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Parol Evidence

We have said it before, and will say it again – some debtors will do or say just about anything to avoid payment of their debts. Take this defence: The document I signed does not demonstrate the true state of the deal between creditor and me because the creditor promised me that (fill in the blanks). The action between Toronto-Dominion Bank v. 1745361 Ontario Corp and Carter, a 2013 Ontario Superior Court of Justice decision, contains an example of this defence.

Loan

The main principal of a corporation applied for a small business loan. She was refused; the bank felt that she did not have the financial backing or appropriate experience for her new venture. The principal therefore persuaded the defendant to join her in the venture and, based on both of their guarantees, the bank agreed to lend $250,000 to the corporation. In keeping with the nature of a small business loan, the personal guarantees were limited to 25% of the actual loan.

The corporation defaulted and the bank commenced an action.

Defence

The defendant claimed that, when he signed his guarantee, he told the bank representative that he was only supposed to be a limited partner with the principal and had not yet finalised his arrangement with her. He claimed that the bank representative acknowledged this and knew that the defendant’s signature was conditional on the arrangements being finalised.

At the same time as the guarantees were signed, the defendant deposited $73,000 into the corporation’s bank account. He then received, from a party with whom the corporation was going to do business, $30,000 plus an indemnification of his guarantee to the bank and an indemnification for the money he deposited.

When asked why he did not follow up with the bank regarding his “conditional” guarantee, the defendant could give no answer.

Outcome

The judge gave short shrift to the defence. The Supreme Court of Canada has held that there cannot be an oral waiver of a written contract if the oral waiver contradicts specific unambiguous terms in the written agreement. This is known as the parol evidence rule. The guarantee stated that it was continuing, absolute, and “unconditional.”

Seeing the writing on the wall, defendant’s counsel had also argued that the bank had agreed to hold the guarantee in escrow pending the finalisation of the defendant’s relationship with the principal. The bank’s representative denied this. It would make no sense for the bank to advance the money without the guarantee being in force.

Regardless of the factual dispute, the judge held that an escrow arrangement can only arise when documents are being held by a third party and, in this case,  the guarantee was being held by the bank itself. We are not convinced that this is a correct statement of the law, but it matters not; the judge held that the alleged escrow arrangement contradicted the specific terms of the guarantee and could not stand.

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.