National Trust Co. v. Mead,  2 S.C.R. 410
National Trust Company Appellant
David Mead, Remai Financial Corp.
Construction (1981) Inc. Respondents
indexed as: national trust co. v. mead
File No.: 21157.
1990: February 23; 1990: August 16.
Present: Lamer C.J.* and
Wilson, La Forest, L'Heureux‑Dubé, Gonthier, Cory and McLachlin JJ.
on appeal from the court of appeal for
‑‑ Action on covenant to pay ‑‑ Individual assuming
mortgage from corporation which had waived provincial statutory protection
against being sued on covenant to pay ‑‑ Provincial statute
permitting only corporate mortgagors to waive protection ‑‑ Whether
individual assuming mortgage bound by waiver as a successor or assign of
original corporate mortgagor ‑‑ Whether assumption agreement
effects a novation ‑‑ The Limitation of Civil Rights Act, R.S.S.
1978, c. L‑16, ss. 2, 40.
respondent Remai Construction (1981) Inc. ("Remai") granted a
mortgage to the appellant National Trust as security for a loan to be applied
in the construction of a condominium unit. Remai waived the protection of the
Saskatchewan Limitation of Civil Rights Act, s.
2(1) of which provides that no action lies on the covenant to pay in a
mortgage. Section 2(2)(d) extends this protection to subsequent purchasers who
assume such a mortgage. Under s. 40(1) of the same Act agreements purporting
to waive the protection of the Act are null and void, but s. 40(2) creates an
exception to ss. 2 and 40(1) by permitting corporate mortgagors to waive the
protection and provides that such a waiver is binding on the corporation's
successors and assigns.
respondent Mead purchased the condominium unit from Remai and executed an
assumption of liability agreement in favour of National Trust which contained a
covenant making Mead personally liable on the mortgage. The mortgage fell into
arrears and National Trust brought an action against Remai and Mead for the
full amount of the principal and interest owing. The action against Remai was
later discontinued. The chambers judge granted an order nisi for
sale of the property but refused to order personal judgment for the deficiency
against Mead. The Court of Appeal dismissed National Trust's appeal.
issues in this appeal are (1) whether the general protection extended to
individuals under s. 2(1) prevails over the exception contained in s. 40(2) for
corporations and their successors or assigns; (2) whether the particular
wording of the assumption agreement releases Mead from liability on the
personal covenant; and (3) whether the assumption agreement effects a novation.
appeal should be dismissed.
C.J. and Wilson, La Forest, L'Heureux‑Dubé, Gonthier and Cory JJ.:
Remai's exercise of its waiver under s. 40(2) of The Limitation of
Civil Rights Act is not binding on Mead. Any exception to the principle
in s. 2 that individual mortgagors be insulated from personal liability should
be construed as narrowly as possible. The meaning of "successor" in
s. 40(2) should be restricted to other corporations since the application of
the s. 40(2) exception to "successors" was only intended to ensure liability
on the personal covenant of a corporation which steps into the shoes of the
original corporate mortgagor. While "assigns" would prima facie
include individual assigns of corporate mortgagors, the purpose of this
exception is to protect mortgagees who extend mortgages to corporations on
condition that the latter provide a personal covenant and who then find that
the corporation has unilaterally (and without the mortgagee's consent) assigned
the mortgage to an individual on whom the personal covenant would not otherwise
be binding under the Act. It is these "assigns" who must be bound by
the personal covenant of the original corporate mortgagor if the mortgagee is
to have the protection contemplated by s. 40(2). In this case the concern
about the mortgagee's rights being unfairly defeated does not arise since
National Trust freely entered into an assumption agreement with Mead. The fact
that Mead assumed the mortgage by way of assumption agreement with National
Trust means that he is entitled to the protection of s. 2(2)(d) of the Act,
which is not subject to the waiver exception under s. 40(2).
personal covenant set out in the assumption agreement is unenforceable against
Mead. The wording of the agreement, in conjunction with the Act, is clearly
capable of being construed as releasing Mead from any obligation to pay under
the covenant. The agreement provides that Mead will be bound by all the terms
of the mortgage "as though it had been originally made, executed and
delivered to him as Mortgagor", in which case s. 2 would have applied, no
exception under s. 40(2) would have been available, and the personal covenant
would have been unenforceable pursuant to s. 40(1).
assumption agreement did not effect a novation. The clause in the agreement
stating that National Trust may at any time release the original mortgagor
cannot be construed as a present release of Remai such as would be necessary to
replace Remai with Mead as principal debtor. This conclusion is strengthened
when the terms of the original mortgage are taken into consideration: the
"no prejudice" clause confirms that there was no intention on the
part of National Trust to release Remai. Taken together, these provisions are
a strong indication that Mead's assumption of the debt was not accepted by
National Trust in full consideration and substitution of Remai's obligation.
The conduct of the parties does not negate that indication. National Trust's action
in discontinuing its suit against Remai is equivocal, and cannot be construed
as supporting an inference that the trust company was no longer looking to
Remai for satisfaction of the debt. Discontinuance does not preclude a
litigant from bringing the action at a later date, and thus does not constitute
the kind of compelling circumstance necessary to found a novation.
McLachlin J.: Wilson J.'s conclusions and reasons were agreed with, subject to
the comment that ss. 2(2)(d) and 40(2) of the Act involve a facial conflict
which should be resolved by recourse to legislative intention.
Permanent Trust Co. v. Neumann (1986), 8 B.C.L.R. (2d) 318; Re Bank of
Nova Scotia and Vancouver Island Renovating Inc. (1986), 31 D.L.R.
(4th) 560; Prospect Mortgage Investment Corp. v. Van‑5
Developments Ltd. (1985), 68 B.C.L.R. 12; disapproved: Eaton Bay
Trust Co. v. Ling (1987), 45 D.L.R. (4th) 1; referred to: Herold v.
