Leisure North v. Co. Holdings Ltd., 2018 SKPC 074

IN THE PROVINCIAL COURT OF SASKATCHEWAN CIVIL DIVISION Citation: 2018 SKPC 074 Date: November 16, 2018 File: 17 - 0817 Location: Prince Albert _____________________________________________________________________________ Between: Leisure North and Co. Holdings Ltd. o/a Home Building Centre – Prince Albert Plaintiff - and - Joell Kowal and Michael Taylor Defendants Bonita Linzmeyer For the Plaintiff Joell Kowal Appearing in Person Michael Taylor Not present ______________________________________________________________________________ JUDGMENT S.D.

SCHIEFNER , J ______________________________________________________________________________ [ 1 ] The Plaintiff (“Home Building Centre”) is a Saskatchewan company which sells building products. It brings this action against Mr. Michael Taylor for recovery of $29,456.67, which is the balance due and owing to Home Building Centre for goods sold to HP and R Contracting (the “proprietorship”). The Home Building Centre sues Mr. Taylor as the sole proprietor of HP and R Contracting. The Home Building Centre sues Ms.

Joell Kowal on the strength of a guarantee she executed accepting responsibility to pay all invoices for products purchased by Mr. Taylor on behalf of his proprietorship. [ 2 ] Mr. Taylor did not attend or participate in these proceedings. Ms. Kowal does not dispute that she personally guaranteed

payment of the goods and materials purchased by Mr. Taylor at the Home Building Centre. However, she takes the position that the limit of her responsibility to do so is $6,000, being the sum set forth in the credit application attached to the personal guarantee she completed on behalf of Mr. Taylor. [ 3 ] For the reasons that follow, I find in favour of the plaintiff. EVIDENCE AND FINDINGS OF FACT [ 4 ] At all relevant times, the defendants were residents of Arborfield, Saskatchewan. Until recently, they were in a common law relationship and had been in that relationship for the previous 10 to 12 years.

For most of that period, Mr. Taylor was a building contractor doing various construction projects. Ms. Kowal assisted Mr. Taylor with his business by doing some basic bookkeeping for him. Other than that, Ms. Kowal was not involved in the day-to-day activities of the proprietorship. [ 5 ] Ms. Kowal testified that Mr. Taylor operated his construction business under the business name of “HP and R Contracting”. She also testified that prior to 2015 he had experienced some difficulties as a contractor both in terms of managing his accounts and dealing with his vendors.

As a result, some local building suppliers would no longer deal with him. However, in 2015 Mr. Taylor still had a good relationship with the Home Building Centre. [ 6 ] Ms. Linzmeyer is the accounts manager of the Home Building Centre. She testified that, prior to May of 2015, Mr. Taylor had been a cash customer and established a track record through a series of cash purchases. In May of 2015, Mr. Taylor approached Home Building Centre and was interested in establishing a line of credit. Ms.

Linzmeyer testified that many contractors seek credit accounts to enable them to take on more construction projects or bigger projects than they could as purely a cash customer. She gave Mr. Taylor a credit application which he took home. [ 7 ] Ms. Kowal testified that she and Mr. Taylor discussed the credit application. She knew that Mr. Taylor wanted to establish a credit account with Home Building Centre. They were both aware that Mr. Taylor had a poor credit history and that Home Building Centre would conduct a credit check. They discussed the difficulty that he would have in getting a credit account if Mr.

Taylor applied in his own name. Ms. Kowal, on the other hand, had a good credit history. As a result, Ms. Kowal agreed to complete the credit application for Mr. Taylor (“Application for Credit). [ 8 ] The Application for Credit was completed in the name of the proprietorship. The address indicated on the form was the post office box jointly used by Ms. Kowal and Mr. Taylor in Arborfield. Under the heading, “Principals/Officers Information”, Ms. Kowal described herself as “Book Keeper/Guarantor”. The form indicates that additional principals or officers could be listed on an attachment.

