By Sam Billard of Aird & Berlis LLP
The Grant Estate case [312 D.L.R. (4th) 366 (R.S.O. 1990 C.L.15)] is, on its face, a decision relating to the Limitations Act (R.S.O. 1990 C.L.15) of Ontario which has since been replaced and so is of little interest. However, it is a sensible commercial judgment by the Ontario Court of Appeal of the sort we like to see. It makes a couple of points that affirm assumptions many have made about how the law works or should work, and is of some interest for that reason.
The facts in Grant Estate are that The Toronto-Dominion Bank (“TD”) loaned a sum of money to Rebanta Holdings Inc. (“Rebanta”) in May of 1989 and the Mortgage Insurance Company of Canada (“MICC”) provided TD with a surety guarantee bond. Rebanta entered into an indemnity agreement with MICC with respect to any payments it was required to make under the surety guarantee bond and secured its indemnity with collateral mortgages on three properties. Rebanta defaulted under its loans in 1992 and MICC paid under its surety bond in 1993.
There followed an unexplained hiatus until June of 2002 when MICC demanded payment under its indemnity agreement and proceeded to act on the collateral security.
The Court makes an interesting point about the nature of collateral security. In this instance, the indemnity agreement provided for interest at the prime rate while the mortgage documents provided for interest at 18% per annum. Considering that this judgment is rendered in 2009 with respect to debts incurred in 1989, an estimated difference in the rate of interest applicable of 14% per annum would have a material effect on how much money is owed.
The Court notes that the mortgages by their terms are collateral to the indemnity agreement. Accordingly, if the debtors had paid everything they owed under the indemnity agreement, they would have been entitled to a release of the mortgages. The amount secured cannot be more than that and, absent some explanation in the documentation for different rates applying to different obligations, the rate in the indemnity agreement governs.
The Court also makes an observation about when limitation periods start to run. The general rule is that the obligation to pay under a demand debt arises and the limitation period starts to run on the date the money is advanced. There are exceptions. One of those exceptions occurs with respect to guarantees where the Court says:
“Where demand is stated to be a condition precedent to the enforcement of the guarantee, there is no crystallized liability until demand is made on the guarantee and the limitation period does not commence until that time.”
Both of the points are very useful. The first one in particular reminds us that:
- There is only ever one deal between the borrower and the lender and we have to be careful that the documentation reflects that deal; and
- When we say that security is collateral to a particular obligation, if we mean to create new obligations under that collateral security, we need to be careful that those obligations are not inconsistent with the primary obligation, unless we make it clear in the contracts which agreement governs.