British American Oil Co. (1954), 12 W.W.R. (N.S.) 333; First City
Trust Co. v. Friesen (1985), 38 Sask. R. 220; Canada Trustco
Mortgage Co. v. Grover,  2 W.W.R. 766; Potash v. Royal Trust
Co.,  2 S.C.R. 351; Disney Farms Ltd. v. Canadian Imperial
Bank of Commerce,  5 W.W.R. 285; Polson v. Wulffsohn (1890),
2 B.C.R. 39; Central & Eastern Trust Co. v. Rosebowl Holdings
Ltd. (1981), 34 N.B.R. (2d) 308; Central Trust Co. v.
Bartlett (1983), 30 R.P.R. 267; Saskatchewan Trust v.
Ross (1985), 41 Sask. R. 121.
and Regulations Cited
Limitation of Civil Rights Act, R.S.S.
1978, c. L‑16, ss. 2 [am. 1983‑84, c. 44, s. 2], 40.
Bench Rules of Saskatchewan, rule 198(4).
from a judgment of the Saskatchewan Court of Appeal (1988), 70 Sask. R. 11,
 5 W.W.R. 365, 52 D.L.R. (4th) 159, affirming the refusal of Wright J. to
order a personal judgment against the respondent in a mortgage action. Appeal
Turnbull, for the appellant.
Canham, for the respondents.
judgment of Lamer C.J. and Wilson, La Forest, L'Heureux-Dubé, Gonthier and Cory
JJ. was delivered by
WILSON J. --
The issue in this case is the right of a mortgagee in the province of
Saskatchewan to sue on the personal covenant. The parties contend that
resolution of this issue depends upon the interpretation of the relevant
statute, the construction of an assumption agreement, and the application of
the principle of novation.
respondent Remai Construction (1981) Inc. ("Remai") granted a
mortgage in the amount of $40,725 to the appellant National Trust Company
("National Trust") on June 28, 1984 as security for a loan to be
applied in the construction of a condominium unit in Saskatoon. The
Limitation of Civil Rights Act, R.S.S. 1978, c. L-16 ("the
Act"), provides that a mortgagee's right to recover the unpaid balance due
on a mortgage is restricted to the land itself. Any personal covenant is void
and unenforceable. The Act, however, permits corporate mortgagors to waive the
protection provided by the Act and Remai did so in the present case.
August 28, 1984, the respondent David Mead ("Mead") purchased the
condominium unit from Remai and executed an Assumption of Liability Agreement
("Assumption Agreement") in favour of National Trust. The Assumption
Agreement contained a covenant making Mead personally liable on the mortgage.
October 1, 1986, the mortgage fell into arrears and two months later National
Trust commenced an action against Remai and Mead jointly and severally for inter alia the
full amount of the principal and interest owing. In its statement of defence,
Remai alleged that the Assumption Agreement released it from its covenant to
pay or alternatively constituted a novation which had the effect of discharging
it from any further liability on the covenant. The action against Remai was
entered no statement of defence. National Trust then applied for an order nisi for
sale and for personal judgment against Mead. Wright J. in chambers refused to
order personal judgment for the deficiency but granted an order nisi for
sale without recorded reasons. The Saskatchewan Court of Appeal dismissed
National Trust's appeal. National Trust now appeals to this Court.
Limitation of Civil Rights Act provides:
2(1) Where land is hereafter sold
under an agreement for sale in writing, or mortgaged whether by legal or
equitable mortgage for the purpose of securing the purchase price or part of
the purchase price of the land affected, or where a mortgage is hereafter given
as collateral security for the purchase price or part of the purchase price of
land, the vendor's or mortgagee's right to recover the unpaid balance due shall
be restricted to the land sold or mortgaged and to cancellation of the
agreement for sale or foreclosure of the mortgage or sale of the property, and
no action shall lie on the covenant for payment contained in the agreement for
sale or mortgage.
(1.1) The benefit of subsection (1) extends to and
includes a mortgage that secures, or is given as collateral security for, the
purchase price or part of the purchase price of the land, whether or not the
mortgagee was the vendor of that land.
(2) The benefit of subsections (1) and (1.1) extends
to and includes:
(a)the personal covenant of the purchaser contained
in any assignment by the vendor of such an agreement for sale;
(b)the personal covenant of the assignee contained
in any assignment by the purchaser of such an agreement for sale;
(c)the personal covenant of the mortgagor contained
in an agreement extending any such mortgage;
(d)the personal covenant of a purchaser of lands
subject to any such mortgage, to assume and pay the mortgage;
and no action lies on any such personal covenant.
40(1) Subject to subsection (2), every
agreement or bargain, verbal or written, express or implied, that this Act or
any provision thereof shall not apply or that any benefit or remedy provided by
it shall not be available, or which in any way limits, modifies or abrogates or
in effect limits, modifies or abrogates any such benefit or remedy, is null,
void and of no effect, and moneys paid under or by reason of any such agreement
or bargain are recoverable in any court of competent jurisdiction.
(2) A corporate body may in writing agree that this
Act or any provision thereof shall have no application to:
(a)any mortgage, charge or other security for the
payment of money made, given or created by it after March 25, 1959;
(b)any agreement or instrument entered into by it
after March 25, 1959, involving the payment by it of money, or its liability to
(c)any agreement or instrument renewing or extending
or collateral to any such mortgage, charge, other security, agreement or
(d)the rights, powers or remedities [sic] of any
other person under any such mortgage, charge, other security, agreement or
notwithstanding anything in this Act, an agreement made by a corporate body
under this subsection shall be binding upon the corporate body, its successors
relevant parts of the Assumption Agreement between National Trust (the
Mortgagee) and Mead (the Purchaser) read as follows:
WHEREAS by a mortgage dated the 28th day of
June, 1984 . . .
AND WHEREAS the Purchaser
represents to the Mortgagee that he has purchased the said lands and premises
and is now the owner thereof subject to the said mortgage.
AND WHEREAS the Purchaser has
agreed to assume and covenant with the Mortgagee to pay to the Mortgagee the
mortgage indebtedness now owing under the said mortgage.