No other principals or officers were indicated on the application. Ms. Kowal gave her banking information and authorized her bank to release her bank information. Under the heading “Accounting Information”, Ms. Kowal inserted $6,000 where the form asked “Monthly Credit Desired”. [ 9 ] The Application for Credit went on to indicate the following: Customer’s signature attests to financial responsibility and willingness to pay all invoices with Home’s terms. Customer agrees that all purchases made by customer are subject to the terms and conditions on

Schedule A. Customer agrees that whoever customer designates below is authorized to act/purchase on behalf of the customer unless Home is otherwise notified in writing. Customer will advise Home in writing immediately upon any change that alters the legal identity of the customer. [ 10 ] In completing the Application for Credit, Ms. Kowal identified Mr. Taylor as an authorized purchaser for the proprietorship. [ 11 ] The document entitled “guarantee” was attached to the Application for Credit (“Guarantee”).

The Guarantee reads in part as follows: In consideration of Home (as defined on page 1 of Credit Application) extending financing/credit and supplying goods and services (“Goods”) from time to time to the Customer (as defined on page 1 of the Credit Application) the undersigned hereby …. unconditionally guarantees the due payment of all monies which now or which shall at any time hereafter be due or remaining unpaid including all interest, legal and other costs, charges and expenses to Home by the Customer. The Guarantor …. Hereby … agrees with Home that:

2. … Home shall have the sole and unfettered discretion to grant renewals, extensions … 4. The Guarantor agrees that as between the Guarantor and Home, the Guarantor shall be liable as principal debtor until Home shall have received payment of all sums owing to it. [ 12 ] Ms. Kowal completed and signed both the Guarantee and the Application for credit on May 26, 2015, and did so in her own handwriting. Mr. Taylor added his PST number to the credit application. Otherwise, all writing on both forms was added by Ms. Kowal. She then signed and dated both documents. [ 13 ] Mr.

Taylor took these documents to Home Building Centre. Ms. Linzmeyer testified that a credit check was conducted and it came back positive for Ms. Kowal. The Application for Credit was approved and a credit account was established for Mr. Taylor in the name of the proprietorship. [ 14 ] Ms. Linzmeyer testified that soon after the credit account was established Mr. Taylor began making a series of purchases. These purchases were charged to the credit account. Mr. Taylor made some payments toward these purchases.

However, within a few months, the $6,000 credit limit identified in the Application for Credit had been exceeded by Mr. Taylor’s purchases. Ms. Linzmeyer testified that monthly invoices indicating purchases, payments and the outstanding balances were mailed to the address provided. [ 15 ] Ms. Kowal testified that she saw the monthly statements from Home Building Centre. She was aware “fairly soon” after signing the guarantee that the outstanding balance owed to Home Building Centre exceeded $6,000. While Ms. Kowal was aware that additional credit had been extended on the line of credit, she thought that Mr.

Taylor (and not her) would be responsible for any amounts over $6,000. Simply put, Ms. Kowal proceeded on the assumption that $6,000 was the upper limit of her responsibility to Home Building Centre irrespective of the quantum of purchases made by Mr. Taylor. [ 16 ] On October 1, 2015, the credit account for the proprietorship was over the $6,000 limit originally applied for and there had not been a payment on the account for some time. As a consequence, the Home Building Centre placed the account on hold – meaning no additional credit would be extended until payment arrangements were made. In response, Mr.

Taylor contacted the Home Building Centre and offered to bring down a cheque. It is not clear from the evidence whether or not Mr. Taylor did make a payment on the account at that time. Nor is it clear from the evidence what the actual balance of the account was at that time. However, all parties agree that it exceeded $6,000. [ 17 ] The Home Building Centre kept records of the interactions with Mr. Taylor and Ms. Kowal. These records indicate that on October 16, 2015, the Home Building Centre was contacted by Mr. Taylor.

He asked that they release a large amount of building material for a garage package – materials worth approximately $12,000. On December 3, 2015, Mr. Taylor again contacted the Home Building Centre. This time he asked that carpet be released so that he could complete another job that he was working on. On both occasions, the Home Building Centre agreed and the building materials were provided to Mr. Taylor.

These records indicate that the Home Building Centre understood that the credit account could reach as high as $24,000 and they were prepared to permit these additional transactions. [ 18 ] The Home Building Centre’s records further indicate that Mr. Taylor anticipated receiving payments upon completion of two major projects. It would appear that he agreed to make specific payments to the Home Building Centre when he got paid. For example, the Home Building Centre anticipated receiving a payment in the amount of $8,000 on December 8 th and another payment in the amount of $15,000 on December 15 th .

