



COURT OF APPEAL FOR ONTARIO

CITATION: Madison Joe Holdings Inc. v. Mill Street & Co.
    Inc., 2021 ONCA 205

DATE: 20210406

DOCKET: C68275

MacPherson, Gillese and Nordheimer JJ.A.

BETWEEN

Madison Joe Holdings Inc.

Plaintiff/Moving Party
(Respondent)

and

Mill Street
    & Co. Inc., All Source Security Container Mfg.

Corp.,
    Roy Murad and Noah Murad

Defendants/Responding Parties
(Appellants)

AND BETWEEN

Mill
    Street & Co. Inc. and All Source Security Container Mfg.

Corp.

Plaintiffs by Counterclaim

and

Madison
    Joe Holdings Inc. and Peter Pancel

Defendant by Counterclaim

Micheal Simaan, for the appellants

Jason Berall, for the respondent

Heard: February 26, 2021 by video conference

On appeal from the judgment of Justice Jessica Kimmel of
    the Superior Court of Justice, dated March 10, 2020, with reasons reported at
    2020 ONSC 1429.

MacPherson J.A.:


A.

Introduction

[1]

The plaintiff/respondent, Madison Joe Holdings Inc. (MJH) brought a
    motion in the Superior Court for summary judgment on three unpaid promissory
    notes (the Notes). The Notes were issued by the defendant/appellant All
    Source Security Container Mfg. Corp. (All Source) and guaranteed by the
    defendants/appellants Mill Street & Co. Inc. (Mill Street), Noah Murad
    (Noah) and Roy Murad (Roy).

[2]

The Notes were issued by All Source to MJH in connection with Mill
    Streets acquisition of All Source from MJH. Also in connection with the
    acquisition: (a) All Source entered into a loan agreement with TD Bank (the
    Loan Agreement); and (b) All Source, TD Bank and MJH entered into an Inter-Creditor
    and Subordination Agreement (the Inter-Creditor Agreement) that restricts
    payments from All Source to MJH under the Notes that would put All Source
    offside the financial covenants that it is required to maintain under the Loan
    Agreement with TD Bank.

[3]

According to the appellants, the payments of the principal and accrued
    interest owing under the Notes would put All Source offside its financial
    covenants with TD Bank. They therefore argued at the summary judgment motion
    that All Source did not default under the Notes because the payments were
    restricted by the Inter-Creditor Agreement. They further argued that, since the
    Inter-Creditor Agreement restricted All Source from making the payments, the
    guarantors could not be liable for those payments under the terms of the
    guarantees.

[4]

The motion judge rejected the appellants arguments. She accepted MJHs
    position that the guarantees were triggered by All Sources failure to pay
    principal and interest when due under the Notes and that the restrictions on
    payments by All Source pursuant to the Inter-Creditor Agreement did not apply
    to the guarantees. As a result, the motion judge granted summary judgment (a) against
    All Source for the monthly interest payments owing under the Notes (subject to
    the Inter-Creditor Agreement which she found restricted the repayment of
    principal given the financial state of All Source), and (b) against the
    guarantors for the monthly interest payments and unpaid principal.

[5]

The appellants appeal from this decision.

B.

facts

(1)

The parties and events

[6]

Prior to the relationship between the parties, MJH was the 100% owner of
    All Source.

[7]

All Source is an Ontario corporation that is in the business of
    manufacturing and distributing document destruction collection containers.

[8]

Mill Street is an Ontario corporation that claims on its website to own
    and operate a diverse range of companies in North America.

[9]

Noah Murad is the President of Mill Street and All Source. Roy Murad is
    Noahs father.

[10]

In
    July 2014, Mill Street purchased 50% of the interest in All Source from MJH. In
    December 2016, Mill Street purchased the remaining 50% of All Source from MJH.

[11]

When
    Mill Street acquired the remaining 50% of All Source in December 2016, the
    purchase price under the Share Purchase Agreement was $3 million and was to be
    paid as follows: (a) $1.8 million by cash or certified cheque on closing; (b)
    one million Class B preferred shares in Mill Street issued to MJH; and (c) a
    vendor take-back promissory note to MJH in the amount of $200,000 with 6% interest
    payable monthly due on December 16, 2017 to be guaranteed by Mill Street, Roy
    and Noah (the VTB Note).