NOW THIS INDENTURE WITNESSETH that in
consideration of the premises and the sum of One Dollar ($1.00) now paid by the
Mortgagee to the Purchaser, it is hereby agreed as follows:
1. The Purchaser covenants and agrees with the
Mortgagee, that he will pay to it the said principal money now owing, and all
monies that may be advanced hereafter with respect to the said mortgage,
together with interest thereon, and that he will perform each and all of the
covenants, conditions, and obligations in the said mortgage contained to be
performed by the Mortgagor therein at the times and in the manner and in all
respects as therein provided, and that he will be bound by each and all of the
terms and covenants, conditions and obligations of the said mortgage as though
it had been originally made, executed and delivered by him as Mortgagor.
AND THE PURCHASER HEREBY AUTHORIZES AND INSTRUCTS
THE MORTGAGEE TO PAY TO THE MORTGAGOR NAMED IN THE SAID MORTGAGE OR TO HIS
NOMINEE, THE FULL PROCEEDS OF THE LOAN THEREBY SECURED.
Agreement shall extend to and bind and may be taken advantage of by the
respective heirs, executors, administrators, successors and assigns as the case
may be of each and every party hereto . . . all covenants shall be joint and
several; time shall be of the essence hereof; and all provisions hereof shall
have effect notwithstanding any statute to the contrary.
mentioned, Wright J. hearing the case in chambers gave no recorded reasons for
his order nisi.
for the Saskatchewan Court of Appeal (1988), 70 Sask. R. 11, Cameron
J.A. encapsulates the statutory scheme as follows at p. 12:
a person who borrows money from another for the purpose of buying land and
gives that other a mortgage upon the land to secure repayment of the loan, can
have the land taken from him on foreclosure, if he defaults, but cannot be sued
on his covenant to pay: The Limitation of Civil Rights Act, S.S. 1979,
c. L-6, s. 2. That is subject, however, to an exception. A corporate borrower
is empowered to agree when granting a mortgage that the statute will not apply
to that mortgage: s. 40(2). And, according to the Act, an
agreement or waiver of that sort binds both the corporation and its
"successors and assigns".
a review of the facts Cameron J.A. sought guidance from previous authority on
the question whether a mortgagee is limited to its remedy against the land when
an individual assumes a mortgage from a corporation which has waived the
statutory protection of s. 2. He found the jurisprudence inconsistent on this
point, noting that a great deal seemed to depend on the terms of the particular
assumption agreement and whether it could be said to give rise to a novation.
then considered the particular wording of the Assumption Agreement before him,
especially the undertaking of Mead to perform all the covenants in the mortgage
"as though it had been originally made, executed and delivered by him as
Mortgagor". At pages 16-17, he found these words virtually dispositive of
the matter before him:
meaning of these words is clear. And if taken literally, so too is their
effect. Had Mr. Mead been the original mortgagor he would have been entitled
to the benefit of s. 2 of the Act, and would have been disabled by s. 40
from agreeing otherwise. Thus the effect of the words is to extend to him the
benefit of the statute and, in turn, to limit National Trust to its remedy
against the land. Even if this were uncertain, the result would not change,
because the agreement falls to be construed contra proferentem -- against the
one who drew it and in favour of the one who made it. Hence the words have to
be given the meaning most favourable to Mr. Mead.
Saskatchewan Court of Appeal also based its decision on a finding that novation
had occurred in the form of a substitution of Mead for Remai as mortgagor.
Cameron J.A. drew the four elements necessary to establish a novation from Herold v.
British American Oil Co. (1954), 12 W.W.R. (N.S.) 333 (Alta. S.C.) and Canada
Permanent Trust Co. v. Neumann (1986), 8 B.C.L.R. (2d) 318 (C.A.) as
(i)The new debtor must assume the complete liability.
(ii)The creditor must accept the new debtor as a
principal debtor and not as an agent or guarantor.
(iii)The creditor must accept the new contract in full
satisfaction and substitution for the old contract.
new contract must be made with the consent of the old debtor.
this case Mead expressly assumed in clause 1 of the Assumption Agreement the
complete liability under the mortgage. National Trust accepted him as
principal debtor and gave valuable consideration. Mead undertook to repay the
loan and agreed in clause 2 of the Agreement that if National Trust released
Remai "from any or all of the covenants" contained in the mortgage,
this would not affect his (Mead's) liability or National Trust's charge on the
land. As between National Trust and Remai the Court of Appeal concluded that
National Trust had discharged Remai. It premised this finding on National
Trust's discontinuance of its action against Remai. The Court of Appeal also
found that National Trust accepted the new arrangement in satisfaction of and
in substitution for the old one based on the combination of the Assumption
Agreement and National Trust's conduct in relation to Remai. Finally, Remai
consented to the substitution of Mead as the new debtor. The court was
therefore satisfied that the Assumption Agreement effected a novation and that
the chambers judge was right in confining National Trust to its remedy against
the land under s. 2(1) of the Act.
issues raised by this appeal are as follows:
A.Does the general protection extended to
individuals under s. 2(1) of the Act prevail over the exception contained in s.
40(2) for corporations and their successors or assigns?
B.Does the particular wording of the Assumption
Agreement release Mead from liability on the personal covenant?
the assumption agreement effect a novation?
2 of the Act provides that when land is mortgaged for purposes of securing the
purchase price of land, the mortgagee's recovery rights are restricted to
foreclosure and sale of the mortgaged land. No action on the personal covenant
lies against the mortgagor for any deficiency. Section 2(2)(d) extends that
protection to subsequent purchasers by sweeping within its ambit "the
personal covenant of a purchaser of lands subject to any such mortgage, to
assume and pay the mortgage".
plain reading of s. 2(2)(d) National Trust cannot recover from Mead on his
personal covenant. This statutory intent is reinforced by s. 40(1) of the Act,
which provides that agreements purporting to waive the protection of the Act
are "null, void and of no effect".