Their records also indicate that Mr. Taylor did not make either of these payments. In January of 2016, Mr. Taylor provided a payment to the Home Building Centre. However, his cheque was returned by the bank because of insufficient funds. [ 19 ] In May of 2016, Mr. Taylor tried to arrange for financing through his bank to pay off the credit account with the Home Building Centre. Apparently, he was unsuccessful in doing so as no further payments on the account were ever received by the Home Building Centre. [ 20 ] In June of 2016, the Home Building Centre turned the outstanding account over to a collection agency.

At that time, the outstanding balance on the account was $28,312.83. [ 21 ] On November 16, 2016, Ms. Kowal contacted the Home Building Centre by phone. Prior to this date, Ms. Kowal had not had

any direct communication with the Home Building Centre. Ms. Kowal confirmed her willingness to pay $6,000.00 but not the total amount of the outstanding account. [ 22 ] No payment was received by the Home Building Centre from either Mr. Taylor or Ms. Kowal toward the outstanding balance after June 1, 2016. ANALYSIS [ 23 ] The Home Building Centre brings a claim against Mr. Taylor for breach of contract, by virtue of his failure to pay for the items he purchased. The Home Building Centre brings a claim against Ms.

Kowal for breach of contract, by virtue of her failure to fulfil her obligations pursuant to a personal guarantee. The Plaintiff’s claim against Mr. Taylor is straight forward and requires little analysis. The Plaintiff’s claim against Ms. Kowal is a bit more complicated. a. Plaintiff’s Claim against Mr. Taylor – Breach of Contract : [ 24 ] There is no dispute that Mr. Taylor purchased building products and other materials from the Home Building Centre and that he did so on credit. The net value of the items purchased by Mr.

Taylor, less payments made by him toward that account, was $28,312.83, as of June 1, 2016. The Home Building Centre demanded payment from Mr. Taylor and he refused or neglected to pay the outstanding balance of his account. I find in favour of the Plaintiff in its claim against Mr. Taylor. The Home Building Centre shall be entitled to judgment against Mr. Taylor in the amount of $28,312.83, together with prejudgment interest on that amount as and from June 1, 2016, together with costs in the amount of $100. b. Plaintiff’s Claim against Ms.

Kowal - Guarantee : [ 25 ] The Home Building Centre brings a claim against Ms. Kowal for failing to fulfil obligations set forth in a personal guarantee. Determination of the Plaintiff’s claim against Ms. Kowal requires that I consider three questions: 1) Is the guarantee valid? 2) Is the guarantee enforceable? 3) Do Ms. Kowal’s obligations under the guarantee extend to the total outstanding balance of the account or is it limited to $6,000 or otherwise? i. Is the Guarantee Valid? [ 26 ] Guarantees are a common form of security in commercial transactions.

Vast sums of money are loaned each year on the strength of a guarantee. In general terms, guarantees are a contractual obligation and as such they are governed by the law of contracts. See: Moschi v Lep Air Services Ltd. [1973] AC 331 (HL) . [ 27 ] A guarantee is a contractual obligation undertaken by a person (commonly known as the “surety” or “guarantor”) in which that person promises that a second person (known as the “principal”) will perform a contract or fulfill certain obligations.

If the principal fails to perform said obligations, the surety then becomes obligated to fulfil the obligations set forth in the guarantee. In determining whether a particular undertaking amounts to a guarantee, the court will look to the substance of the transaction rather than the form of the agreement or the terms in which it is described by the parties. However, like any contract, a guarantee must possess a certain degree of specificity. The agreement must be in writing and signed by the guarantor. There must be an offer by the surety and an acceptance of that offer by the creditor.

