Supreme Court of Canada
Fox et al. v. Royal Bank of Canada et al., [1976] 2 S.C.R. 2
Date: 1975-10-07
Frank B. Fox, Eastern Shore Construction Limited, a body corporate, William H. Jack and Frank B. Fox carrying on business under the firm name and style of Bent Brook Farms, Ford H. Webber, Harpell H. Power and D.D. Lynds Appellants;
and
The Royal Bank of Canada, a body corporate, and Standard Brands Limited Respondents.
1974: October 7, 8; 1975: October 7.
Present: Martland, Judson, Ritchie, Spence and Dickson JJ.
ON APPEAL FROM THE SUPREME COURT OF NOVA SCOTIA, APPEAL DIVISION
Guarantee—Surety and sub-surety—Co-sureties—Sub-surety guaranteeing liability of surety—Surety paying creditor—Right of sub-surety to indemnity from the co-sureties.
J, an employee of Moirs Limited, had become involved in several ventures, including Eastern Shore Construction Limited and Dolphin Industries Limited, all of which dealt with the Royal Bank of Canada through Jack, and many of which were indebted to that Bank. In 1968 it had been decided to incorporate Dolphin Holdings Limited to consolidate the borrowings and shares of the various other companies and J arranged for that company, a loan of $100,000 with the Bank to which he was already substantially indebted. The bank accepted J as guarantor of this loan on the strength of the fact that he had been able to obtain from Standard Brands Ltd., the successor to Moirs Limited, a guarantee of his liabilities to the bank to the extent of $100,000 (found as a fact by the trial judge to have been given to support J’s personal guarantee of the Dolphin Holdings account). Thereafter J solicited and obtained further guarantees of the same account from the appellants on the basis of a representation that Standard Brands Ltd. had guaranteed the bank’s loan to Dolphin Holdings Ltd. whereas no such guarantee had been given, the sole responsibility assumed by Standard Brands Limited having been to guarantee J’s indebtedness. When the financial position of the Jack enterprises deteriorated the bank called the loan and proceeded against the guarantors to the extent of their guarantees (each for $100,000). Subsequently a formal demand was made on J’s guarantor, Standard Brands, which
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honoured its guarantee in respect of J’s liability as a defaulting guarantor of the Dolphin Holdings account.
The trial judge held that Standard Brands having discharged J’s liability was subrogated to the rights of the bank and had the rights of the bank against all guarantors including J. The appeal division agreed.
Held: The appeal should be dismissed.
The creditor was the bank and the principal debtor Dolphin Holdings Limited with the appellants in the position of primary sureties or ‘sureties in a prior degree’. Standard Brands was a surety for J, not a co-surety and such a sub-surety was entitled to relief in toto of the surety against the principal or sureties in a prior degree. While one of a number of sureties who discharges the principal debt in full is entitled to contribution from his co-sureties pro tanto in the amount of that debt less his own proportionate share of liability, a sub-surety who is a stranger to the guarantee of liability of the principal debtor and who has discharged the debt as the guarantor of the personal liability of one of the co-sureties stands in the shoes of the principal debtor and is entitled to indemnity from the principal debtor and all the sureties including the principal surety whose account he has guaranteed.
Craythorne v. Swinburne (1807), 14 Ves. Jun. 160, 33 E.R. 482; Re Denton Estate, [1904] 2 Ch. 178 referred to.
APPEAL from a judgment of the Supreme Court of Nova Scotia, Appeal Division, dismissing an appeal from a judgment of Jones J. Appeal dismissed.
Harry E. Wrathall, and Lewis A. Bell, Q.C., for the appellants.
David R. Chipman, Q.C., and James S. Cowan, for the respondents.
The judgment of the Court was delivered by
RITCHIE J.—This is an appeal from a judgment of the Appeal Division of the Supreme Court of Nova Scotia affirming the judgment rendered at trial by Mr. Justice Jones whereby it was ordered that the plaintiffs are entitled to enter judgments
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against the several defendants in the amounts by which they had respectively guaranteed the account of Dolphin Holdings Limited with the Royal Bank of Canada.