40(2), however, creates an exception to s. 2 and 40(1) of the Act by permitting
corporate mortgagors to waive the protection. In its mortgage agreement with
National Trust, Remai expressly waived the protection under s. 2 of the Act and
gave a personal covenant on the mortgage. Under the terms of s. 40(2) such a
waiver is binding upon "the corporate body, its successors and
assigns". The question to be decided therefore is whether Mead is bound
by the waiver as a successor or assign of Remai. The answer turns on the
interaction between ss. 2 and 40(1) of the Act, which preclude enforcement of
the personal covenant against an individual mortgagor, and s. 40(2) of the Act,
which binds successors and assigns to a waiver of s. 2 by a corporate
the Saskatchewan Court of Appeal points out, existing case law on the point is
not very helpful. In First City Trust Co. v. Friesen (1985),
38 Sask. R. 220 (Q.B.), an individual assumed a mortgage from a corporate
builder. MacLeod J. rejected an argument that s. 40(2) bound only corporate
successors and assigns. At page 223 he states:
Whether the mortgagee can or cannot obtain personal
judgment against the defendant Friesen depends on the terms of the assumption
agreement. Without that agreement, there would be no privity of contract
between the mortgagee and Friesen, and personal judgment could only go against
the defendant corporate body . . . .
satisfied that the position of persons such as Friesen, (that is, successors
and assigns) was contemplated by the legislature, whose words must be accepted
for what they say, without imposing an artificial construction on those words
to benefit a person who, if different circumstances had prevailed, could have
been able to invoke the protection of the statute as against the mortgagee.
Trustco Mortgage Co. v. Grover,  2 W.W.R. 766 (Sask. Q.B.),
Wright J. (the chambers judge in the case at bar) rejected First City on the
strength of this Court's judgment in Potash v. Royal Trust
Co.,  2 S.C.R. 351. In Potash this Court was
asked to interpret s. 10 of the federal Interest Act, R.S.C.
1970, c. I-18, which provided that individuals must be given the right to pay
off a mortgage after five years. The respondent in that case entered into a
renewal agreement after five years without paying off the mortgage and then
proceeded to pay it off subsequent to entering into the renewal agreement.
Although the Act did not specifically provide that a person could not waive its
provisions, I stated for the Court at p. 373 that "I agree with counsel
for Potash that s. 10(1) was enacted in the public interest and that the long
standing rule against contracting out or waiver should apply to it."
Wright J. does not expand his application of Potash to the
facts of Grover but I assume that he took from it
that, if parties cannot waive protective provisions in circumstances where the
statute is silent, then where the statute expressly invalidates a waiver (e.g.,
s. 40(1) of the Act), any exception to that protection should be construed as
narrowly as possible. The facts in Grover were for all
intents and purposes the same as in the case at bar. Wright J. found that the
applicant mortgagee was not entitled to judgment against the individual
mortgagor to whom the mortgage had been assigned by the original corporate
agree with Cameron J.A. that these cases are not of much assistance. I turn
therefore to a consideration of the purpose of s. 2 of the Act. Section 2
protects individual mortgagors from being personally liable on a mortgage and
restricts the mortgagee's remedy to the property. Individuals usually take out
mortgages to secure residential houses or farms. Their home is typically the
largest single asset they have. One can well imagine that once that is lost
the individual in many instances has little else to seize and imposing the
additional burden of personal liability would be onerous and perhaps futile. I
note in passing that s. 2 was originally enacted by the Saskatchewan legislature
in 1934 (S.S. 1934-35, c. 89, s. 4) at a time when many prairie farmers were
"losing the farm" thanks to the notorious and disastrous effects of
the "dustbowls" and the Depression.
40 of the Act was enacted through a series of amendments to the statute between
1953 and 1961. The purpose in permitting corporate borrowers to waive the
protection provided under the Act was, in my view, aptly described by Malone J.
in Disney Farms Ltd. v. Canadian Imperial Bank of Commerce, 
5 W.W.R. 285 (Sask. Q.B.) at pp. 287-88:
1965 the Limitation of Civil Rights Act [R.S.S. 1965, c. 103, s. 27] has
permitted bodies corporate to waive the entire provisions thereof. A similar
waiver provision is also found in the Saskatchewan Land Contracts (Actions)
Act, R.S.S. 1978, c. L-3 [s. 5]. In my opinion, the purpose of these
provisions is to facilitate corporate financing that otherwise may not be
available if lenders could not realize upon their security on default by a
corporate borrower. I am also of the opinion that the provisions of the
Limitation of Civil Rights Act were primarily intended to benefit and protect
individuals, as distinct from limited companies, who usually are more
sophisticated in the management of their affairs and require larger amounts of
capital to maintain their operations.
it is clear that the policy concerns animating the protection of individuals
from personal liability for mortgage deficiencies are not particularly
compelling when applied to corporations. The meaning to be attributed to the
provisions of the Act should reflect these policy concerns. Thus, any exception
to the principle in s. 2 that individual mortgagors be insulated from personal
liability should be construed as narrowly as possible.
to s. 40(2) of the Act, the provision states that if a corporation waives its
protection, that waiver binds all successors and assigns "notwithstanding
anything in this Act". When used in reference to corporations, a
"successor" generally denotes another corporation which, through
merger, amalgamation or some other type of legal succession, assumes the
burdens and becomes vested with the rights of the first corporation. In terms
of s. 40(2) of the Act it is understandable that a new corporation should be
bound by the waiver of the old one since the new one is essentially supplanting
the old one in all respects. Indeed, restricting the meaning of
"successor" in s. 40(2) to other corporations makes sense in
light of the policy driving the Act. In my view, the application of the
s. 40(2) exception to "successors" was only intended to ensure
liability on the personal covenant of a corporation which steps into the shoes
of the original corporate mortgagor. It is apparent that Mead is not a
"successor" to Remai here.