Furthermore, the terms of the guarantee must be certain and complete. [ 28 ] Having considered the evidence in these proceedings, I am satisfied on the balance of probabilities of the following: 1. Both the Application for Credit and the Guarantee were completed and signed by Ms. Kowal. 2. Ms. Kowal completed the Application as agent for Mr. Taylor and his proprietorship. In doing so, she was aware that this document was an offer to the Home Building Centre to extent credit to Mr. Taylor, in the name of his proprietorship. 3. Ms. Kowal completed the Guarantee in her personal capacity. In doing so, Ms.

Kowal agreed to guarantee repayment of the credit advanced to Mr. Taylor and/or the proprietorship from time to time.

4. Ms. Kowal’s offer was accepted by the Home Building Centre and the Home Building Centre extended credit to theproprietorship on the strength of and in reliance upon the personal guarantee provided by Ms. Kowal. [29] In light of the foregoing, I am satisfied that the document executed by Ms. Kowal on May 26, 2015, is a valid personalguarantee. ii. Is the Guarantee enforceable? [30] A personal guarantee is an ancillary contract. It presupposes a primary obligation on the part of another. Default on the partof the principal is required to make the guarantee enforceable. There is no dispute that Mr.

Taylor purchased building material from theHome Building Centre on credit. Mr. Taylor has neglected or refused to pay for those items. As a consequence, the Home BuildingCentre is entitled to seek enforcement of Ms. Kowal’s agreement to answer for any debt incurred by Mr. Taylor (as set forth in theGuarantee). [31] A guarantee may be avoided where a party entered into it under duress or undue influence. Duress is a narrow concept andonly applies in the most blatant of menacing conduct, such as physical violence. No such evidence was tendered in these proceedings norsuggested by Ms. Kowal.

Undue influence, on the other hand, is a broader concept. [32] In Barclays Bank plc v O’Brien, [1993] 4 All ER 417 [Barclays], the House of Lords held that, where a woman enters into amanifestly disadvantageous transaction, and where there is a substantial risk that the husband has committed some equitable or legalwrong (i.e., undue influence or misrepresentation) in order to secure the woman’s consent to the guarantee, the Bank was required to takefurther actions before accepting the wife’s guarantee.

Such additional action took the form of requiring or, at least, recommending thatthe wife obtain independent legal advice before executing a guarantee. [33] In Canada, there is no presumption that undue influence exists in the case of a husband-and-wife relationship or a commonlaw partnership. See: Bank of Canada v Stuart, (SCC), [1911] AC 120. Whether or not undue influence is present is aquestion of fact, and the burden of proving such influence rests on the party so claiming.

The kind of influence necessary was describedby the Court in Domenco v Domenco and Ignat, (MB KB), 41 DLR (2d) 267 (MBQB) as “overpowering”. [34] Also, undue influence is not available to set aside a guarantee provided to a creditor unless that creditor knew or reasonablyought to have known that such influence was being exerted on the surety by the principal or another party.

Simply put, it is not a defenceto a claim brought by a creditor against a surety for that person to complain that he/she was subject to undue influence unless the creditorhad actual knowledge of undue influence being placed on the surety or if there is some basis upon which the creditor ought reasonably tohave been aware of the potential for such influence. See: Barclays. [35] For Ms. Kowal to set aside the personal guarantee she provided to the Home Building Centre on the basis of undue influencethere must be evidence that she was subject to overpowering influence by Mr.

Taylor and that the Home Building Centre knew or oughtto have known of such influence. I find no evidence to support the conclusion that Mr. Taylor exercised overpowering influence overMs. Kowal or that her decision to help Mr. Taylor and his business (by completing an application for credit on his behalf and byproviding a guarantee to the Home Building Centre) was anything other than the exercise of her free will – imprudent as that action mayhave been. While I have the greatest empathy for Ms.

Kowal and the unfortunate circumstances in which she now finds herself, theCourts will not protect a surety against his/her own folly, imprudence or lack of foresight unless it can be established that the surety’sobligations were obtained as a result of undue influence or duress. Neither of these which have been established in these proceedings. [36] Even if such influence by Mr.

Taylor did exist, I find no evidence to support the conclusion that the Home Building Centrewas a party to such influence or that it knew of such influence or that it ought to have reasonably known that such influence was beingexerted on Ms. Kowal. [37] For these reasons, I find that the Guarantee is enforceable. iii. Is there any limit on the extent of Ms. Kowal’s obligations under the Guarantee?