[12]

When
    Mill Street acquired the remaining 50% of All Source, it still owed payments
    under the existing promissory notes it issued in connection with its purchase
    of the first 50% of All Source. To restructure that debt, the Share Purchase
    Agreement also provided that the existing notes be extinguished and that All
    Source execute two new promissory notes to MJH in their place: (a) Promissory
    Note A in the amount of $400,000 with 6% interest payable monthly due on
    December 15, 2017 to be guaranteed by Mill Street, Roy and Noah (Note A); and
    (b) Promissory Note B in the amount of $508,588.70 with 6% interest payable
    monthly due on December 15, 2018 to be guaranteed by Mill Street, Roy and Noah
    (Note B).

[13]

In
    connection with Mill Streets acquisition of the remaining 50% of All Source,
    Noah, on behalf of All Source, entered into the Loan Agreement with TD Bank.
    The Loan Agreement states that TD Bank would loan All Source: (a) $2 million as
    a term loan to fund the acquisition of the remaining 50% interest in All
    Source; and (b) an operating loan to support working capital requirements.

[14]

Finally,
    TD Bank, All Source and MJH entered into the Inter-Creditor Agreement on
    December 16, 2016.

[15]

Section
    4.1 of this agreement provides that All Source may not make, and MJH will not
    accept, payments of principal or interest on the Notes [e]xcept as expressly
    provided in Section 5.2 hereof.

[16]

Section
    5.2 sets out the circumstances in which All Source may make and MJH may accept
    Permitted Payments, which are defined as principal and interest payments
    payable pursuant to the Notes. In particular, s. 5.2 provides that All Source
    may make payments on the Notes without TD Banks consent if those payments
    would not put All Source offside its financial covenants in the Loan Agreement:

5.2 Notwithstanding any other provision of this Agreement,
    Borrower [All Source] may make and MJH may accept, collect and receive,
    Permitted Payments, provided:

(1) (a) no Default shall have occurred under the TD Loan
    Agreement which has not been cured or waived by TD, at the time of any such
    payment; and (b) the making of any such payment will not result in a Default under
    the TD Loan Agreement.

[17]

Apart
    from the maturity dates and principal amounts owing, the Notes and guarantees
    are virtually identical. Each of the Notes begins with a preamble and is
    followed by a guarantee, all within the same document. Defined terms in the
    Notes and Guarantees are adopted from their respective preambles. The preambles
    to each of the Notes provide: AND WHEREAS the Guarantors (as set out below)
    have agreed to guarantee the obligations of the Debtor as contained in this
    [Note].

[18]

Sections
    1 and 2 of the Notes provide that All Source is required to pay monthly
    interest throughout the term of the Notes until maturity and, at maturity, is
    required to pay the full principal together with any accrued and unpaid
    interest.

[19]

Section
    4(a) of the Notes provides that it is an Event of Default for All Source to
    fail to make any payment of interest or principal when due unless All Source is
    prevented by reason of the refusal of any required consent of TD Bank:

4. Events of Default. The outstanding Principal Amount and all
    accrued and unpaid interest thereon shall, at the option of the Holder, be
    immediately due and payable without notice upon the occurrence of any of the
    following events of default (each, an Event of Default):

(a) the Debtor [All Source] fails to make any payment of
    interest or of the Principal Amount when due under the VTB Note or fails to
    make any payment of interest or of the principal amount when due under Note A
    or Note B and such failure is not remedied within thirty (30) days (provided,
    however, that if the Debtor is prevented by reason of the refusal of any
    required consent by The Toronto-Dominion Bank from making such payment of
    Principal Amount or interest when due hereunder or under Note A or Note B
    pursuant to the [Inter-Creditor Agreement], then such failure shall not be
    considered an Event of Default hereunder or under Note A or Note B for the
    purpose of permitting the holders of any of either this VTB Note or Note A or
    Note B to demand cash payment in full

[20]

Section
    3 of the guarantees provides that the guarantors guarantee money owed by All
    Source to MJH if All Source defaults in making payments when due under the
    Notes:

If, as a result of Debtors [All Source] default in making
    payments due under the VTB Note in accordance with its terms, the Debtor shall
    owe monies to the Holder [MJH], the due payment of such monies is hereby
    jointly and severally guaranteed by the Guarantors [Mill Street, Noah and Roy].