word "assign" has, of course, a broader meaning. An
"assign" is anyone to whom an assignment is made and presumably, but
for the specific reference to "successors", would include both
individuals and corporations. As between mortgagors, an assignment would be an
agreement between the original mortgagor and his purchaser by which the latter
would assume the mortgage debt in exchange for valuable consideration. Section
2(2)(b) of the Act specifically extends the protection of s. 2 to assignees of
purchasers whereas s. 40(2) binds assigns of corporations who have waived s. 2
"notwithstanding anything in this Act". This would presumably
include individual assigns of corporate mortgagors. It is my view, however,
that the purpose of this exception is to protect mortgagees who extend
mortgages to corporations on condition that the latter provide a personal
covenant and who then find that the corporation has unilaterally (and without
the mortgagee's consent) assigned the mortgage to an individual on whom the
personal covenant would not otherwise be binding under the Act. It is those
"assigns" who must be bound by the personal covenant of the original
corporate mortgagor if the mortgagee is to have the protection contemplated by
the section. This situation would arise where there is an assignment of the
mortgage from a corporate mortgagor to an individual without an assumption
agreement between the individual mortgagor and the mortgagee.
the mortgagee (in this case National Trust) has entered into an assumption
agreement with the new mortgagor, however, the concern about the mortgagee's
rights being unfairly defeated simply does not arise. National Trust was
completely free in the present case to decide whether or not to let Mead assume
the mortgage from Remai. If it saw itself as exposed to an undue risk if it
could not sue on the personal covenant to recover a deficiency on the mortgage
debt, it was at liberty to refuse to enter into the Assumption Agreement with
Mead. It is noteworthy that while ss. 2(2)(a) - (d) extend the protection of
the Act to circumstances of assignment, extension or assumption of a mortgage,
s. 40(2) only binds successors and assigns to a waiver by a corporate
body. There is no evidence on the record indicating whether Remai assigned its
mortgage to Mead. Even if it had, however, the fact that Mead also assumed the
mortgage by way of Assumption Agreement with National Trust entitles him to the
benefit of s. 2(2)(d), which in turn is not subject to the waiver exception
under s. 40(2). Remai's exercise of its waiver under s. 40 of the Act does not
therefore bind Mead.
in general agreement with the reasoning of the Court of Appeal regarding the
interpretation and effect of the Assumption Agreement. The wording of the
Agreement, in conjunction with the Act, is clearly capable of being construed
as releasing Mead from any obligation to pay under the personal covenant set
out in the Agreement. It provides inter alia that Mead will be
bound by all of the terms, covenants, conditions and obligations of the
mortgage "as though it had been originally made, executed and delivered by
him as Mortgagor." The Court of Appeal pointed out that had the Agreement
been originally made, executed and delivered by Mead as mortgagor, s. 2 would
have applied, no exception under s. 40(2) would have been available, and the
personal covenant would have been unenforceable pursuant to s. 40(1). National
Trust would have been restricted to its remedy against the land. The doctrine
of contra proferentem would resolve any lingering ambiguity in Mead's favour.
Trust submits that the doctrine of contra proferentem is
inapplicable here because the construction put on the Agreement by the Court of
Appeal would make the inclusion of the personal covenant pointless. It could
have no effect. Since the Court should strive to give meaning to the parties'
agreement, it should reject an interpretation that would render one of its
my view, the presence of s. 40(1) in the Act belies the claim made by National
Trust that the ideal construction of the Agreement is one that gives effect to
each and every one of its terms. Section 40(1) explicitly contemplates the
inclusion of a personal covenant in a mortgage but states that such covenants
are null, void and of no effect subject to the exception contained in s. 40(2)
for corporate mortgagors. Although the closing paragraph of the Assumption
Agreement states that "all provisions hereof shall have effect
notwithstanding any statute to the contrary", this cannot be enforced by
National Trust in face of the explicit prohibition in the statute against
contracting out of its protection.
the result, I think the Court of Appeal construed the Assumption Agreement
correctly when it declared that the personal covenant was unenforceable against
Mead. I do not find it necessary to invoke the doctrine of contra
proferentem to buttress this conclusion.
respondent Mead has pleaded in the alternative that the Assumption Agreement
effected a novation so that the old agreement with Remai was gone and the new
agreement with Mead as mortgagor was substituted for it. If this were so Mead
would unquestioningly be entitled to the protection of s. 2 of the Act. While
it is not strictly necessary to decide this issue since I have already
concluded that, as a matter of interpretation of the Assumption Agreement, Mead
is not liable on the covenant, it may nevertheless be helpful if the Court were
to try to resolve some of the confusion concerning the application of the
doctrine of novation in a mortgage context.
common law has long recognized that while one may be free to assign contractual
benefits to a third party, the same cannot be said of contractual obligations.
This principle results from the fusion of two fundamental principles of
contract law: 1) that parties are able to make bargains with the parties of
their own choice (freedom of contract); and 2) that parties do not have to
discharge contractual obligations that they had no part in creating (privity of
contract). Our law does, however, recognize that contractual obligations which
a party has freely assumed may be extinguished in certain circumstances and the
doctrine of novation provides one way of achieving this.
novation is a trilateral agreement by which an existing contract is
extinguished and a new contract brought into being in its place. Indeed, for
an agreement to effect a valid novation the appropriate consideration is the
discharge of the original debt in return for a promise to perform some
obligation. The assent of the beneficiary (the creditor or mortgagee) of those
obligations to the discharge and substitution is crucial. This is because the
effect of novation is that the creditor may no longer look to the original
party if the obligations under the substituted contract are not subsequently
met as promised.
assent is the crux of novation it is obvious that novation may not be forced
upon an unwilling creditor and, in the absence of express agreement, the court
should be loath to find novation unless the circumstances are really
compelling. Thus, while the court may look at the surrounding circumstances,
including the conduct of the parties, in order to determine whether a novation
has occurred, the burden of establishing novation is not easily met. The
courts have established a three-part test for determining if novation has
occurred. It is set out in Polson v. Wulffsohn (1890), 2 B.C.R.
39 as follows:
1.The new debtor must assume the complete liability;
2.The creditor must accept the new debtor as principal
debtor and not merely as an agent or guarantor; and
creditor must accept the new contract in full satisfaction and substitution for
the old contract.
has been some disagreement among courts across the country as to the weight to
be attributed to these elements and it might be helpful to review some of the
authorities. Indeed, such a review makes it clear that these three factors are
not the only ones to be considered. The courts are usually confronted with an
amalgam from which they must distil their finding of fact as to whether
novation has occurred or not.
start with the conduct of the parties. In Central & Eastern
Trust Co. v. Rosebowl Holdings Ltd. (1981), 34 N.B.R.
