Court Rejects Spouse’s Argument that she did not Read Guarantee Before Signing it to Secure Husband’s Business Loan

On April 20, 2007, the Ontario Supreme Court granted default judgment in the amount of $105,766.00 to the Bank of Montreal in a case all too representative of the perils faced by small business owners and their spouses when asked to sign personal guarantees.

Brian Schon was the sole officer and director of his masonry and bricklaying business that he incorporated in August 2001. His wife, Michelle, was never an officer, director, employee or shareholder of the company, nor was she employed by nor did she receive any compensation or remuneration from the company. In March 2001, Shon borrowed $50,000 from the bank for the business at which time he and Michelle signed a promissory note. In August 2003, the company applied to the bank for an additional $80,000 of credit. The company indebtedness at the time was $87,000. The bank agreed to advance the additional $80,000 that would increase the company's indebtedness to the bank to the sum of $167,000. As a condition of the bank's agreement to advance the $80,000 the bank required the personal guarantees of the borrower, Shon, and his wife. Shon and Michelle executed the guarantee. Michelle did not read the guarantee before signing it, nor did she seek independent legal advice. The question before the Court was whether she was personally liable on the guarantee.

After reviewing the evidence, the Judge noted:

From the foregoing evidence of the respondent, she says she would not have signed the guarantee if she had known that it was a guarantee for the company's indebtedness to the bank. Obviously the respondent had the guarantee document before her when she signed it. She agrees that it appeared to be a legal document. She signed it of her own free will; the document was not obscured in any way; she could have read it if she had chosen to do so and she was not pressured threatened or intimidated into signing it. Placing the respondent's evidence at its highest, she executed the August guarantee without ascertaining the nature of the document she was signing. Signing an agreement without having read it does not in the absence of fraud or misrepresentation absolve a person from being bound by the agreement.”

With regard to the absence of independent legal advice, the Judge quoted from an earlier decision of the Ontario Court of Appeal Bank of Montreal v. Featherstone (1989), 68 O.R. (2d) 541 (Ont. C.A.), in which the Court stated:

The failure of a wife to obtain independent legal advice before executing a guarantee will not in every case entitle her to escape liability under the guarantee. The obvious purpose of the bank in requesting a certificate of independent legal advice is to avoid, if possible, the spouse's later raising defences such as non est factum, unconscionability, fraud, misrepresentation or undue influence. The burden of proving each of these defences rests upon the person seeking to set aside the guarantee. In this case, however, there was no evidence to support any of these defences nor were any of these defences pleaded, apart from an allegation that Mr. Breen advised these defendants that the guarantees imposed no legal liability upon them. They called no evidence to this effect.

In the absence of any evidence of undue influence, fraud or misrepresentation or any evidence supporting a defence of non-est factum, the failure of the bank to ensure that the spouse obtained independent legal advice before signing the guarantee may not be fatal to the claim of the bank.

In the end, the Judge held that the wife was not absolved of her liability under the guarantee and granted Judgment to the Bank. The moral of the story: Read and understand what you are signing before you sign, and get independent legal advice. An ounce of prevention is worth a pound of cure.