1. Introduction
It seems that there is virtually no Canadian caselaw on the question posed by the title. Indeed, in the recent case, The Guarantee Company of North America v Raeside,[1] the court noted at paragraph 31:
There is a dearth of Canadian caselaw in which courts have commented on the right of a surety to demand collateral pursuant to an indemnity agreement before the surety actually pays for a debt for which the principal is liable.
This forced the court to turn to American jurisprudence.
2. Facts
The deceased, Vernon Bates, died intestate in Michigan on 17 November 2018, with an estate of approximately $8.6 million USD. The defendant, Mr Raeside, and Mr Bates were maternal cousins. On 20 December 2018 the defendant filed a petition for probate in the Oakland County Probate Court in Michigan. He sought to be appointed administrator and requested that a bond be issued. He named 21 maternal heirs in the petition but did not mention any paternal heirs. In January 2019 the Probate Court appointed the defendant administrator of the Bates estate and required him to post a $4,000,000 bond.
The defendant applied for a bond from the plaintiff, which issued it on 4 February 2019. On 30 January 2019 the defendant also signed an indemnity agreement in favour of the plaintiff, which included a number of conditions. One of the conditions provided that if the surety should set up a reserve to cover any liability under the bond, the defendant would immediately, on demand, deposit a sum of money with the surety in the amount of the reserve, ‘to be held by the [surety] as collateral security on said bond’.
On 22 February 2019 three putative paternal heirs filed a Notice of Appearance in the probate proceedings. In October 2019 the defendant caused approximately $7,000,000 to be distributed out of the estate to the maternal heirs, He himself received $500,000. The defendant did not inform the paternal heirs of the distribution.
In an affidavit of 5 December 2023, the defendant deposed that he was informed of the paternal heirs’ claim in February 2019, but did not know them, He asserted that his lawyer told him that the paternal heirs would have to prove their heirship and appeal the prior findings about the beneficiaries. His lawyer told him that the time for an appeal had expired, and having heard nothing further, the defendant assumed that the paternal heirs had abandoned their claim.
In August 2020 counsel for the paternal heirs filed a petition to determine the heirs and a petition to remove the defendant as administrator. In May 2021 counsel filed another petition to have the paternal heirs recognized by the court, and in September 2021 the defendant moved to dismiss those two petitions.
In January 2022 the court denied the motion to dismiss, and after a bench trial in May 2022, the probate judge ordered that the defendant be removed as administrator and held that the paternal heirs should be recognized as heirs of the estate. She held that once the defendant was informed of the paternal heirs, he had a duty as fiduciary to investigate the validity of their claims and to bring a petition to redetermine the heirs, which he breached. She also appointed a successor administrator in the estate.
In November 2022 the paternal heirs filed a motion for an accounting by the defendant and an order for disgorgement. On 3 November 2023 the probate judge held:
(1) the maternal and paternal heirs were each entitled to 50% of the net estate;
(2) the defendant breached his fiduciary duty be distributing more than 50% to the maternal heirs, and $55,000 in gifts to non-heirs;
(3) the defendant had to return one-half of the gifts to the non-heirs, one-half of the improper distribution to the maternal heirs, and the amount taken by him as fees;
(4) the defendant’s wife had to return an amount paid to her as fees; and
(5) all the maternal heirs had to disgorge the improper portion of the distributions made to them.
The defendant did not comply with the order.
On 1 February 2023 the plaintiff wrote to the defendant that since he had wrongfully distributed $3,555,000 in breach of his duties, it had posted a reserve of $3,585,000 to cover a potential loss and anticipated legal expenses. The plaintiff demanded that the defendant deposit the latter sum with it in accordance with the indemnity agreement.
The plaintiff also wrote to each of the maternal heirs, demanding that they reimburse to the estate one-half the distributions they received, none of the maternal heirs, including the defendant, have complied with the demand.
3. Analysis and Judgment
3.1 Summary Judgment Motion
Justice Hebner began her analysis by reviewing the law on summary judgments, citing Hryniak v Mauldin.[2] The court must determine whether there is a genuine issue for trial. There is no genuine issue for trial if the motion allows the judge to make necessary findings of fact; if it allows the judge to apply the law to the facts; and if summary judgment is a proportionate, more expeditious, and less expensive means to achieve a just result than a trial. If the plaintiff has shown that there is no genuine issue for trial, the onus shifts to the defendant to show that the defence has a real change of success at trial, based on the evidence adduced on the motion.