(2d) 308 (C.A.), Rosebowl had granted a mortgage to Central with one Huestis
acting as guarantor of the loan. Rosebowl subsequently sold the property to
another party who assumed the mortgage. When Central subsequently informed
Rosebowl as to the balance then due on the mortgage, Rosebowl advised Central
that the mortgage had been assumed by its purchaser and that a new mortgage was
being recorded. Thereafter, Central closed out Rosebowl's account.
Approximately two years later the purchaser started to fall into arrears.
Rosebowl was not informed of these defaults until Central decided to sell the
property under the power of sale contained in the mortgage. Proceedings were
brought against Rosebowl and Huestis when the sale resulted in a deficiency.
and Huestis submitted that Central took all the necessary steps to give effect
to the sale and assumption of mortgage by the purchaser when it closed out
Rosebowl's account as opposed to crediting it with the monthly instalments made
by the purchaser. It was also stressed that Rosebowl's solicitor acted for the
trust company when the equity of redemption was transferred. Ryan J.A.,
writing for the court, held that these circumstances were insufficient to
establish a novation. He held that there was no express agreement to the
effect that Central would accept the purchaser as principal debtor and give up
its right of action against Rosebowl and Huestis nor did the evidence support
an inference to that effect.
if changes have been made to the terms of the original mortgage? In Canada
Permanent Trust Co. v. Neumann, supra, the
Neumanns joined together with another couple, the Mas, and granted a mortgage
to Canada Permanent. Later wishing to absolve themselves of this liability,
the Neumanns conveyed all their interest and title to the Mas in return for the
latter's promise to assume sole liability for the mortgage debt. Canada
Permanent was not a party to this transfer and did not specifically release the
Neumanns from their debt. The Mas later entered into a modification agreement
reducing the interest rate as well as the amount of the monthly instalments.
The Neumanns were not aware of this agreement until the Mas defaulted and the
trust company demanded payment. Canada Permanent brought suit against the
Neumanns on their personal covenant. The trial judge allowed the action and
granted judgment in an amount calculated in accordance with the modification
J.A. allowed the Neumanns' appeal, finding that there had been a novation. He
based his judgment on the fact that the modification agreement had altered the
mortgage in several respects, holding at p. 321:
cannot be two contracts of mortgage and two methods of calculating the mortgage
debt existing in respect of the same mortgage at the same time. This is
legally repugnant and can only be construed as a novation and an acceptance on
the part of the trust company of the Mas exclusively as principal debtors, thus
releasing the Neumanns of their obligation. These circumstances are, in my
view, consistent with novation.
different result on similar facts was reached in the case of Central
Trust Co. v. Bartlett (1983), 30 R.P.R. 267 (N.S.C.A.). There, the equity of
redemption in certain lands had been transferred several times. After each
transfer the transferee entered into an assumption agreement with Central Trust
providing that all remedies were reserved by the mortgagee. The final
transferee renewed the mortgage at a much higher rate of interest than the rate
in the original mortgage and subsequently fell into arrears. The property was
sold and Central Trust sued Bartlett on his personal covenant for the
deficiency. Bartlett argued, inter alia, that the
mortgagee could be taken as impliedly releasing him from his obligations under
the mortgage by entering into a renewal agreement with another party on very
different terms and without his consent. Hart J.A. rejected this argument at
p. 272 and held that Bartlett continued to be liable for the original amount in
event could Mr. Bartlett become liable for any amount in excess of the amount
he undertook to pay in accordance with the rate of interest set forth in his
agreement. A tender of this amount would, I believe, end any further
obligation he may have to the mortgagee under the assumption agreement. The
mere extension of time to pay would not, in my view, be evidence of an
intention to release the other persons liable to pay the mortgage debt.
my view, significant changes in the terms of a mortgage effected without the
consent of the original mortgagor constitute very strong evidence of novation.
It is not necessary, of course, for a different contract to be brought into
existence for a novation to take place. The essence of novation is the
substitution of debtors. However, where significant changes in terms occur and
the creditor has not applied to the original mortgagor for its consent, I
believe this is a strong indication that the creditor is no longer looking to
the mortgagor for payment.
view has been expressed by the British Columbia Court of Appeal on a number of
occasions: see especially Re Bank of Nova Scotia and Vancouver Island Renovating
Inc. (1986), 31 D.L.R. (4th) 560 and Eaton Bay
Trust Co. v. Ling (1987), 45 D.L.R. (4th) 1. In the Vancouver
Island case the purchaser had entered into an agreement with
the bank on substantially changed terms. When the purchaser fell into arrears
the bank looked to Vancouver Island for the deficiency. The British Columbia
Court of Appeal held that usually such changes in terms would support Vancouver
Island's argument that there had been a novation. However, not so in this case
because the guarantor of Vancouver Island's liability on the covenant acted as
solicitor for the purchaser and was therefore well aware of the amendments to
the mortgage and must be taken to have expressly or impliedly consented to
noted earlier that there are three requirements for an effective novation. The
significance attached by some courts to changes in the mortgage terms has given
rise to the suggestion that a fourth requirement should be added, namely the
consent of the original debtor. Consent as an added element arose from the
decision of Egbert J. in Herold v. British American Oil Co., supra, a case
dealing with a typical commercial contract. The Herold case
has been followed in British Columbia: see Eaton Bay Trust Co., supra; Neumann, supra; and Prospect
Mortgage Investment Corp. v. Van-5 Developments Ltd. (1985),
68 B.C.L.R. 12 (C.A.). In Neumann, Lambert J.A. attempted to bring some
clarity to the issue by drawing a distinction between those instances where
what takes place is akin to the straightforward assignment of a simple debt and
those instances where the burdens or benefits to one of the parties to the
original contract have been altered. At pages 322-23 he said:
my opinion, in a case where the old debtors are co-covenantors on a
straightforward mortgage of land so that they are simply debtors, the situation
is comparable to the situation of the assignability of another simple debt,
that is, the consent of the old debtor is not required. So in straightforward
mortgage cases the fourth principle of novation referred to . . . does not
apply. In such a case the consent of the party being released is not a
requisite of the complete novation. The situation may well be otherwise where
both the burden and the benefits are being altered for one of the parties to
the original contract.
my view, if Lambert J.A. meant to suggest in this passage that the consent of
the original debtor is required for a novation in cases where there have been
significant changes in the original mortgage terms, I think he must be in
error. It seems to me that if the original mortgagor consents to the mortgage
being assumed by his assignee on different terms, this would indicate rather
that he considers himself to continue to be bound despite the assignment.
