When will a third party guarantee not be valid?667402 Alberta Ltd (Re), 2018 ABQB 1048 (CanLII)
1. A group of related companies were the subject of proceedings pursuant to the Companies’ Creditors Arrangement Act, and an Initial Order was granted on July 5, 2017. The focus of the proceedings evolved from reorganization to liquidation. Prior to July 2017, one of the subject companies (“191”) entered into contractual arrangements with “Weslease” regarding a proposed sale and lease back transaction in relation to a wastewater treatment plant owned by 191 (the “Transaction”). Instead of providing personal guarantees, the principals of the corporate group proposed that two of the other companies (“137” and “CNC”) would guarantee the obligations of 191. Several documents were prepared to give effect to the Transaction.
2. Weslease later claimed that monies were due and owing to by 191 and sought to enforce the security pursuant to the 137 and CNC collateral mortgages. The mortgages did not contain the word “guarantee”. In Alberta, the Statute of Frauds applies when a party guarantees another party’s obligations. According to the Statute, a binding guarantee requires that the agreement be set out in “a memorandum or note made in writing”.
3. Weslease argued that despite the absence of the word “guarantee”, it was obvious from the wording of the mortgages that 137 and CNC were guaranteeing the obligations of 191. In the alternative, Weslease argued that, looking at all of the documents governing the Transaction, a memorandum in writing evidencing a guarantee existed and bound the parties. Weslease claimed that a guarantee does not need to be limited to a single document titled “Guarantee”. The requirements of the Statute of Frauds would be satisfied if the names of the parties appeared on the memorandum—either expressed or by reasonable construction or by reference to other documents physically or referentially attached thereto. Otherwise, the doctrine of part performance should apply and the Court should exercise its discretion and find a valid and subsisting oral guarantee.
4. The Monitor argued that neither 137 nor CNC were parties to the Transaction and did not provide any form of guarantee in relation to the liabilities of 191 to Weslease. Consequently, Weslease could not enforce its security pursuant to the mortgages.
5. The Court agreed with the Monitor that Weslease’s argument hinged on the Court ignoring or rewriting the language of the documents governing the Transaction. The wording of the collateral mortgages did not provide that 137 and CNC were guaranteeing the obligations of 191. A mortgage does not create a debt, but instead acts as security for a debt that otherwise exists. The mortgages, by their terms, purported to secure any indebtedness owed by 137 and CNC to Weslease under the Transaction. In fact, there was no underlying debt owing from 137 or CNC to Weslease. 137 and CNC were not listed as parties to the Transaction, nor as guarantors. Any oral agreement purporting to have the same effect cannot result in a binding guarantee.
6. The Court conceded that there may be a case where various documents, when considered together, can sufficiently create a binding guarantee that satisfies the Statute of Frauds, this was not such a case.
7. Further, the Transaction documents contained “Entire Agreement” clauses in respect of the respective rights and obligations of the parties to the Transaction. As the Alberta Court of Appeal noted in Houle v Knelsen Sand and Gravel Ltd, 2016 ABCA 247, the point of “entire agreement” clauses is that the obligations of the parties will be determined in accordance with the written terms of the contract, not extraneous negotiations and discussions that have not been reduced to writing and, consequently, not formally acknowledged by the contracting parties.
8. Neither 137 nor CNC received any consideration for granting the collateral mortgages. It is a basic principle of contract law that promises made without consideration do not create enforceable contracts, unless the contract is executed under seal. Neither of the mortgages was executed under seal.
9. As for Weslease’s argument about part performance, the Court confirmed that courts will apply the doctrine of part performance if three criteria are met:
a. the plaintiff shows detrimental reliance;
b. the plaintiff establishes that the acts of detrimental reliance sufficiently manifest the contract alleged; and
c. if the link between the acts and yet-to-be-in-evidence contract is sufficiently strong, “parol” evidence of that contract may be permitted to be adduced.
10. Generally, the doctrine of part performance does not apply to guarantees. Weslease conceded as much but did not offer any authorities on which basis to distinguish this situation. Even if the doctrine of part performance were to apply to guarantees, Weslease failed to establish the three criteria required. There was no evidence that Weslease relied on the mortgages in order to enter into the Transaction, nor that it would not have entered into the Transaction without them.11. The Court concluded that there were no guarantees by 137 and CNC in favour of Weslease, and granted the Monitor’s application to discharge the collateral mortgages.