A recent decision of the Alberta Court of Queen's Bench in G-Star1 serves as a reminder of the importance of clarity and consistency when inserting guarantee limits and release conditions in letter loan agreements and guarantees. In G-Star, the Court was asked to grant summary judgment on a personal guarantee of corporate obligations. The plaintiff, G-Star Canada Inc. ("G-Star Canada") supplied clothing to a retail clothing company operating as Underground Clothing ("Underground"), a company controlled by the defendant, John Garrett Stiles ("Stiles"), pursuant to a maximum credit facility of up to $450,000. Stiles gave a guarantee to G-Star Canada for debts of Underground up to $250,000.
Underground made a proposal to its creditors under the Bankruptcy and Insolvency Act.2 At the time of the hearing of G-Star, the debt owed to G-Star Canada by Underground exceeded $250,000. G-Star Canada commenced a claim against Stiles for $250,000, the limit of the guarantee.
The credit facility was provided pursuant to a letter agreement between G-Star Canada and Underground. The guarantee was given separately by Stiles. Both the letter agreement and the guarantee referenced a "limit", and if the limit were reduced, the guarantee was to be reduced proportionately; and further that if the limit was reduced to a particular sum, the guarantee would be released. However, problems arose because the letter agreement and the guarantee contained conflicting "limits" which, if reduced, would trigger the release of the guarantee.
The letter agreement defined the limit of the credit facility as "a value up to CAD $200,000 (the "Limit"), plus the value of the personal guarantee", and provided that "if the Limit is reduced to $0.00, the Guarantee, in its entirety, shall be deemed to be immediately released and surrendered". The guarantee purported to adopt the definition of "Limit" in the letter agreement, but provided that "if the Limit is reduced to $200,000.00, this Guarantee, in its entirety, shall be deemed to be immediately released and surrendered".
The Court noted that the intent of the parties seemed clearly to have been to provide up to $450,000 of inventory if the guarantee of $250,000 was given. However, the circumstances under which the guarantee was to be returned were unclear.
Ultimately, the Court found on the evidence that the Limit was never reduced. Accordingly, there was no entitlement to any reduction in the liability or to the return of the guarantee, and G-Star Canada's application for summary judgment was granted.
Although the Court's finding that the Limit had not been reduced obviated the need to determine the impact of the inconsistency between the loan agreement and the guarantee, the Court suggested that if the Limit had been reduced, the Court "might well have concluded that the entitlement to a reduction in liability and eventual return of the guarantee was simply never clear, and that the guarantee would stand without reduction"3. The Court also noted that Stiles' interpretation of the guarantee release mechanism was not commercially reasonable, and would effectively render the guarantee meaningless.4
To avoid unnecessary litigation, lenders inserting guarantee limits or release conditions into their letter loan agreements and standard form guarantees should make sure the limit is expressed consistently in both documents. It is also a good practice to include a paramountcy clause identifying which document takes precedence if there is a conflict between documents.
Footnotes
1 G-Star Canada Inc v John Garrett Stiles 2014 ABQB 33 [G-Star].
2 Bankruptcy and Insolvency Act (Canada) RSC 1985, c B-3, as amended.
3 G-Star at para 29.
4 G-Star at para 27.
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