[38] The Home Building Centre seeks recovery of the full amount of the outstanding account - $29,456.67 as of December 31,2016. On the other hand, Ms. Kowal argues that the reference to “$6,000” in the application for credit under “monthly credit desired”created a financial limit on the quantum of her personal guarantee. [39] Having reviewed the Guarantee, I do not find that it contains a financial limit. In the Guarantee, Ms.

Kowal “unconditionallyguarantees the due payment of all monies which are now or which shall at any time hereafter be due or remaining unpaid including allinterest, legal and other costs, charges and expenses to Home by the Customer”. The express language of the Guarantee indicated that itis a “continuing and irrevocable guarantee and shall cover all present and future liabilities” of the proprietorship to the Home BuildingCentre. [40] Ms. Kowal may have hoped that the personal guarantee she provided was limited to $6,000.00.

However, the reference to$6,000 was the amount of monthly credit that was sought from the Home Building Centre not the limit of her financial liability under theGuarantee. A plain reading of the documents indicates that Ms. Kowal’s liability under the Guarantee was defined by the amount ofbuilding material that was purchased by Mr. Taylor from the Home Building Centre that remained unpaid at the end of each month. Ifthe customer happened to purchase more than $6,000 worth of material, the guarantee provided by Ms. Kowal extended and covered allsuch purchases. [41] However, that does not end the analysis. [42] Ms.

Kowal’s guarantee falls into the class of accommodation sureties – those who enter into a guarantee in the expectation oflittle or no remuneration. The law protects such guarantors by strictly construing their obligations. [43] On November 1, 2015, the Home Building Centre placed the credit account on hold. Subsequently, Mr. Taylor met withrepresentatives of the Home Building Centre, who agreed to extend credit on the account on terms and conditions negotiated by Mr.Taylor. There is no evidence that Ms. Kowal played any

part in these negotiations. The evidence of Ms. Linzmeyer was that the firsttime the Home Building Centre had any direct dealings with Ms. Kowal regarding the account was in November of 2016, well after theextensions of credit had been granted. There was a significant increase in the quantum of credit extended to the customer and the terms ofthat increase were negotiated by Mr. Taylor and agreed to by the Home Building Centre. In my opinion, this represented a materialalteration to the terms of the contract of debt between the principal and the creditor.

The credit extended to the proprietorship by theHome Building Centre increased from approximately $6,000 to over $24,000. [44] The impact on a personal guarantee following a material alteration of a contract of debt was summarized by Cory J. on behalfof the Supreme Court of Canada in Manulife Bank of Canada v Conlin, (SCC), [1996] 3 SCR 415, at para. 2: 2. It has long been clear that a guarantor will be released from liability on the guarantee in circumstances where the creditor and theprincipal debtor agree to a material alteration of the terms of the contract of debt without the consent of the guarantor.

The principle wasenunciated by Cotton L.J. in Holme v.

Brunskill (1878), 3 Q.B.D. 495 (C.A.), at pp. 505-6, in this way: The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the suretyought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that thealteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it isnot self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court . . . will hold that in such acase the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that ifhe has not so consented he will be discharged.

This rule has been adopted in a number of Canadian cases. See for example Bank of Montreal v. Wilder, (SCC), [1986] 2S.C.R. 551, at p. 562. [45] The common law rule that the principal and the creditor are not permitted to substantively alter the terms of the contract ofdebt without the consent of the surety is designed to prevent mischief between them at the expense of the surety. The basis for the ruleis that any material alteration of the principal contract of debt will result in a change of the terms upon which the surety may becomeliable, together with a material change in risk to which the surety is exposed.

See: The Law of Guarantee (2nd ed. 1996) by Professor K.P. McGuinness at p. 534. [46] In Saskatchewan, the common law has been modified by s. 69 of The Queen’s Bench Act, 1998, SS 1998, c.Q-1.01. Thissection provides as follows: 69(1) Giving time to a principal debtor, or dealing with or altering the security held by the principal creditor, does not of itself discharge

a surety or guarantor.