[21]

After
    the Notes were executed in December 2016, All Source paid the required monthly
    interest payments of $5,542.94 on all the Notes. However, All Source failed to
    pay the principal and outstanding interest owing under the Notes on their
    maturity dates in December 2017.

[22]

MJH
    commenced an action against the debtor All Source and the guarantors Mill Street,
    Noah and Roy on December 17, 2017.

[23]

In
    June 2019, MJH brought a motion for summary judgment against the debtor and the
    guarantors. Kimmel J. heard the motion in September 2019 and rendered her
    judgment in March 2020.

(2)

The motion judges decision

[24]

The
    motion judge framed the issues in this fashion:

The issues raised on this summary judgment motion depend upon
    the interpretation of the inter-related contracts: the share purchase
    agreement, the promissory notes, the guarantees and the Inter-Creditor
    Agreement.

The first question that I must decide is what All Sources
    obligations to MJH were upon the maturity of each of the promissory notes
    (whether in the ordinary course or as a result of acceleration of the principal
    amounts due upon default) in respect of the repayment of the principal amounts
    and/or payment of monthly interest while the principal remained
    unpaid. Related to that, I must decide whether All Source was restricted
    by the Inter-Creditor Agreement from making payments of principal and/or of
    monthly interest to MJH.

The second question I must decide is whether, even if All
    Source is precluded by the Inter-Creditor Agreement from fulfilling any of its
    obligations in respect of the repayment of the principal amounts and/or payment
    of monthly interest under the promissory notes, the Guarantors are liable to
    pay those amounts.

[25]

The
    motion judge stated her conclusions as follows:

For the reasons that follow, I find that the Inter-Creditor
    Agreement restricts All Source from repaying the principal but not the monthly
    interest under the promissory notes, which is payable both before and after the
    maturity of the notes. The Inter-Creditor Agreement does not shield the
    Guarantors from their joint and several obligations to pay the principal
    amounts and monthly interest payable under the promissory
    notes. Accordingly, the plaintiff is entitled to judgment against All
    Source and each of the Guarantors, Mill Street, Noah Murad and Roy Murad, for
    the monthly interest payments under the promissory notes from the date of last
    payment to present. The principal amount owing under each of the promissory
    notes is over-due. The plaintiff is entitled to judgment against the
    Guarantors, but not All Source, for the principal amount of each promissory
    note. The plaintiffs claim for punitive damages is dismissed.

C.

issues

[26]

Although
    the appellants raised three issues in their factum, in their oral argument they
    admitted, candidly and fairly, that the three issues were inextricably linked
    and that the result on the first issue would automatically determine the
    results on the second and third, and much more minor, issues. Accordingly, the
    sole issue on the appeal, as framed by the appellants, is:

Did the learned judge err in the interpretation of the guarantees
    in ignoring the 
in accordance with its terms

    language which prevented enforcement of the guarantees on the same terms as
    enforcement could be made on the promissory notes? [Emphasis in original.]

D.

analysis

[27]

I
    begin by noting that the motion judge was required to interpret several types
    of documents  the share purchase agreement, the three promissory notes, the
    guarantees, and the Inter-Creditor Agreement. These documents involved all of
    the parties in this litigation and one additional party, TD Bank. All of the
    relevant documents are commercial and contractual.

[28]

In
Sattva Capital Corp. v. Creston Moly Corp.
, 2014 SCC 53, at paras. 50,
    52, the Supreme Court held that [c]ontractual interpretation involves issues
    of mixed fact and law and that, therefore, deference is owed to first
    instance decision-makers on points of contractual interpretation. In their
    factum, the appellants frame the issue as Did the learned judge err in the
    interpretation of the guarantees. Accordingly, the palpable and overriding
    standard applies to this issue:
Heritage Capital Corp. v. Equitable Trust
    Co.
, 2016 SCC 19, at paras. 21-24.

