Ms. Zuk provided a personal guarantee for the business her husband founded (“Silverado”). Ms. Zuk was also an accountant, and was Silverado’s sometime bookkeeper and shareholder prior to her divorce from Mr. Zuk, Silverado’s principal. When Silverado defaulted on its loans, RBC called on the guarantee. Ms. Zuk argued that there had been material alterations to the credit advanced to Silverado, which absolved her of liability under the guarantee in respect of those later advances.

In considering this defence, the Court provided a comprehensive restatement of the law on the defence of material alteration. The Court applied a two-step test:

  1. are the challenged alterations to the underlying loan arrangement material? and
  2. does the language of the guarantee permit the material alterations?

When discussing how to apply this test, the Court set out the law on the duty of disclosure to a guarantor, specific vs. continuing/all accounts guarantees, and compensated vs. accommodation sureties. Each of these three factors influences the Court’s interpretation of the guarantee and the level of scrutiny the Court will capply to the language of the guarantee.

In this case, the Court found it relevant that Ms. Zuk had an interest in Silverado, which the Court found made her a compensated guarantor – similar to a bond company. She was not an accommodation surety, like a spouse who receives no compensation for his or her guarantee. These latter types of sureties receive more protection from the Court and the terms of such guarantees will be construed more strictly.

The Court found that the guarantee was a continuing/all accounts guarantee that had explicitly contemplated the type of alteration that in fact occurred.

This case is notable for all guarantors as a restatement of the law on the defence of material alteration, and it is also helpful when drafting guarantees that the parties contemplate might evolve over time.

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