Guaranteeing your Guarantee is Enforceable: ILA and Waiver

Many financing transactions utilize guarantees in support of commercial loans. It is often a requirement that guarantors either seek independent legal advice (“ILA”) or agree to waive their right to receive it (“Waiver”). This article explores when the requirements for ILA or Waiver are commonly engaged in the context of financing transactions. Two main circumstances demand ILA or a Waiver: 1) an individual non-spousal guarantor, and 2) a spousal guarantor.

1. The Individual Guarantor

Whether ILA is required or a Waiver can be obtained for an individual guarantor depends on several factors. First, when an individual is guaranteeing a loan for a corporation in which they have personal involvement, a Waiver may be obtained. We understand “personal involvement” to mean that the individual guarantor is involved in the everyday operations of the corporate borrower by being an active officer, director or shareholder, or maintains a role in managing its affairs (see: The Bank of Nova Scotia v. Renatoneil Consultants Ltd., 2017 ONSC 5473 at para 3).

Second, when the individual guarantor does not have personal involvement within the corporation, ILA should be sought in connection with the commercial transaction. This is because an individual that is personally involved in a corporation is in a better position to assess the financial strength of the corporation and make sound judgements as to whether they should guarantee the corporation’s obligations under the loan.

2. The Spousal Guarantor

When contemplating obtaining a Waiver, an essential consideration is whether this individual is at a high risk of being unduly influenced. This question is engaged each time a spouse is guaranteeing the loan of their partner and is especially important when the guarantor spouse is not benefitting from the financing transaction. Whenever there is a spousal guarantee, it is vital to obtain ILA to mitigate the risk of arguments of undue influence being raised in the future.

For example, SpouseA may approach SpouseB to guarantee their commercial loan. Since SpouseB trusts SpouseA, they do not question the terms of the loan, or the documents they are asked to sign and are repeatedly assured that there are no issues with signing the documents. Five years later, SpouseA declares bankruptcy, defaults on the commercial loan, and the Bank seeks recourse against SpouseB. Without ILA, SpouseB will likely raise a defence that they were unaware of what they were signing and that they were unduly influenced into guaranteeing the loan.

The practical implication for a Lender’s solicitor

A lender’s solicitor’s primary concern is to have the appropriate security in place for the lender and to ensure security is duly executed. The solicitor must determine whether an individual had the authority to execute such security documents and whether that execution is of force and effect. Seeking ILA in the appropriate circumstances listed above engages the latter consideration. If you do not obtain ILA when it is required, or strongly recommended, the lender may be in a situation where someone can challenge the validity of the guarantee and other security documents provided by that individual. The following defences are often engaged when ILA is at issue:

Potential Defences

Undue Influence: The essence of this doctrine is to determine whether an individual executed a document on their own volition, or whether they were influenced in a manner that results in their decision not being wholly independent. An individual who is a party to a transaction must understand the nature and the potential consequences of the transaction. They must make the decision independently of any outside influence, with exception of their lawyer. The consequence of invoking such a doctrine is that when an individual feels they were coerced into entering a transaction, they may argue to a Court that the security documents should be set aside due to the external pressure to enter by a third party.

Non-Est Factum: This is often referred to as the “failure to understand” doctrine which is raised when an individual misunderstood a document they signed and that this lack of understanding was not a result of carelessness or willful blindness. For example, where you have a guarantor that does not speak your language and they do not understand what they are signing, an ILA lawyer must be engaged to explain the documents in the guarantor’s native language to ensure all implications are understood. Similar arguments may be raised where there are fears of a lack of mental capacity.

Guarantees are important tools to support borrowers in financing transactions and it is essential to lenders that guarantees are enforceable. Both defences described above can be mitigated by ensuring that an individual guarantor obtains ILA in these transactions. There will be other situations where the need for ILA may be engaged, however, in the context of commercial transactions, these are two common scenarios that a lender and borrower’s solicitor should keep in mind when executing guarantees and other pertinent security documents with an individual that may be seen as vulnerable to undue influence.

This article is not intended to serve as a comprehensive treatment of the topic and is not legal advice. All legal matters are dealt with pursuant to their specific facts and circumstance. Nothing replaces retaining a qualified, competent lawyer.