What is the effect of a breach of the law of guarantee on a guarantor?

British Columbia, Canada


The following excerpt is from Jens Hans Investments Co. v. Bridger, 2002 BCSC 1230 (CanLII):

Under the law of guarantee a breach by the creditor of the underlying contract in a manner which results in a material variation in risk to the guarantor will discharge the guarantor (Watts v. Shuttleworth (1860) 157 E.R. 1171, affirmed 158 E.R. 510 (Ex. Ch.)).

In Bank of Montreal v. Wilder (1987), 1986 CanLII 3 (SCC), 8 B.C.L.R. (2d) 282 (S.C.C.) the defendants were guarantors of a floating loan to the principal. When the principal began overdrawing its credit limits, the bank agreed to continue financing the company in exchange for the defendant’s agreement to inject more capital into the company and further guarantees, which provided, inter alia, that the bank could deal with the principal and the defendants as they saw fit. The defendants performed their obligations under the new agreements, but the bank did not. Instead, it almost immediately began to dishonor the principal’s cheques. It then demanded that payment of the loan be made within two hours of the demand and on the same day appointed a receiver-manager. The receiver-manager refused to complete the company’s contract, resulting in the eventual bankruptcy of the company.

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