(2) A surety or guarantor is entitled to set up the giving of time or the dealing with or altering of the security as a defence, but this defence shall be allowed only to the extent that it is shown that the surety or guarantor has been prejudiced by the giving of time or the dealing with or altering of the security. [ 47 ] As a result, in Saskatchewan a material alteration to a contract of debt negotiated by the principal and a creditor without the consent of the surety does not presumptively discharge the the surety.

Rather, such alteration provides a defense to the surety but only to the extent that such person has been prejudiced by the actions of the principal and the creditor. [ 48 ] I am satisfied that the Home Building Centre and Mr. Taylor negotiated a substantial alteration to the terms of the contract of debt both on October 16, 2015, and December 3, 2015. These actions quadrupled the quantum of liability to which Ms. Kowal was exposed and they did so without her consent. The additional credit that the Home Building Centre was prepared to extend to Mr.

Taylor marked a significant change in the account being guaranteed by Ms. Kowal. [ 49 ] I am also satisfied that Ms. Kowal was prejudiced by the extension of credit agreed to by the Home Building Centre. The quantum of liability to which Ms. Kowal was exposed following the extension bears little resemblance to the liability she originally agreed to accept. While Ms. Kowal would have become aware that a significant increase in credit had been extended by the Home Building Centre once she reviewed the subsequent monthly statements, at that point the changes had already been negotiated and approved.

In other words, the notice Ms. Kowal would have received in the form of the monthly statements would have been ineffective in providing timely notice (prior to a material alteration to the contract of debt). [ 50 ] While Ms. Kowal’s obligations under her personal guarantee are not limited by the reference to $6,000 in the Application for Credit, her obligations under the Guarantee are limited to the amount of the outstanding balance as of October 16, 2015, being the point in time when Mr.

Taylor negotiated the first substantial increase in the credit being extended by the Home Building Centre. [ 51 ] Unfortunately, I do not have sufficient evidence to quantify this amount. [ 52 ] While I am satisfied that the personal guarantee provided by Ms. Kowal to the Home Building Centre is valid and enforceable, I find that two material alterations in the original contract of debt occurred without Ms. Kowal’s consent. I also find that Ms. Kowal has been prejudiced by the alteration to the security held by the Home Building Centre within the meaning of s. 69 of The Queen’s Bench Act, 1998 .

As a result, I find that Ms. Kowal’s obligations under the personal guarantee are limited to the amount of the outstanding credit account at the point in time that the first material alteration was negotiated – being October 16, 2015. [ 53 ] I do not find that Ms. Kowal is entitled to a complete discharge of her obligations. Ms. Kowal knowingly and willingly undertook to guarantee payment of the debt incurred by Mr. Taylor for items purchased by his proprietorship from the Home Building Centre. While the new arrangements negotiated by Mr.

Taylor increased the quantum of credit to be extended by the Home Building Centre, it is not apparent that doing so altered the risk that Ms. Kowal could become liable under the original guarantee she provided. The alterations negotiated by Mr. Taylor only increased the quantum of debt involved. not the terms of the guarantee she provided. As a result, Ms. Kowal’s prejudice within the meaning of s. 69(2) of The Queen’s Bench Act, 1998 only provides a defence to the additional debt incurred by Mr. Taylor following October 16, 2015.

CONCLUSION AND ORDERS [ 54 ] I find in favour of the Plaintiff in its claim against Mr. Taylor. The Home Building Centre shall be entitled to judgment against Mr. Taylor in the amount of $28,312.83, together with prejudgment interest on that amount as and from June 1, 2016, together with costs in the amount of $100. [ 55 ] I find in favour of the Plaintiff in its claim against Ms. Kowal. But I make no order as to quantum at this time. I invite the Home Building Centre and Ms. Kowal to attempt to determine this amount by agreement if possible. I shall remain seized with respect to the quantification of Ms.

Kowal’s obligations under the Guarantee should their efforts be unsuccessful.

[ 56 ] Ms. Kowal shall be entitled to judgement against Mr. Taylor in the amount of and with respect to any payments made by her to the Home Building Centre pursuant to her obligations under the Guarantee. Dated at the City of Prince Albert, in the Province of Saskatchewan, this 16 th day of November, 2018. ______________________________ S.D. Schiefner, J