Court Rewrites Bank Loan and Guarantee to Correct “Mutual Mistake”

The Ontario Court of Appeal recently considered whether it was appropriate to “rectify” an agreement between sophisticated parties to a loan/guarantee arrangement, in the face of what amounted to a mistake.
A corporation, E Ltd., had persuaded the Bank to extend its line of credit to $700,000. E, as president and sole shareholder of E Ltd, personally guaranteed the loan and also pledged a $700,000 collateral mortgage on his own property. Eventually E Ltd. owed the Bank over $3 million, and it soon became insolvent. The Bank called the loan and sought to enforce the security provided by E. Ultimately, E paid $700,000 to the Bank, which discharged the collateral mortgage; however it demanded an additional $700,000 under E’s personal guarantee as well. E refused to pay, and the Bank sued both E and E Ltd. The Bank succeeded against E Ltd at trial, but the action against E personally was dismissed. The trial court conceded that, in normal cases, the terms on the face of the collateral mortgage and guarantee would have bound E to personally pay the entire debt of E Ltd. In this case, however, there was evidence that the parties’ common intention was otherwise: the collateral mortgage was intended to be security for E’s guarantee obligation, which was extinguished when he paid the first $700,000. It said:
“The case before us is not a case of unilateral mistake. On the trial judge's reasonable view of the record, it is a case of common mistake: when entering into the written agreement, neither party intended to create two independent $700,000 obligations. Both thought the obligations were connected.”
That being the situation, rectification by the court was the remedy. Moreover, the Court of Appeal dismissed the notion that this would "open the floodgates", by making it too easy for a court to correct mistakes in signed contracts, even those entered into by sophisticated parties. Rather, it found that to allow the Bank to collect $1,400,000 on its security for a $700,000 loan would amount to unfair dealing and would unjustly enrich the Bank at E's expense. See Royal Bank of Canada v. El-Bris Ltd., 2009 (ON C.A.)