Aftenberger (1969), 9 D.L.R. (3d) 42, Laskin J.A. (as he then was) distinguished the two kinds of cases as follows at p. 49:
In my view, the encompassing principle to be applied is that a surety is discharged if either the principal contract to which he gave his guarantee is varied without his consent in a matter (as the Supreme Court of Canada said in Holland‑Canada Mortgage Co. v. Hutchings, [1936] S.C.R. 165 at p. 172, [1936] 2 D.L.R. 481 at p. 486), not plainly unsubstantial or necessarily beneficial to the guarantor; or, if the terms of the contract of guarantee between the creditor and the surety are breached by the creditor. Where, as here, there is simply a wrongful dealing with the security taken by the creditor, and it is not shown that the taking (and hence the keeping as well) of the security was a condition of the giving of the guarantee, then the surety cannot be relieved beyond the value of the security lost to him.
Lambert J.A. states:
This is not a case where the contract between the creditor and the principal debtor was varied without the consent of the guarantor; it is a case where the principal contract was broken unilaterally by the creditor in a way which materially affected both the obligations and the rights of the guarantor. I regard this as a stronger case even than the case of a variation of the principal contract. So I think that the breach operates as a complete discharge in this case.
35. It seems to me that the authorities relied on by Lambert J.A. support his approach provided, and this is the crucial proviso, the pre‑existing guarantees given by the Wilders somehow "attached" to the June agreement. As has been noted earlier, the guarantees themselves do not refer to any particular agreement. They are general guarantees covering liabilities incurred by the Company in its dealings with the Bank in the ordinary course of its relationship with the Bank. Nor were the guarantees originally given on the faith of any particular agreement. Counsel for the Wilders submits, however, that the pre‑existing guarantees did "attach" to the June agreement. He finds some support for this in Rowlatt, Rowlatt on the Law of Principal and Surety (4th ed. 1982), at p. 88, where the learned author suggests that general guarantees of future liabilities "attach" to liabilities incurred through any subsequent agreements made between the creditor and debtor. The learned author states:
However, where a guarantee is given in general terms to cover the liabilities which are to result from a future course of dealing generically specified in the guarantee, the creditor can vary the course of dealing under which successive liabilities arise, so long as the course of dealing continues to be of the character coming within the scope of the guarantee, and no change is made in the terms of any liability after it is actually incurred and the guarantee is attached to it.
36. In my view the June agreement was an agreement for the financing of the Company's business within the contemplation of the overall loan agreement which was guaranteed by the Wilders. By itself, of course, it was not prejudicial to the guarantors; indeed, quite the contrary. However, if the pre‑existing guarantees attached to it, and I believe that they did, then the key question becomes whether the subsequent breach of it by the Bank materially changed the risk assumed by the guarantors to the guarantors' detriment. I think there can be no doubt that it did. I agree with Lambert J.A. that the Bank's breach caused the Company's default. It materially impaired the value of the security it held for the Company's indebtedness by preventing the Company from continuing as a viable commercial operation. As a consequence the guarantors' equitable rights of subrogation and indemnity were seriously interfered with if not effectively destroyed. As far as its effect on the liability of the guarantor is concerned there seems to be no justification for distinguishing between a variation of a principal contract without consent and a breach of a principal contract varied with consent. The case of Watts v. Shuttleworth, supra, would appear to be authority for that proposition.
6. Conclusions
37. There was in this case an umbrella loan agreement, general in nature, under which the Bank agreed to finance the Company's business. This general agreement was the one guaranteed by the Wilders' earlier guarantees. The initial loan agreement became very specific, however, when all the interested parties entered into the June agreement. The Bank under the umbrella agreement could have decided to make the business decision to stop financing the Company at any time prior to the June agreement. After that agreement this option was closed to it. It agreed with the Company and with the guarantors that it would continue to finance the Company at least until it had completed the Alberta road projects. It failed to do so despite the fact that the Wilders kept their part of the bargain. The Bank's breach not only increased the guarantors' risk in a way which was "not plainly unsubstantial" and impaired their security; it put the principal debtor out of business and into bankruptcy. Such conduct on the part of the Bank cannot, in my opinion, be viewed as within the purview of the clause in the guarantee contracts permitting the Bank to deal with the Company and the guarantors as it "may see fit". I agree with Lambert J.A. that such a clause must be construed as extending to lawful dealings only.
38. I would dismiss the appeal with costs and order the appellant to release to the respondents its claim to the life insurance proceeds hypothecated to it as security for the respondents' guarantees.
Appeal dismissed with costs.
Solicitors for the appellant: Campney & Murphy, Vancouver.
Solicitors for the respondents: Dungate, Nicholson & Co., Prince George.