Consent to changed terms, in other words, does not indicate novation but rather
continuing liability. On the other hand, when changes in the terms have been
effected without the knowledge or consent of the original mortgagor, that will
be a strong indication in favour of novation.
respect to the effect of assumption and renewal agreements, it would appear
that some courts have come perilously close to holding that the execution of
such agreements per se effects a novation. Thus, for
example, in Saskatchewan Trust v. Ross (1985), 41 Sask.
R. 121, Osborn J. of the Saskatchewan Queen's Bench held that a novation had
been effected when the purchaser of the equity of redemption submitted all the documents
regarding assumption of the mortgage in accordance with the request of the
mortgagee. This, together with the mortgagee's failure to communicate in any
way with the original mortgagor until the purchaser had been in default for
several months, was sufficient in the court's view to establish a novation.
courts have come out strongly that the execution of an assumption agreement in
and of itself is not sufficient to establish a novation. For example, in Prospect
Mortgage, supra, Esson J.A. commented at p. 26:
novation is essentially an issue of fact, it would be wrong in principle to
say, as a generalization, that assumption agreements or extension agreements,
or other particular classes of documents, do or do not create a novation. The
question must be decided in each case having regard to all of the circumstances
of which the language of the new contract is only one.
my view, the execution of an assumption agreement does not per se effect
a novation. As Esson J.A. quite rightly noted, because novation is a question
of fact, it would be wrong to hold that the execution of a document by itself
would satisfy the doctrine. This is not to say, however, that such an
agreement may not carry significant weight in determining whether a novation
has taken place. Indeed, if the parties have directed their minds to setting
out the terms of the debt relationship in writing, it seems to me that the
terms of that agreement should conclude what the parties intended their
relationship to be. In other words, in the absence of a written agreement or
clear contractual language, the conduct of the parties may take on greater
significance in elucidating the intent of the parties than when such an
agreement has in fact been executed and is clear. Thus, the language of
assumption agreements is deserving of careful scrutiny even although the
subsequent conduct of the parties may also be factored into the Court's
prejudice" clauses of various kinds have been considered by the courts
with conflicting results. In Central Trust Co. v. Bartlett, supra, the
equity of redemption in certain lands had been transferred several times. Each
transferee executed an assumption agreement which contained a clause reserving
all security taken by the mortgagee in respect of the mortgage. The court in
that case held that since the assumption agreement specifically provided that
Bartlett was not to be released, this negatived any finding of novation.
British Columbia Court of Appeal first considered the effect of such clauses in Prospect
Mortgage, supra. In that case the mortgage company
attempted to hold Van-5 to its covenant after a sale of the mortgaged lands had
resulted in a deficiency. When Van-5 purchased the property, it signed an agreement
containing the following clause:
. . .
the Covenantors further covenant and agree with the Mortgagee that the
liability of the covenantors under this Mortgage shall not be released or
affected in any manner whatsoever by any acts, omission or thing whatsoever
done by or consented to by the Mortgagee or the Mortgagor except for the
payment in full of the principal monies, interest and all other monies secured
by this Mortgage.
sold its interest to the purchasers who also signed an agreement with
Prospect. By the terms of the agreement, the interest rate on the mortgage was
to remain the same although the amount of the monthly payments was increased.
The agreement also contained a "no prejudice" clause. Van-5
contended that it was no longer liable on the covenant since there had been a
novation of the mortgage when it sold its interest to a subsequent purchaser
who entered into an agreement on different terms. Esson J.A. held that the
language of the modification agreement by itself did not effect a novation.
Indeed, he noted that the language in fact expressed a contrary intention on
the part of Prospect. Esson J.A. continued at p. 27:
this issue, however, the language of the new agreement is not conclusive
against the covenantors who, of course, are not parties to it. There are
matters raised in the affidavits submitted by the covenantors which may be
capable of establishing an intention by the creditor, notwithstanding the
language of the agreement, to accept a new contract in full satisfaction of and
in substitution for the old.
basis the court refused the petitioner's application for personal judgment and
directed a trial of the novation issue.
following year in Re Bank of Nova Scotia and Vancouver Island Renovating
Inc., supra, Macfarlane J.A. of the same court
took a very similar approach to Esson J.A.. In that case both the original
mortgage and the renewal agreement contained similar clauses to those in Prospect
Mortgage. Macfarlane J.A. refused to treat these provisions as
determinative and articulated the following rationale for his refusal at
as the without prejudice clause in the renewal agreement is concerned, it is
not binding on the mortgagors because the mortgagors were not parties to that
agreement. The clause is, however, circumstantial evidence which may be looked
at in considering whether it was the intention of the bank to accept Van Isle
in the place of the Pearsons as mortgagors and to substitute the new agreement
with Van Isle for the old agreement with the Pearsons. Similarly, the clause
in the original mortgage entitled "Extension of Time" is a clause
that can be looked at as circumstantial evidence in determining whether the
original mortgagors are bound or not.
result the court looked to the conduct of the parties to determine the novation
issue. It found that the intention of the bank was to deal with Van Isle alone
and therefore the bank had to be taken as accepting the new contract in
substitution for the old one.
judgment of the same court in Eaton Bay Trust Co. v. Ling, supra, seems
to be very much at odds with both of the previous decisions. In that case
Lynch sold his property to Ling, who in turn assumed the mortgage at a higher
interest rate with the mortgagee. Ling did not execute a formal assumption
agreement and did not give Eaton Bay a personal covenant. Lynch's mortgage
contained a "no prejudice" clause. When the mortgage fell into
arrears, Eaton Bay sued Lynch on his personal covenant. Lynch argued that
there had been a novation as the terms of the mortgage had been amended without
his notice or consent.
