Can-Win Leasing (Toronto) Limited v. Moncayo

Can-Win Leasing (Toronto) Limited v. Moncayo Collection Decisions of the Court of Appeal Date 2014-10-08 Neutral citation 2014 ONCA 689 Docket numbers C56702 Judges Feldman, Kathryn N.; Lauwers, Peter D.; Strathy, George R. Subject Civil Decision Content COURT OF APPEAL FOR ONTARIO CITATION: Can-Win Leasing (Toronto) Limited v. Moncayo, 2014 ONCA 689 DATE: 20141008 DOCKET: C56702 Feldman, Lauwers and Strathy JJ.A. BETWEEN Can-Win Leasing (Toronto) Limited Plaintiff (Appellant) and Rafael Moncayo Defendant (Respondent) Licio E. Cengarle, for the appellant Rafael Moncayo, acting in person Alan S. Cofman, appearing as duty counsel Heard: March 10, 2014 On appeal from the judgment of Justice Robert F. Goldstein of the Superior Court of Justice, dated February 6, 2013, with reasons reported at 2013 ONSC 851. Strathy J.A.: [1] Can-Win Truck Sales Inc. (“Can-Win Truck”) was owned and operated by Clifford Irwin and the respondent, Rafael Moncayo. Together, Mr. Moncayo, Mr. Irwin and the appellant, Can-Win Leasing (Toronto) Limited (“Can-Win Leasing”), guaranteed the debt of Can-Win Truck to the Royal Bank of Canada (“RBC”). Mr. Irwin, who passed away after the trial, was the sole shareholder of Can-Win Leasing. He caused Can-Win Leasing to pay down Can-Win Truck’s guaranteed debt in 2008 and 2009, without informing Mr. Moncayo and in the absence of any demand by RBC on either Can-Win Truck or any surety. [2] The trial judge dismissed Can-Win Leasing’s action for equitable contribution from Mr. Moncayo for the amounts paid to RBC. For the reasons set out below, I would dismiss the appeal. A. FACTS [3] Mr. Irwin and Mr. Moncayo were 50-50 shareholders in Can-Win Truck. Together with the appellant Can-Win Leasing, they guaranteed RBC’s loan to Can-Win Truck. [4] Mr. Irwin became concerned about the state of Can-Win Truck’s business. His evidence was that by January of 2008, he wanted the company closed. Mr. Moncayo wanted to continue the business. [5] The trial judge found that in March 2008, Mr. Irwin took over both Can-Win Truck and a related venture, R&R Leasing Inc. (“R&R”), to the exclusion of Mr. Moncayo, whom he shut out of the business. On March 26, 2008, Mr. Irwin wrote a note to Mr. Moncayo, saying that he had arranged with the bank to have sole signing authority, so that he could “control the bank until we get this company back on its feet.” Mr. Irwin and Mr. Moncayo retained a consultant to see whether they could resolve the impasse. Their discussions were unsuccessful. [6] There is no evidence that Can-Win Truck was at any time in default under the loan agreement or that RBC was seeking to terminate that agreement. Nor is there evidence of any demand by RBC on Can-Win Truck or any of the guarantors. [7] The trial judge found that Mr. Irwin then took unilateral action to pay down Can-Win Truck’s debt. He found that this action had been taken not in the interest of Can-Win Truck, but rather in Mr. Irwin’s own interest. The banking records indicate that through Can-Win Leasing, Mr. Irwin paid down $500,000 of RBC’s loan to Can-Win Truck in August 2008. [8] Mr. Irwin explained his actions by saying he was getting a lot of pressure from RBC, which was threatening him, and he was worried the bank was going to foreclose on the property pledged as security for Can-Win Leasing’s guarantee. [9] The trial judge found this was a unilateral and voluntary act on Mr. Irwin’s part. He also found that it was not reasonably necessary for the survival of Can-Win Truck and that the business was salvageable. [10] It is not disputed that when Mr. Irwin excluded Mr. Moncayo from the business, closed it down and paid off the loan, he was acting for his own purposes, to prevent RBC from exercising its security against Can-Win Leasing’s property. [11] Some seven months later, in March 2009, RBC assigned the debt and the security to Can-Win Leasing, based on Can-Win Leasing’s promise to pay the balance owing of $178,000 before March 31, 2009. [12] The payment of the debt by Can-Win Leasing and the assignment of the debt to it took place without notice to Mr. Moncayo. [13] Can-Win Leasing made a demand on Mr. Moncayo for his “share” of the loan on July 24, 2009. B. THE DECISION BELOW [14] It is common ground that RBC made no formal demand for payment to Can-Win Truck or the guarantors. Nor was there any evidence that Can-Win Truck was in default to RBC. [15] The trial judge found that, in spite of this, Mr. Irwin caused Can-Win Leasing to pay down the line of credit by $500,000 in August 2008 without consulting or informing Mr. Moncayo. He found this was done in Mr. Irwin’s own interest and not in Can-Win Truck’s interest. He was “suspicious” of Mr. Irwin’s evidence that RBC had been “pressuring” him with respect to the line of credit and that Mr. Irwin was worried the bank was going to foreclose on the property: The Bank did not force Mr. Irwin to cause Can-Win Leasing to make the payment. There was no formal demand issued by the Bank. There is no evidence that the Bank stated that it would foreclose on Mr. Irwin’s Kipling property. Mr. Irwin only testified that he was worried about it. In other words, there was no compulsion at law, and no common demand from a third party. [At para. 22.] He noted that “Mr. Irwin did not produce any documents to support his assertion that the bank was putting pressure on him.” [16] In explaining his suspicion of Mr. Irwin’s evidence, the trial judge noted that while the line of credit had been at its limit of $750,000 in January 2008, it had been paid down by $40,000 in May 2008 and by a further $50,000 in June 2008. The trial judge concluded that since Can-Win Truck had made regular payments on the line of credit, there must have been at least some cash flow. Mr. Irwin testified that he had been receiving pressure in April and May of that year, but it was in August 2008 that Can-Win Leasing made the payment of $500,000. [17] The trial judge also gave reasons for rejecting the argument that it was “necessary” for Can-Win Leasing to assume Can-Win Truck’s obligation to RBC and for his preference of the evidence of Mr. Moncayo to that of Mr. Irwin on the issue of whether Can-Win Truck could survive. Mr. Irwin’s evidence that he wanted to shut down the business in January 2008 was contradicted by the note he wrote to Mr. Moncayo indicating that he had made arrangements with the bank that gave him sole signing authority, so that he could “control the Bank until we get the company back on its feet” (at para. 26). The trial judge found this indicated an intention not to close down the business, but to get it back on its feet. [18] He also found that although there was evidence that Can-Win Truck was losing money, there was no evidence that Mr. Irwin’s knowledge of the trucking sales and leasing business was any better than Mr. Moncayo’s or that he was in any better position than Mr. Moncayo to evaluate the company’s viability. [19] He found that Mr. Irwin’s refusal to give Mr. Moncayo an accounting for R&R, in the face of his admission that there was about $200,000 in equity in the company, did not indicate a good-faith effort to deal with Can-Win Truck’s financial affairs. [20] In the result, the trial judge found that Can-Win Truck was salvageable. [21] He also found that the payment by Can-Win Leasing was not reasonably necessary for the survival of Can-Win Truck. The following observations, at para. 28 of his reasons, summarize his conclusions: I also find that it was not reasonably necessary for the survival of Can-Win Truck for the payment to have been made. Mr. Irwin’s assertions are contradicted by his own actions and by the documents that he produced. It may have been reasonably necessary for Mr. Irwin to make the payment, but that is not the same thing. