Warranty Providers Take Note of a Recent Decision from Ontario Court of Appeal

Warranty providers ought to take note of a recent decision from the Ontario Court of Appeal.  Intercap Equity Inc. v. Bellman, Intercap Equity Inc. v. Bellman, 2022 ONCA 61 (CanLII), emphasizes the importance of personal guarantees stating unambiguously that the guarantor’s commitment is “continuous”.  Assuming the contracts in issue are drafted appropriately, Intercap confirms that such continuous personal guarantees will remain binding on guarantors even if the underlying membership agreement changes over time.

The new home warranty industry in British Columbia is, first and foremost, a consumer protection initiative.  But as anyone on the inside knows, the day-to-day operations of a warranty provider focus as much on builder performance as homeowner claims.  Front-end attention to builders – on best construction practices, financial stability, and customer satisfaction – leads to fewer claims.  Even when those claims arrive, warranty providers rely on their builders’ indemnity commitments as both a motivational tool to compel builders to attend to defects, and a legal tool for monetary recoveries after expenditures.

Personal guarantees are the financial backstop often required by warranty providers to support membership agreements.  Membership agreements are typically long and complex, whereas personal guarantees are relatively simple.  The membership agreement addresses all manner of registration, renewals, and claims responses, etc., with the indemnity section lumped in… somewhere.  By stark contrast, the personal guarantee is often one single page and simply requires a personal signatory to commit to covering the debts of a builder, should such debts arise.

Of course, membership agreements often change.  Their complexity necessitates fine-tuning over time.  How does a new membership agreement affect an old guarantee?  Will a warranty provider have to negotiate a new one?

Intercap provides some direction on this point, in that the court considered an analogous scenario where the “main” contract was replaced with a second contract, and the personal guarantors sought to establish that their personal guarantees were no longer binding because what they had guaranteed in the first place (i.e., the original main contract) was now substantially different.  The case provides overarching commentary that is directly applicable to a scenario where a warranty provider changes a membership agreement but wants to rely on previously provided personal guarantees.

As always, the wording of the agreement before the court was critical. In Intercap, the critical term was “in connection with”, which the court interpreted as meaning that the appellate personal guarantors had obligations that spanned a series of loans, as opposed to the one original loan.

The below passage demonstrates the court’s reasoning in this respect:

[64]    In this case… [the guarantee] clearly contemplates that liability will continue even if the Second Loan Agreement is terminated provided liability is “in connection with” the Second Loan Agreement… The terms of [the guarantee] are unambiguous.

[65]In sum, a review of This Loan and [the guarantee] as a whole, giving the words their ordinary and grammatical reading, consistent with the objectives of the parties, leads to the conclusion that this is a continuing guarantee and that the liabilities under This Loan are connected to the liabilities under the Second Loan Agreement. The motion judge did not err in his application of the principles of contractual interpretation.

[66]    Thus, although the Second Loan Agreement was terminated and replaced with This Loan, [the guarantee] enables Intercap to recover “all such liabilities incurred before or after” execution of [the guarantee] “in connection with” the Second Loan Agreement, to secure any ultimate balance remaining.

On appeal, the personal guarantors also tried to suggest that the continuing nature of the guarantees was not mentioned in the negotiation of a second loan, in effect suggesting the personal guarantors deserved notice the guarantee would continue.  It would not be surprising to see a personal guarantor of a warranty membership agreement raise a comparable argument.  Often there are silent partners, spouses, shareholders, or prior business associates that sign personal guarantees.  With a ten-year coverage period, it can be more than a decade before a personal guarantee is called upon, and the personal guarantor may have forgotten about an old signature they put on a piece of paper long ago.

In Intercap, the Court of Appeal held fast to the unambiguous language of the personal guarantee and confirmed that extrinsic evidence would not be accepted to create a debtor-friendly revisionist history of the documented terms.

In sum, Intercap confirms that warranty providers can rely on builders’ old guarantees, even if the relevant membership agreement changes and guarantors do not receive notice of such changes.  Of course, this conclusion assumes that guarantees are drafted unambiguously, as was the case in Intercap.  With the right language in place, personal guarantees will continue to be an effective backstop for warranty providers seeking indemnity for claim expenditures.

Below are a few examples of key language used in British Columbia new home warranty contracts that would likely support the proposition that they constitute “continuing guarantees”:

• “…this Agreement shall remain in full force and effect, even if an Indemnitor never had or no longer has any interest in the Builder…”
• “The Indemnitors shall indemnify… the Warranty Provider from all Indemnity Losses… from… any (New Home, claim, compliance)”
• “…all debts and liabilities, present or future…”
• “This Guarantee shall be a continuing Guarantee…”