J.A. rejected Lynch's argument on the following grounds. He held that, in the
usual course of events, material changes in terms would be a strong indication
that there had been a novation of the mortgage. This, he held, was a
consequence of the dual aspect of a mortgage, i.e. the pledge of land and the
personal covenant. Carrothers J.A. referred to his own judgment in Canada
Permanent Trust Co. v. Neumann, supra, for
the proposition that it was legally repugnant to have two different mortgage
debts. Notwithstanding the fact that material changes had been made to the
original mortgage, the court went on to hold that there had been no novation in
the circumstances. It viewed the "no prejudice" clause in the
original mortgage as evidencing in futuro consent on the
part of Lynch to the kind of alterations embraced by the renewal agreement
between Eaton Bay and Ling.
in general agreement with the decisions in Prospect Mortgage and Vancouver
Island but I am uneasy with the Ling
decision. It seems to me that the notion of in futuro consent
may work considerable inequities in some circumstances. Given the conduct of
the mortgagee in that case, I would have been inclined to hold that a novation
had been effected.
Saskatchewan Court of Appeal applied four tests of novation in the present case
and found that each of them had been met. The court noted that it was
permitted to take all the circumstances into account. In doing so the court
not only considered the language of the Assumption Agreement but as well took
into account the fact that National Trust had discontinued its action against
Remai. Cameron J.A. held that this action supported an inference that National
Trust both accepted Mead as principal debtor and accepted the new contract in
full satisfaction of and substitution for the old contract (the second and third
Assumption Agreement executed by Mead contained the following provision
regarding release of Remai:
is agreed that the Mortgagee may at any time and in such manner as it thinks
fit release the Mortgagor named in the said mortgage from any or all of the
covenants therein contained and that neither such release nor anything
herein contained nor anything done pursuant hereto shall affect or be construed
to affect the lien, charge or encumbrance of or conveyance effected by the
said mortgage, or the priority thereof over other liens, charges, encumbrances,
or conveyances, or, except as expressly provided by any such release of the
Mortgagor, to release or affect the liability of the Purchaser or of any
party or parties whomsoever who may now be or hereafter become liable to the
Mortgagee under or on account of the said mortgage; nor shall anything herein
contained or done in pursuance hereof affect or be construed to affect any
other security or instrument, if any, held by the Mortgagee as security for the
aforesaid mortgage indebtedness. [Emphasis added.]
Court of Appeal construed this clause as effecting the release of Remai. With
great respect, I think it was in error in so doing. In this provision Mead
agrees with National Trust that National Trust is free in the future to release
the original mortgagor and that, should it do so, Mead's liability would in no
way be affected. Such a provision, in my opinion, does not effect a novation.
Its effect, as I see it, is to preserve National Trust's remedies against both
Remai and Mead until such time as National Trust releases Remai. It cannot
itself be construed as a present release of Remai such as would be necessary in
order to replace Remai with Mead as principal debtor.
conclusion is, in my opinion, strengthened when the terms of the original
mortgage are taken into consideration. That mortgage contained a "no
prejudice" clause which read:
extension of time given by the Mortgagee to the Mortgagor or any one claiming
under the Mortgagor, nor any other dealing by the Mortgagee with the owner
of the equity of redemption in the Mortgaged Premises shall in any way affect
or prejudice the rights of the Mortgagee against the Mortgagor or any other
person liable for the payment of the moneys secured by this Mortgage. No
forebearance by the Mortgagee to seek any remedy for breach of any covenant,
agreement, provision or proviso contained in this Mortgage shall operate as a
waiver of any rights or remedies of the Mortgagee with respect to such or any
subsequent or other breach. [Emphasis added.]
clause confirms that there was no intention on the part of National Trust to
release Remai. Taken together, these provisions are a strong indication that
the assumption of the debt by Mead was not accepted by National Trust in full
consideration and substitution of Remai's obligation. The question therefore
becomes whether the conduct of the parties can negative that indication.
action of National Trust in discontinuing its suit against Remai could be
construed as supporting an inference that the trust company was no longer
looking to Remai for satisfaction of the debt. Indeed, the Court of Appeal
viewed it in that light. With respect, I think that the Court of Appeal erred
in so doing. I think it attributed too much significance to the discontinuance
of National Trust's action against Remai. While I appreciate that the
Assumption Agreement contemplated that National Trust could release Remai
"at any time and in such manner as it thinks fit", I believe that its
conduct in discontinuing its action against Remai is equivocal, particularly in
light of Rule 198(4) of the Saskatchewan Queen's Bench Rules which
states that discontinuance of an action shall not be a defence to any
subsequent action against the party. Since discontinuance does not preclude a
litigant from bringing the action at a later date, it is not, in my view, an
adequate basis on which to find an intention to release the original
mortgagor. It does not constitute the kind of compelling circumstance
necessary to found a novation.
other circumstances were presented as indicating that novation occurred. Since
I have found that there was no intention on the part of National Trust to
release Remai, it follows that the test for novation has not been met.
would dismiss the appeal on the combined interpretation of the Act and the
Assumption Agreement. The respondent, David Mead, is entitled to his costs.
following are the reasons delivered by
MCLACHLIN J. -- I
agree with Wilson J.'s conclusions and reasons, subject to the following
comment. I view ss. 2(2)(d) and 40(2) of the Act as involving a facial
conflict, which I would resolve by recourse to legislative intention, and in
particular the intention of the legislature to benefit the non-corporate
dismissed with costs.
for the appellant: Pederson, Rourke, Pinch, Saskatoon.
for the respondents: Rendek, McCrank, Halvorsen, Canham, Regina.