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Posted on October 1, 2002 | Posted in Lawyers' Issues

One of the tried and true means by which a guarantor can attempt to escape the legal effect of a guarantee is by claiming duress. The guarantor admits that the guarantor executed the deed but states that it was only because the guarantor was forced to sign it. The creditor must, of course, have some knowledge of the duress. The question arises: how much knowledge? This was dealt with in Gedja Holdings Inc. v. Gondosch, an unreported 2002 decision of the Ontario Court of Appeal on appeal from a 2000 unreported Superior Court of Justice decision.

Here We Go Again

The creditors were individuals who operated a meat business. They also carried on a side business of lending money, with or without security. They had been in this side business before entering into the impugned transaction.

Two brothers owned a car dealership through a corporation. The corporation had received its funding from two sources: an unsecured loan from the creditors and a further loan from Canada Trust. CT decided that it no longer wished to continue financing the corporation and demanded payment of its loan. The brothers, presumably because they could not obtain alternative financing from a financial institution, requested the creditors to provide funds to repay the CT loan. The creditors agreed but only if the brothers provided security for not only the new loan from the creditors but also the existing loan. The brothers agreed.

The security took the form of personal guarantees of the brothers and mortgages from the brothers’ spouses over their matrimonial homes. The creditors used their lawyer to draft the mortgage documentation. The mortgages were executed and registered, the loans went into default, the business went bust, and the creditors attempted to enforce their security.


The brothers argued that the mortgages were not really mortgages; they were just evidence of good faith. In any case, they argued, there was no consideration for the mortgages. For good measure, they argued that they were forced to sign.

The trial judge disposed of these issues easily. He did not believe the brothers’ contention that they did not understand the import of the mortgages or that they did not understand that the mortgages were really mortgages, rather than some nebulous good faith documents. The trial judge also noted that the fresh money advanced was consideration for securing past monies advanced.

As to the duress argument, the trial judge stated: “The plaintiffs did not compel the Gondosch brothers to sign, other than by making the mortgages a condition for the loan of further monies as sought by the Gondosch brothers. That type of compulsion is part of every day commercial life.”


The spouses were in a different position.

The lawyer could not remember whether the spouses signed the mortgages at her office; she thought they did. She made no notes of the meeting. Further, there was no indication in the reasons for decision that the lawyer asserted that it was her unvarying practice never to allow mortgages to be executed outside her office.

The spouses testified that they did not execute the mortgages in the lawyer’s office; rather, their respective husbands brought the documents home for them to sign. Further, each claimed that her husband told her that if she did not sign, they would lose both the business and the house. The spouses had no legal or business training, did not have any significant involvement in the car dealership, and relied completely on their husbands. Under this scenario, the spouses executed the mortgages.

The lawyer testified that she told one of the brothers to obtain independent legal advice and to advise the other brother and both spouses to do the same. She never followed up on the results of this advice. This advice, of course, was utterly useless to protect her clients. She had to ensure that the spouses received independent legal advice and she did not do so.


For the spouses to fall into a protected category, they had to demonstrate that their signatures on the mortgages were obtained by undue influence or that there was a presumption of undue influence because of the nature of the relationship between the brothers and the spouses. The Ontario Court of Appeal had set out these tests in its 2000 decision in Bank of Montreal v. Duguid 47 O.R. (3d) 737.

The trial judge held that the facts demonstrated undue influence. The spouses were pressured by the brothers to sign with threats of economic ruin if they did not.

However, this is not enough. The creditors also had to have notice, either actual or constructive, of the undue influence. It is rare that any creditor would have actual notice and, accordingly, the real question was whether the creditors had constructive notice.

The judge found that the creditors were not just lenders. They had an ownership interest in the car dealership, knew the spouses were not actively involved in the decision-making of the dealership, and knew that the dealership was in financial trouble. The transaction was manifestly to their benefit and manifestly to the detriment of the spouses.

The judge noted that the creditors were under a duty to enquire. Although they relied on their lawyer to protect their interests, they were bound by the lawyer’s actions or, in this case, inaction. The lawyer did not explain the mortgages to the spouses, did not demand ILA, and took no steps to ensure that the execution of the mortgages was completed without undue influence.

Accordingly, the trial judge set aside the mortgages as against the spouses and granted judgment only against the brothers.


The creditors appealed the decision to the Court of Appeal. However, the Court, by way of a 2-page hand-written endorsement, dismissed the appeal. Assuming there was some evidence to support the facts found by the trial judge, the Court of Appeal would have had to accept those findings of fact and the inferences drawn from those facts. Accordingly, the result of the appeal was probably a foregone conclusion.


This action was based on mortgages signed 12 years ago. Subsequently decided cases stated that documents ought never to be executed outside of lawyers’ offices. However, even then, there was no dearth of cases outlining the circumstances in which independent legal advice ought to be obtained to protect against claims of undue influence and non est factum. The lawyer obviously had no real knowledge of these cases. We suspect that the lawyer has already reported herself to her insurers for her utter failure to protect her clients.

The Duguid decision, on which this decision was based, is under appeal to the Supreme Court of Canada and, accordingly, we will soon hear more about undue influence and constructive notice. However, that decision is being appealed by the person claiming undue influence and is being appealed in an attempt to broaden the circumstances under which undue influence can be claimed. The appeal, if successful, would not have altered the Gedja decision.


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