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Court of Appeal Rejects Unconscionability Argument

Mayaben Shah and her company applied for a small business loan with the Bank of Montreal for her and her husband’s donut shop. In order to secure the loan, Mr. Ileshkumar Shah and Mr. Amer Javed provided a joint guarantee to the Bank of Montreal. The loan application went through and the principal company was provided with a loan of $213,486.00. Later, amidst financial turmoil, Mr. Shah resigned as a director of the company which operated the donut shop, and ceased involvement with the store despite remaining on the books as the Vice-President. The company defaulted on the loan and Bank of Montreal sought repayment from the guarantors.

On a motion for summary judgment, Justice Mario D. Faieta ordered the appellants to pay $55,521.79 on their personal guarantee to Bank of Montreal and further, set aside Mr. Shah’s fraudulent transfer of his half-interest in the matrimonial home to his spouse. The appellants challenged that decision on two grounds:

  1. the trial judge erred in failing to find the Bank of Montreal’s conduct regarding the loan was unconscionable; and
  2. the motion judge erred in finding that Mr. Shah’s transfer of his interest in the Matrimonial home to Mrs. Shah was a fraudulent conveyance.

The Court of Appeal dismissed this appeal in whole. This review will focus on the Court of Appeal’s decision in regards to the first question only.

Reasons

Unconscionability is an equitable doctrine which allows a court to release parties from contractual obligations where it finds the contract to be patently unfair to either side or where one party took advantage of the other when entering into the contract. The appellants argued that while the contract was not unconscionable in its inception, it became unconscionable when the Bank refused to grant access to Mr. Shah of the debtor company’s account information. The Court of Appeal found that, while the Bank did breach a term of the contract by refusing to provide account information to Mr. Shah, this failure was not substantial enough to allow the appellant to be released from his obligations as guarantor of the loan. The Court of Appeal found that the Supreme Court decision in Bahsin v Hrynew did not extend the common-law test for unconscionability beyond the equities of an agreement, towards an assessment of a party’s ongoing performance of their duties under the contract. The Court of Appeal went on to state that, while there is a duty to act honestly in the performance of a contract, the appellants failed to bring forth any evidence of dishonesty and their case therefore failed. Citing previous decisions, the Court of Appeal affirmed that a guarantor should not be discharged from their obligations absent actions on behalf of the creditor which go to the heart of the agreement. Instances of the types of breaches which would likely release a guarantor from their obligations  exist where:

  1. a creditor acts in bad faith towards the surety;
  2. the creditor concealed material information at the inception of the guarantee;
  3. the creditor causes or connives the default of the principal debtor; or
  4. where there is a variation in the terms of the contract between the creditor and the principal debtor of a type that would prejudice the interests of the surety.

In this case, the Bank’s failure to provide Mr. Shah with account information was not a material breach and therefore did not warrant Mr. Shah’s release from his obligations as guarantor.

Our Thoughts

If used properly, the doctrine of unconscionability can be a useful tool in a lawyer’s arsenal when challenging a contract. When the court finds an agreement to be unconscionable, it has broad discretionary powers to award a remedy it deems just, including amending certain terms of the contract or deeming the contract null and void altogether. This doctrine is the subject of much criticism because it goes against the principle of “buyer beware” which underpins a healthy free-market. As the argument goes—it’s not for the courts to determine whether the substance of a contract made between two private parties is fair. Courts are in no better position than anyone else to assess the prudence of business decisions. It’s up to the parties to assess the value of a contract in relation to their personal interests.

The idea that courts can assess the fairness of contracts and retroactively change the terms of those contracts amounts to paternalism. Taken to the extreme, parties can abuse this doctrine by entering into contracts they know to be unconscionable and later challenging the same contract they freely entered when things go sour. Proponents of the doctrine will argue, however, that the court cannot be asked to enforce a contract it knows to be patently unfair. They will argue that the doctrine of unconscionability is necessary both to protect people in vulnerable situations and to ensure the administration of justice is not placed in disrepute by enlisting the courts’ power in enforcing ridiculously unfair bargains. The middle ground between these two positions which has been reached in our jurisprudence is reflected in cases such as these: we allow for a doctrine of unconscionability but we limit its application to only the clearest of cases. 
 
See: Bank of Montreal v. Javed, 2016 ONCA 49
 
The above article is for general information purposes only and does not constitute legal advice. If you have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere.