Prior History: Business Development Bank of Canada v. Noble, [2012] N.J. No. 397, 2012 NL.C. LEXIS 577 [Canada] noted in 2013 ANNUAL REVIEW OF LETTER OF CREDIT LAW & PRACTICE at 354.

Note: TWN, a fishing company of which Tony Noble (Guarantor) was director and shareholder, applied for two loans from the Business Development Bank of Canada (Lender) for the construction of a fishing vessel. Guarantor personally guaranteed the loans up to specific amounts through guarantees which were contained in the loan agreement. It provided:

2. Guarantee

The Guarantor unconditionally guarantees performance by the Borrower of all promises under the Loan Security and payment by the Borrower of the Principal Sum, protective disbursements, interest and other amounts the Borrower has promised to pay under the Loan Security (the foregoing amounts collectively are called the "Outstanding Balance"). The Guarantor also promises to pay to the Bank all legal fees and disbursements, on a solicitor and client basis, incurred by the Bank in reference to any suit upon this guarantee. The liability of the Guarantor under this guarantee does not exceed the Limited Amount plus legal expenses plus interest on the Limited Amount at the rate provided under the Loan Security calculated and compounded monthly from the date the Bank demands payment under this guarantee.

4. Liability Not Diminished by Acts of the Bank or the Borrower

Except for payment of all sums due under the Loan Security, payment of the amount due under this guarantee or written discharge, no act or omission of the Bank or of the Borrower, before or after default, discharges or diminishes the liability of the Guarantor under this guarantee and without restricting the foregoing, the Guarantor convenants with the Bank as follows:

(a) the Bank may grant time and other indulgences to the Borrower, to a Guarantor and to any other person liable for all or any portion of the Principal Sum;


7. Payment and Remedying Defaults

The Guarantor shall pay the amount guaranteed or rectify any default immediately upon receiving a demand from the Bank and shall do so whether or not the Bank has exhausted its recourses against the Borrower, other parties, the Loan Security or anything mortgaged under the Loan Security. A demand is effectually made when a letter is posted to the address of the Guarantor last known to the Bank.

When Applicant defaulted on both loans and failed to pay after a demand, Lender sued Applicant to recover the amounts and moved for summary judgment which the trial court granted and declined to reconsider. On appeal, the Newfoundland and Labrador Supreme Court - Court of Appeal, in an opinion written by C.W. White, reversed.

Guarantor had asserted that the statute of limitations had run since the default on the loan had occurred in beyond the applicable limitations period. In resolving this question, the trial court had considered whether the guarantee was a performance guarantee or a demand guarantee, concluding that it was the latter and that, accordingly, the limitations period only began to run when a demand was made, thereby bringing the action within the limitations period.

Guarantor argued that a default on the loan and not making a demand was a condition precedent to an action on the guarantee. Looking to Paragraph 7 of the Guarantee, the appellate court concluded otherwise, agreeing with the trial judge that the obligation of the Guarantor was triggered by a demand and not a default by the Borrower. The appellate court relied on the language of Clause 7. Payment and Remedying Defaults of the loan agreement that stated "The Guarantor shall pay the amount guaranteed or rectify any default immediately upon receiving a demand from the [Lender] . . . A demand is effectually made when a letter is posted to the address of the Guarantor last known to the [Lender]".

The Court, however, set aside the trial court's order for summary judgment on the basis that other issues raised in the case were "not properly engaged by the [trial] judge".

Comment: It is clear that the trial court thought that the guarantee was a "demand guarantee" and that the appellate court did not revise this appellation. Whether it was independent is another question. This terminology adds further to the confusion surrounding "guarantees", suggesting that even the adjective "demand" does not necessarily connote independence.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.