Ensuring Your Warranty is Enforceable: ILA and Waiver – Financial Services

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Many financing transactions use collateral in support of commercial loans. Guarantors are often required to seek independent legal advice (“ILA”) or agree to waive their right to receive it (“Waiver”). This article explores instances where ILA or waiver requirements are commonly incurred in the context of financing transactions.

There are two primary circumstances that require ILA or a waiver: 1) a non-spouse individual guarantor and 2) a joint 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 guarantees a loan for a company in which he is personally involved, a waiver can be obtained. We mean by “personal involvement” the fact that the individual guarantor is involved in the day-to-day operations of the borrowing company by being an officer, director or active shareholder, or retains a role in the management of its affairs (see: The Bank of Nova Scotia v. Renatoneil Consultants Ltd.2017 ONSC 5473 at paragraph 3).

Second, when the individual guarantor has no personal involvement with the company, the ILA must be sought as part of the business transaction. This is because someone who is personally involved with a company is in a better position to assess the company’s financial strength and make informed decisions about whether to guarantee the company’s obligations under the loan.

2. The guarantor spouse

When considering obtaining a waiver, a key consideration is whether that person is at high risk of being unduly influenced. This question is asked each time a spouse guarantees their partner’s loan and is particularly important when the guarantor spouse does not benefit from the financing transaction. Whenever there is a spousal guarantee, it is essential to obtain ILA to mitigate the risk of undue influence arguments being raised in the future.

For example, SpouseA may approach SpouseB to secure their business 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 is no problem 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 defense that he was unaware of what he was signing and was improperly influenced to secure the loan.

The practical implication for a lender’s lawyer

A lender’s attorney’s primary concern is to have the appropriate security in place for the lender and to ensure that the security is duly enforced. The lawyer must determine if a person had the authority to sign these security documents and if this signature is in force. Searching for ILA in the appropriate circumstances listed above engages this last consideration. If you do not obtain the ILA when required or strongly recommended, the lender may be in a situation where someone can challenge the validity of the collateral and other security documents provided by that person. The following defenses are often engaged when AHI is involved:

Potential defenses

Undue influence: The essence of this doctrine is to determine whether an individual signed a document of his own volition or was influenced in a way that made his decision not entirely independent. A person who is party to a transaction must understand the nature and potential consequences of the transaction. They must make the decision independent of any outside influence except their lawyer. The consequence of invoking such a doctrine is that when an individual feels compelled to enter into a transaction, he may argue in court that the security documents should be canceled due to external pressure to enter through a third.

Non-East Factum: This is often referred to as the “lack of understanding” doctrine which arises when an individual has misunderstood a document they have signed and that lack of understanding was not the result of negligence or blindness. voluntary. For example, if you have a guarantor who does not speak your language and does not understand what he is signing, an ILA attorney should be engaged to explain the documents in the guarantor’s native language to ensure ensure that all implications are understood. Similar arguments can be made when a lack of mental capacity is feared.

Guarantees are important tools to support borrowers in financing transactions and it is essential for lenders that guarantees are enforceable. Both of the defenses outlined above can be mitigated by ensuring that an individual guarantor obtains the ILA in these transactions. There will be other situations where the need for ILA may be incurred, however, in the context of commercial transactions, these are two common scenarios that counsel for a lender and a borrower should bear in mind. when executing bonds and other relevant security documents with a person who may be considered vulnerable to undue influence.

About Mackrell International – Canada – Scott Venturo LLP is a full-service business law firm in Calgary, AB and a member of Mackrell International. Mackrell International – Canada is made up of four independent law firms in Alberta, British Columbia, Ontario and Quebec. Each firm is regionally based and well connected in our communities, a benefit shared with our clients. Through close relationships among our Canadian member firms, we are committed to working with clients who have legal needs in multiple jurisdictions in Canada.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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