[29]

The
    appellants contend that the promissory notes and guarantees were two contracts
    that were closely connected to, and even specifically referenced by, each
    other. The guarantees state they be resorted to only if the debtor defaults in
    making payments under a Note in accordance with its terms. The motion judge
    found that All Source had not defaulted in making payments due under the Notes
    as the parties contracted that failure to pay the Notes would not amount to a
    default under the precise situation that arose here  the failure to pay due to
    the operation of the Inter-Creditor Agreement. In other words, say the
    appellants, in certain circumstances, which arose here, non-payment does not
    equal default. And without default, there can be no enforcement on the
    guarantees.

[30]

The
    appellants further submit that there is nothing commercially unreasonable about
    this interpretation. It is consistent with the guarantors only agreeing to be
    liable if the default was caused by events other than the financial situation
    of the debtor, which is inextricably linked to the formula under the Inter-Creditor
    Agreement.

[31]

The
    motion judge rejected this interpretation. She said:

The guarantees, which are effectively appended to the Notes, do
    not reference the defined term Events of Default contained in the
    Notes. Instead, the guarantees refer to All Sources default in making
    payments due under the Note in accordance with its terms, resulting in monies
    owing to MJH. A default can be a failure to pay. I find that the trigger for
    the guarantee in section 3 occurred when All Source failed to pay monies due to
    be paid to MJH under the terms of the Notes. This respects the choice of words
    and the use of the generic termdefault in the guarantees, rather than the
    defined term, Event of Default and it also gives meaning to the conceptual
    framework of the agreement.



There is no commercial absurdity in this interpretation, as the
    defendants contend. It reflects an agreement to delay the payment of the
    purchase price payable by Mill Street for the shares in All Source, and an
    agreement to allow the purchaser to structure the payments to come from All
    Source rather than from the purchaser, with the back stop that if the purchase
    monies could not be generated from the business of All Source itself, they would
    be paid by the purchaser (Mill Street, one of the Guarantors) and its
    principals (the other Guarantors). This interpretation gives effect to the
    purchase price and security that MJH contracted for and it respects the
    Inter-Creditor Agreement that was concerned with the TD Banks priority
    recourse to All Source and its assets (the Collateral).

The alternative interpretation that the
    defendants urged upon the court would render the security of the guarantees
    illusory because it would mean that if All Source was not in a financial
    position to repay the Notes because of its other financial obligations, then
    the Guarantors would not have to pay either. Whereas a guarantee would
    ordinarily be called upon in precisely that circumstance.
[Emphasis
    added.]

[32]

I
    agree with this clear and careful analysis and conclusion. Importantly, and at
    a minimum, the motion judges analysis and conclusion are far removed from
    being a palpable and overriding error. Indeed, the motion judges
    interpretation is the only interpretation consistent with what the leading
    scholar on guarantees describes as the Fair Protection Rule:

As a general principle, the courts always interpret a guarantee
    so that the protection or security which it affords to a creditor is rendered
    real rather than illusory. Alternatively stated, guarantees are read so as to
    give effect to the apparent intent of the parties, so as to afford fair
    protection to creditor in accordance with that apparent intent. This rule
    should be stated as the most basic principle of guarantee interpretation
    because it is clearly necessary to give a guarantee instrument an
    interpretation which is fully consistent with its apparent purpose.

See Kevin McGuinness,
The Law of Guarantee
, 3rd
    ed. (Toronto: Lexis Nexis Canada, 2013), at pp. 281-82.

[33]

I
    conclude by setting out again the terms of the guarantee:

If, as a result of Debtors [All Source] default in making
    payments due under the VTB Note in accordance with its terms, the Debtor shall
    owe monies to the Holder [MJH], the due payment of such monies is hereby
    jointly and severally guaranteed by the Guarantors [Mill Street, Noah and Roy].