The circumstances giving rise to this appeal are set out in extenso in the reasons for judgment of the learned trial judge and reviewed in the reasons for judgment delivered by Mr. Justice Cooper on behalf of the Appeal Division, and as Mr. Justice Jones’ reasons have now been conveniently published in 29 D.L.R. (3d) 167, I do not find it necessary to retrace the course of events in the same detail.
The essentials of the matter are that one William H. Jack, who had been an employee of Moirs Limited, had become involved in a number of ventures the most prominent of which were Eastern Shore Construction Limited and Dolphin Industries Limited, all of which dealt with the Royal Bank of Canada through Jack.
Many of the Jack enterprises were indebted to the Bank in varying amounts and early in 1968 it was decided to incorporate Dolphin Holdings Limited for the sole purpose of consolidating the borrowings and the shares of the various other companies. Jack himself said: “It was to be strictly a shell holding company in which to consolidate the whole thing.” The new company being in need of substantial capital, Jack arranged a loan of $100, 000 for it with the bank to which he was already substantially indebted. In the result the bank accepted Jack as guarantor of this loan on the strength of the fact that he had been able to obtain from Standard Brands Limited, the successor of Moirs Limited, a guarantee of his liabilities to the bank to the extent of $100,000 and the learned trial judge found as a fact that this latter guarantee was given to support Jack’s personal guarantee of the Dolphin Holdings account.
Armed with this additional security, Jack solicited and obtained guarantees of the same account from the appellants in this action and from Dolphin Industries Limited and Bentley and Archibald Limited, and in so doing he represented to the various guarantors that Standard Brands had guaranteed the bank’s loan to Dolphin Hold-
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ings Limited. One of the turning points of this case is that no such guarantee had been given and that the sole responsibility assumed by Standard Brands Limited was to guarantee the indebtedness of Jack.
The financial position of the Jack enterprises deteriorated steadily and the bank called the loan and proceeded against Jack, Bentley and Archibald Limited and Dolphin Industries Limited to the limit of their guarantees, which were each for $100,000. Default judgments were obtained by the bank against these parties and the appellants joined them as third parties to the present action together with Standard Brands, for the purpose of ensuring that they could be made available to contribute along with the other guarantors to the indebtedness. Only Standard Brands filed a defence to the third party notices. A similar notice was filed against Dolphin Holdings Limited seeking indemnity to which no defence was entered. The present appellants constitute all the guarantors of Dolphin Holdings Limited except Dolphin Industries Limited, Jack and Bentley and Archibald Limited.
On April 9, 1970, a formal demand was made by the bank on Standard Brands as Jack’s guarantor, and Standard Brands accordingly honoured its guarantee in respect of the liability of Jack as a defaulting guarantor of the account of Dolphin Holdings Limited.
The learned trial judge was, in my view, correct in holding that, as a matter of law, by discharging Jack’s liability in this regard, Standard Brands Limited became subrogated to the rights of the bank and stood in its shoes with all the rights to which the bank was entitled against all guarantors of Dolphin Holdings Limited, including Jack. These are the rights which Standard now asserts against the appellants and I agree with Mr. Justice Cooper in summarizing the position as follows:
The Bank was clearly the principal creditor and Dolphin Holdings Limited the principal debtor. The appellants as Guarantors of the indebtedness of Dolphin Holdings Limited were sureties for that indebtedness to the limits of their Guarantees and as among themselves (and the third parties) were co-sureties. Standard, having guaranteed the indebtedness of Jack and not of Dolphin
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Holdings Limited, was not a co-surety with the appellants. The trial Judge so found and indeed these findings do not appear to be in dispute. It is stated in the factum of the appellants
‘…the Learned Trial Judge found that Standard, by virtue of its Guarantee, was a surety for Jack and was not a co-surety with Jack and the other Guarantors of the account of Dolphin Holdings, including the appellants. The appellants do not take issue with this finding…’
I did not understand that the appellants had changed their position in this regard during the argument before this Court.