Her Honour noted that the indemnity agreement is clear and that the 1 February 2023 letter by the plaintiff to the defendant triggered the contractual obligation that required the defendant to deposit the funds demanded as collateral security. In the absence of Canadian case law, she turned to American cases.[3] They hold that under the accepted equitable principle a surety is entitled to be indemnified only when the surety pays the debt for which the principal is liable. However, the American cases also hold that this principle does not apply when the parties have entered into an express indemnification agreement. In that case the surety is entitled to insist on the letter of the contract, and if the contract consists of a collateral security provision, the surety is entitled to enforce it and to receive collateral security even though the surety has not yet suffered an actual loss.
Her Honour acknowledged that these cases were not binding on her, but she found them persuasive and applied them. Since there was an express indemnification agreement that required the defendant to deposit security with the plaintiff when it set up a reserve to cover a liability and demanded him to deposit the security, the defendant had to deposit the security. Consequently, there was no genuine issue for trial.
3.2 Non-Est Factum
The defendant pleaded this defence. However, Justice Hebner noted that the defendant had the opportunity to read the bond and the general indemnity agreement before signing the bond but did not do so. He was represented by a Michigan lawyer when he obtained the bond, and the defendant had opportunity to ask the lawyer questions about the application for the bond and the indemnity agreement.
Her Honour referred to Marvco Color Research Ltd v Harris,[4] in which Estey J, writing for the court at p 779 adopted the following statement from the dissenting opinion of Cartwright J in Prudential Trust Co Ltd v Cugner:[5]
… generally speaking, a person who executes a document without taking the trouble to read it is liable on it and cannot plead that he mistook its contents, at all events, as against a person who acting in good faith and in the ordinary course of business has changed his position in reliance on such a document.
In Marvco Estey J took the view that Cartwright J had correctly outlined the principles of the law of non est factum. Consequently, he held in Marvco[6] that the defendant-respondents:
… are barred by reason of their carelessness from pleading that their minds did not follow their hands when executing the mortgage so as to be able to plead that the mortgage is not binding on them.
Justice Hebner also referred to Sutton Group-Admiral Realty Inc v Taborovska[7] in which the court set out the elements of the defence of non est factum as follows:
- the defendant must prove that he was mistaken about the nature of the contract;
- the defendant must prove that his mistake was the result of misrepresentation by the other contracting party; and
- the defendant must prove that he was not careless in signing the contract.
Justice Hebner found that the defendant had not met the elements of the defence, because he provided no evidence to show that the plaintiff or anyone on its behalf misrepresented the terms of the bond and indemnity agreement to him. Rather, he was careless in signing the contract because he did not read it and did not ask his lawyer any questions about it, although he had opportunity to do so. Consequently, she held that the defence of non est factum was not made out.
3.3 Relief from Forfeiture
The defendant also relied on s 98 of the Courts of Justice Act,[8] which provides that a court may grant relief against penalties and forfeitures on such terms as it considers just.
Justice Hebner referred to the judgment of Doherty JA, writing for the court in Ontario (Attorney General) v 8477 Darlington Crescent,[9] where he said:
The power to grant relief is predicated on the existence of circumstances in which enforcing a contractual right of forfeiture, although consistent with the terms of the contract, visits an inequitable consequence on the party that breached the contract.
And:
The examination of the reasonableness of the breaching party’s conduct lies at the heart of the relief from forfeiture analysis. A party whose conduct is not seen as reasonable cannot hope to obtain relief from forfeiture.
Justice Hebner found that the defendant’s conduct was not reasonable when he signed the bond application and the indemnity agreement. At best it was careless. Moreover, he breached his fiduciary duty by not investigating the claim of the paternal heirs and obtaining a court order before distributing the assets. He should also have obeyed the disgorgement order.
Consequently, she held that the defences of non est factum and relief from forfeiture also did not require a trial. She ordered that the defendant post collateral in the total amount required by the disgorgement order plus $47,500, for a total of $2,456,355 USD.
—
[1] 2024 ONSC 4902.
[2] 2014 SCC 7.
[3] Fidelity and Deposit Co of Maryland v Bristol Steel & Iron Works Inc, 722 F 2d 1160 at 1163 (4th Cir 1983); United States Surety Company v Stevens Limited Partnership, 905 F Supp 2d (Ill Dist Ct 2012), pp 859-60.
[4] [1982] 2 SCR 774.
[5] [1956] SCR 912.
[6] [1982] 2 SCR 774 at 785.
[7] 2021 ONSC 2837, para 7.
[8] RSO 1990, c C.43.