[34]

I
    would describe this as a three-step guarantee. Step 1: the Debtors (All
    Source) default in making payments due under the Notes. This happened. Step 2: as
    a result, the Debtor owes money to the Holder (MJH). This happened. Step 3: the
    guarantee is triggered. This happened.

E.

disposition

[35]

I
    would dismiss the appeal. The respondents are entitled to their costs of the
    appeal fixed, per the agreement of counsel, at $13,500, inclusive of
    disbursements and HST.

J.C. MacPherson J.A.

I agree. E.E. Gillese
    J.A.


Nordheimer J.A.: (Dissenting)

[36]

I
    have read the reasons of my colleague. I do not agree with his conclusion. In
    my view, the motion judges reasons reflect a palpable and overriding error in
    her interpretation of the documents in question, particularly the guarantees.
    Further, her conclusion is inconsistent with certain fundamental principles
    that are applicable to guarantees generally.

[37]

My
    colleague has set out the background facts, which I need not repeat. I agree
    with his synthesis of the issue to be determined, that is, the proper
    interpretation of the guarantees.

[38]

I
    also accept my colleagues expression of the appropriate standard of review.
    However, his reference to
Sattva Capital Corp. v. Creston Moly Corp.
,
    2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50 and 52, and the principle that [c]ontractual
    interpretation involves issues of mixed fact and law omits the point, also
    mentioned in that decision, at para 48, that the meaning of words is often
    derived from a number of contextual factors, including the purpose of the
    agreement and the nature of the relationship created by the agreement
    (citations omitted). Thus, the interpretation of the documents must reflect the
    object and intent of the parties.

[39]

In
    that respect, the purpose of the guarantees was to ensure that, if All Source,
    as principal debtor, defaulted in its obligations to the respondent, Mill
    Street, Roy, and Noah, as guarantors, would make good on those obligations. As
    is commonly the case with guarantees, the guarantor will only become liable if
    the principal debtor defaults in its obligations. This fundamental principle is
    stated in Kevin McGuinness,
The Law of Guarantee
, 3rd ed. (Toronto:
    LexisNexis Canada, 2013), at p. 326: The starting point in ascertaining
    whether the surety is liable, therefore,
is to decide
    whether the principal is in default
, for as a general rule the surety is
    not liable to the creditor unless the principal is liable (emphasis added).

[40]

This
    fundamental principle is one of longstanding application. In
Rees v.
    Berrington
(1795), 30 E.R. 765 (Ch.), at p. 767, Lord Loughborough L.C.
    said, The surety only engages to make good the deficiency. A more modern
    expression of this principle can be found in
Moschi v. Lep Air Services
    Ltd.
, [1972] 2 All E.R. 393 (H.L.), at p. 402, where Lord Diplock said:

The legal consequence of this is that whenever the debtor has
    failed voluntarily to perform an obligation which is the subject of the
    guarantee the creditor can recover from the guarantor as damages for breach of
    his contract of guarantee, whatever sum the creditor could have recovered from
    the debtor himself as a consequence of that failure.

[41]

In
    this case, All Source did not fail voluntarily to perform any obligation to the
    respondent. To the contrary, the respondent had expressly agreed with All
    Source that All Source would not have to make payment to the respondent, if
    doing so would breach All Sources obligations to the TD Bank. My colleague has
    set out the express provision found in the Inter-Creditor Agreement, namely, s.
    5.2, but it bears repeating:

Notwithstanding any other provision of this Agreement, Borrower
    [All Source] may make and MJH may accept, collect and receive, Permitted
    Payments, provided:

(1) (a) no Default shall have occurred under the TD Loan
    Agreement which has not been cured or waived by TD, at the time of any such
    payment; and (b)
the making of any such payment will not
    result in a Default under the TD Loan Agreement
; [Emphasis added.]

[42]

The
    motion judge recognized that the Inter-Creditor Agreement restricted the
    obligations of All Source. She said, at para. 58:

Applying this interpretation to the circumstances of this case,
    MJH could only establish that All Source had committed an Event of Default in
    December of 2017 if it could prove that the repayment of the VTB Note and Note
    A would not put All Source offside of its financial covenants with TD Bank
    (such that it would have been a Permitted Payment under the Inter-Creditor
    Agreement). This has not been established.