In treating Standard as an alter ego of the bank, the trial judge, in my opinion, rightly found that it was entitled to assert the bank’s right to enforce all guarantees of the Dolphin Holdings account.
In reaching his conclusion on this issue, the most cogent finding of the learned trial judge was phrased as follows:
In the present case, the primary responsibility for payment was upon Mr. Jack and his co-sureties in the event of default by Dolphin Holdings Limited. Standard’s liability in turn only arose upon default by Mr. Jack. In my view, Standard was a surety for Mr. Jack and not a co-surety. A surety of a surety is entitled to full indemnity against the principal debtor and sureties in a prior degree. Sureties in a prior degree are not entitled to look to him for contribution.
I agree with this conclusion.
While I have been unable to find any authority directly governing the circumstances here disclosed, I am, like Mr. Justice Cooper, satisfied that the applicable principles are accurately described in Rowlatt on Principal and Surety (2nd ed.) at pp. 169 and 231 where it is said:
The rights of a surety may be classified as follows:—
I. As against the creditor, to have his remedies exercised and his securities enforced
(a) Against the principal or sureties in a prior degree with a view to the relief in toto of the surety, and
…
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II. As against the principal debtor and sureties in a prior degree, to be indemnified and to have the remedies and securities of the creditor kept alive for that purpose.
In the present case the creditor was, of course, the bank and the principal debtor Dolphin Holdings Limited, while the appellants were in the position of primary sureties or “sureties in a prior degree”. Reference may also be had to the cases of Craythorne v. Swinburne and Re Denton, both of which are referred to in the reasons for judgment of Mr. Justice Cooper.
Although Jack was the moving spirit in acquiring the Standard Brands guarantee of his account, the document itself manifested a relationship between the bank and Standard Brands to which Jack was not a party.
Jack had long acted as the representative of his various interests in their dealings with the bank and there is no doubt that the Standard Brands guarantee was designed for the purpose of shoring up the financial structure which was then represented by Dolphin Holdings Limited, but the guarantee which was executed by Standard Brands evidenced that Company’s undertaking to the bank but not to Dolphin Holdings Limited or any of that Company’s sureties, including Jack.
It appears to me to be both equitable and logical that one of a number of sureties who discharges the principal debt in full should be entitled to contribution from his co-sureties pro tanto in the amount of that debt less his own proportionate share of liability, but that a sub‑surety who is a stranger to the guarantee of the liability of the principal debtor and who has discharged the debt as the guarantor of the personal liability of one of the co-sureties, should stand in the shoes of the principal creditor and be entitled to indemnity from the principal debtor and all the sureties, including the principal surety whose account he has guaranteed.
The appellants contended that their guarantees were null and void by reason of the fact that they had been obtained through misrepresentations
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made by Jack as an agent for the bank and that the guarantee forms were not given under seal. I agree with the learned trial judge that there is no evidence to justify a finding that Jack was acting as an agent or a representative of the bank in any representations which he made to the appellants and I note also that the guarantee forms which were exhibits in this action were formally executed and contained no such defects as those alleged.
In the result, the formal judgment in the Trial Division ordered that the plaintiffs were entitled to enter judgments against the appellants in the full amount of their respective guarantees but that they were not entitled to realize on those judgments or any other judgments with respect to the indebtedness which is the subject matter of this action, more than $100,652.05 with costs to be taxed.
It was further ordered at trial that on payment by any appellant pursuant to the aforesaid judgments, such appellant would be entitled to an order for contribution as against the third parties Dolphin Industries Limited and Bentley and Archibald Limited and as against the other appellants, and to an order for indemnity as against the third parties Dolphin Holdings Limited and William H. Jack. This order was affirmed by the Appeal Division and after careful consideration, I can see no reason to disturb it.
For all these reasons, as well as for those so fully stated at trial and in the Appeal Division, I would dismiss this appeal with costs.
Appeal dismissed with costs.
Solicitor for the appellants: Harry E. Wrathall, Halifax,
Solicitor for the respondents: James S. Cowan, Halifax.
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