[9] 2011 ONCA 363, paras 87 and 90.
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Written by: Albert Oosterhoff
Posted on: March 17, 2025
Categories: Commentary, WEL Newsletter
1. Introduction
It seems that there is virtually no Canadian caselaw on the question posed by the title. Indeed, in the recent case, The Guarantee Company of North America v Raeside,[1] the court noted at paragraph 31:
There is a dearth of Canadian caselaw in which courts have commented on the right of a surety to demand collateral pursuant to an indemnity agreement before the surety actually pays for a debt for which the principal is liable.
This forced the court to turn to American jurisprudence.
2. Facts
The deceased, Vernon Bates, died intestate in Michigan on 17 November 2018, with an estate of approximately $8.6 million USD. The defendant, Mr Raeside, and Mr Bates were maternal cousins. On 20 December 2018 the defendant filed a petition for probate in the Oakland County Probate Court in Michigan. He sought to be appointed administrator and requested that a bond be issued. He named 21 maternal heirs in the petition but did not mention any paternal heirs. In January 2019 the Probate Court appointed the defendant administrator of the Bates estate and required him to post a $4,000,000 bond.
The defendant applied for a bond from the plaintiff, which issued it on 4 February 2019. On 30 January 2019 the defendant also signed an indemnity agreement in favour of the plaintiff, which included a number of conditions. One of the conditions provided that if the surety should set up a reserve to cover any liability under the bond, the defendant would immediately, on demand, deposit a sum of money with the surety in the amount of the reserve, ‘to be held by the [surety] as collateral security on said bond’.
On 22 February 2019 three putative paternal heirs filed a Notice of Appearance in the probate proceedings. In October 2019 the defendant caused approximately $7,000,000 to be distributed out of the estate to the maternal heirs, He himself received $500,000. The defendant did not inform the paternal heirs of the distribution.
In an affidavit of 5 December 2023, the defendant deposed that he was informed of the paternal heirs’ claim in February 2019, but did not know them, He asserted that his lawyer told him that the paternal heirs would have to prove their heirship and appeal the prior findings about the beneficiaries. His lawyer told him that the time for an appeal had expired, and having heard nothing further, the defendant assumed that the paternal heirs had abandoned their claim.
In August 2020 counsel for the paternal heirs filed a petition to determine the heirs and a petition to remove the defendant as administrator. In May 2021 counsel filed another petition to have the paternal heirs recognized by the court, and in September 2021 the defendant moved to dismiss those two petitions.
In January 2022 the court denied the motion to dismiss, and after a bench trial in May 2022, the probate judge ordered that the defendant be removed as administrator and held that the paternal heirs should be recognized as heirs of the estate. She held that once the defendant was informed of the paternal heirs, he had a duty as fiduciary to investigate the validity of their claims and to bring a petition to redetermine the heirs, which he breached. She also appointed a successor administrator in the estate.
In November 2022 the paternal heirs filed a motion for an accounting by the defendant and an order for disgorgement. On 3 November 2023 the probate judge held:
(1) the maternal and paternal heirs were each entitled to 50% of the net estate;
(2) the defendant breached his fiduciary duty be distributing more than 50% to the maternal heirs, and $55,000 in gifts to non-heirs;
(3) the defendant had to return one-half of the gifts to the non-heirs, one-half of the improper distribution to the maternal heirs, and the amount taken by him as fees;
(4) the defendant’s wife had to return an amount paid to her as fees; and
(5) all the maternal heirs had to disgorge the improper portion of the distributions made to them.
The defendant did not comply with the order.
On 1 February 2023 the plaintiff wrote to the defendant that since he had wrongfully distributed $3,555,000 in breach of his duties, it had posted a reserve of $3,585,000 to cover a potential loss and anticipated legal expenses. The plaintiff demanded that the defendant deposit the latter sum with it in accordance with the indemnity agreement.
The plaintiff also wrote to each of the maternal heirs, demanding that they reimburse to the estate one-half the distributions they received, none of the maternal heirs, including the defendant, have complied with the demand.
3. Analysis and Judgment
3.1 Summary Judgment Motion
Justice Hebner began her analysis by reviewing the law on summary judgments, citing Hryniak v Mauldin.[2] The court must determine whether there is a genuine issue for trial. There is no genuine issue for trial if the motion allows the judge to make necessary findings of fact; if it allows the judge to apply the law to the facts; and if summary judgment is a proportionate, more expeditious, and less expensive means to achieve a just result than a trial. If the plaintiff has shown that there is no genuine issue for trial, the onus shifts to the defendant to show that the defence has a real change of success at trial, based on the evidence adduced on the motion.