[43]

Notwithstanding
    this conclusion, the motion judge then proceeded to place an interpretation on
    the guarantees that resulted in the guarantors being liable for that which All
    Source was not. Her analysis in this regard ignores the fundamental principle
    underlying guarantees that I have set out above. It also ignores another
    fundamental principle relating to guarantees and, that is, that in considering
    the relative obligations of the parties, all of the contractual arrangements
    must be considered. In other words, the guarantee is not to be read in
    isolation to the contractual arrangements involving the principal debt. As Cory
    J. said in
Manulife Bank of Canada v. Conlin
, [1996] 3 S.C.R. 415, at
    para. 16: [W]hen the guarantee clause is interpreted, it must be considered in
    the context of the entire transaction.

[44]

I
    acknowledge that there may be situations where a guarantor can be liable,
    notwithstanding that the principal debtor is not, but such situations are
    uncommon. An interpretation of contractual arrangements that involve
    guarantees, and that would lead to that result, should be exceptional, given
    the fundamental principles of guarantees. It is a result that should be arrived
    at only if no other reasonable interpretation of the contractual arrangements
    presents itself. It must also reflect the special position that a guarantor (or
    surety) occupies in the eyes of the law, one which only makes the surety liable
    within the strict, or narrow, confines of the liability assumed. This special
    position was expressed by Davis J. in
Holland-Canada Mortgage Co. v.
    Hutchings
, [1936] S.C.R. 165, at p. 172: A surety has always been a
    favoured creditor in the eyes of the law. His obligation is strictly examined
    and strictly enforced.

[45]

The
    principle I have mentioned, that the totality of the contractual arrangements
    must be considered in interpreting the guarantees, is reflected in the wording
    of the guarantees in this case. The motion judge set out the wording of Section
    3 of the guarantees in her reasons, at para. 33:

If, as a result of [All Source's] default in making payments
    due under the [VTB Note/Note A or Note B]
in accordance
    with its terms
, [All Source] shall owe monies to [MJH], the due payment
    of such monies is hereby jointly and severally guaranteed by the Guarantors.
    [Emphasis added].

[46]

Notwithstanding
    this clear provision, and the motion judges finding that All Source was not in
    default as principal, the motion judge concluded that the guarantors were
    liable. She arrived at this conclusion by drawing a distinction between
    default, referred to in Section 3 of the guarantees, and an Event of
    Default as defined in the Notes. She said, at para. 67:

The guarantees, which are effectively appended to the Notes, do
    not reference the defined term "Events of Default" contained in the
    Notes. Instead, the guarantees refer to All Source's "default" in
    making payments due under the Note in accordance with its terms, resulting in
    monies owing to MJH. A "default" can be a failure to pay. I find that
    the trigger for the guarantee in section 3 occurred is [
sic
] when All
    Source failed to pay monies due to be paid to MJH under the terms of the Notes.
    This respects the choice of words and the use of the generic term
    "default" in the guarantees, rather than the defined term,
    "Event of Default" and it also gives meaning to the conceptual
    framework of the agreement.

[47]

With
    respect, this result flows from a tortured interpretive route through the
    agreements which, among other things, does not respect the principles
    underlying the law of guarantees. Further, it is an interpretation that fails
    to give any meaning to the words in accordance with its terms that are
    expressed in the guarantees, and which directly connect the obligations under
    the guarantees to the obligations under the prevailing contractual arrangements
    between All Source and the respondent. More importantly, they expressly relate
    to whether a default has occurred that would trigger the liability of the
    guarantors.

[48]

The
    motion judge said that her interpretation of the contractual documents did not
    result in an absurdity. With respect, the opposite is true. The motion judges
    interpretation leaves the guarantors liable when the principal is not. It is a
    result that is absurd, keeping in mind the particular meaning of that term in
    the context of statutory or contractual interpretation.
[1]
As Iacobucci J. said in
Rizzo & Rizzo Shoes Ltd. (Re)
, [1998] 1
    S.C.R. 27, at para. 27:

According to Côté,
supra
, an interpretation can be
    considered absurd if it leads to ridiculous or frivolous consequences,
if it is extremely unreasonable or inequitable
, if it is
    illogical or incoherent, or if it is incompatible with other provisions or with
    the object of the legislative enactment. [Citation omitted.] [Emphasis added.]

[49]

The
    motion judge justified her interpretation, at least in part, by suggesting that
    any other interpretation would render the guarantees illusory. She said, in the
    portion emphasized by my colleague, at para. 76:

The alternative interpretation that the defendants urged upon the
    court would render the security of the guarantees illusory because it would
    mean that if All Source was not in a financial position to repay the Notes
    because of its other financial obligations, then the Guarantors would not have
    to pay either. Whereas a guarantee would ordinarily be called upon in precisely
    that circumstance.

[50]

That
    conclusion does not follow from the factual situation here. It is also not the
    result of the interpretation of the documents, particularly the guarantees, urged
    by the appellants and with which I agree. The interpretation urged by the
    appellants does not render the guarantees unenforceable for all purposes.
    Rather, it simply precludes enforcement of the guarantees in situations where
    All Source, as principal debtor, is not in default because it is not obliged to
    make payment to the respondent due to the provisions of the Inter-Creditor
    Agreement  an agreement to which the respondent was a party. It is an
    interpretation of the contractual arrangements that holds the respondent to
    precisely what it agreed with All Source, that is, that All Source would not
    have to make payments to the respondent if doing so put All Source offside
    with its obligations to the TD Bank. I reiterate that the respondent expressly
    agreed to that restriction, something that it now attempts to avoid by
    advancing a claim on the guarantees which it is precluded from making against
    All Source directly. A court should be loath to permit that result.

[51]

There
    is another aspect of the conclusion reached by the motion judge that reveals
    the difficulty with the interpretation she adopts. That interpretation fails to
    take into account the rights that the guarantors have against the principal,
    i.e., All Source. If the guarantors are required to make good on their guarantees,
    they would have rights to recover payment from All Source. There is no doubt
    that a surety paying a debt is entitled to recover against the principal, as
    for money paid to his use (citations omitted):
In re A Debtor
, [1937]
    Ch. 156 (C.A.),
per
Slesser L.J.

[52]

In
    this case, however, if the guarantors attempted to do so, they would be met
    with the argument by All Source that it is precluded from making those same
    payments by virtue of the Inter-Creditor Agreement, that is, they are just as
    much precluded from making the payments to the guarantors as they were to the
    respondent. If that argument were to succeed, the prejudice to the guarantors
    is obvious  they would be prevented from recouping that which they were
    compelled to pay to the respondent arising from All Sources failure to do so.

[53]

If,
    on the other hand, the guarantors could compel payment from All Source, on the
    basis that they were not parties to the Inter-Creditor Agreement, and
    consequently not bound by its terms, then the TD Bank would be prejudiced
    because the respondent would have essentially done an end run around the
    Inter-Creditor Agreement. I note that the TD Bank was not a party to these
    proceedings and was, therefore, not present to protect its own interests. In
    any event, the presence of either of those possible results amply demonstrates
    the fundamental flaw in the interpretation adopted by the motion judge.

[54]

I
    return to the basic principle underlying guarantees to which I referred at the
    outset. A guarantor is only liable where the principal debtor is obliged to pay
    but fails to do so. There was no such failure in this case. The conclusion
    reached by the motion judge does not reflect that basic reality and cannot be
    sustained.

Conclusion

[55]

I
    would allow the appeal, set aside the summary judgment, dismiss the summary
    judgment motion, and remit the matter to the Superior Court.

Released: April 6, 2021 J.C.M.

I.V.B. Nordheimer
    J.A.





[1]
[T]he modern contextual approach for statutory interpretation, with
    appropriate adaptations, is equally applicable to contractual interpretation.
    Statutory interpretation and contractual interpretation are but two species of
    the general category of judicial interpretation. :
Manulife Bank of Canada v. Conlin
, [1996]
    3 S.C.R. 415 at paras 40-41 per LHeureux-Dube J.