Her Honour noted that the indemnity agreement is clear and that the 1 February 2023 letter by the plaintiff to the defendant triggered the contractual obligation that required the defendant to deposit the funds demanded as collateral security. In the absence of Canadian case law, she turned to American cases.[3] They hold that under the accepted equitable principle a surety is entitled to be indemnified only when the surety pays the debt for which the principal is liable. However, the American cases also hold that this principle does not apply when the parties have entered into an express indemnification agreement. In that case the surety is entitled to insist on the letter of the contract, and if the contract consists of a collateral security provision, the surety is entitled to enforce it and to receive collateral security even though the surety has not yet suffered an actual loss.
Her Honour acknowledged that these cases were not binding on her, but she found them persuasive and applied them. Since there was an express indemnification agreement that required the defendant to deposit security with the plaintiff when it set up a reserve to cover a liability and demanded him to deposit the security, the defendant had to deposit the security. Consequently, there was no genuine issue for trial.
3.2 Non-Est Factum
The defendant pleaded this defence. However, Justice Hebner noted that the defendant had the opportunity to read the bond and the general indemnity agreement before signing the bond but did not do so. He was represented by a Michigan lawyer when he obtained the bond, and the defendant had opportunity to ask the lawyer questions about the application for the bond and the indemnity agreement.
Her Honour referred to Marvco Color Research Ltd v Harris,[4] in which Estey J, writing for the court at p 779 adopted the following statement from the dissenting opinion of Cartwright J in Prudential Trust Co Ltd v Cugner:[5]
… generally speaking, a person who executes a document without taking the trouble to read it is liable on it and cannot plead that he mistook its contents, at all events, as against a person who acting in good faith and in the ordinary course of business has changed his position in reliance on such a document.
In Marvco Estey J took the view that Cartwright J had correctly outlined the principles of the law of non est factum. Consequently, he held in Marvco[6] that the defendant-respondents:
… are barred by reason of their carelessness from pleading that their minds did not follow their hands when executing the mortgage so as to be able to plead that the mortgage is not binding on them.
Justice Hebner also referred to Sutton Group-Admiral Realty Inc v Taborovska[7] in which the court set out the elements of the defence of non est factum as follows:
Justice Hebner found that the defendant had not met the elements of the defence, because he provided no evidence to show that the plaintiff or anyone on its behalf misrepresented the terms of the bond and indemnity agreement to him. Rather, he was careless in signing the contract because he did not read it and did not ask his lawyer any questions about it, although he had opportunity to do so. Consequently, she held that the defence of non est factum was not made out.
3.3 Relief from Forfeiture
The defendant also relied on s 98 of the Courts of Justice Act,[8] which provides that a court may grant relief against penalties and forfeitures on such terms as it considers just.
Justice Hebner referred to the judgment of Doherty JA, writing for the court in Ontario (Attorney General) v 8477 Darlington Crescent,[9] where he said:
The power to grant relief is predicated on the existence of circumstances in which enforcing a contractual right of forfeiture, although consistent with the terms of the contract, visits an inequitable consequence on the party that breached the contract.
And:
The examination of the reasonableness of the breaching party’s conduct lies at the heart of the relief from forfeiture analysis. A party whose conduct is not seen as reasonable cannot hope to obtain relief from forfeiture.
Justice Hebner found that the defendant’s conduct was not reasonable when he signed the bond application and the indemnity agreement. At best it was careless. Moreover, he breached his fiduciary duty by not investigating the claim of the paternal heirs and obtaining a court order before distributing the assets. He should also have obeyed the disgorgement order.
Consequently, she held that the defences of non est factum and relief from forfeiture also did not require a trial. She ordered that the defendant post collateral in the total amount required by the disgorgement order plus $47,500, for a total of $2,456,355 USD.
—
[1] 2024 ONSC 4902.
[2] 2014 SCC 7.
[3] Fidelity and Deposit Co of Maryland v Bristol Steel & Iron Works Inc, 722 F 2d 1160 at 1163 (4th Cir 1983); United States Surety Company v Stevens Limited Partnership, 905 F Supp 2d (Ill Dist Ct 2012), pp 859-60.
[4] [1982] 2 SCR 774.
[5] [1956] SCR 912.
[6] [1982] 2 SCR 774 at 785.
[7] 2021 ONSC 2837, para 7.
[8] RSO 1990, c C.43.
[9] 2011 ONCA 363, paras 87 and 90.
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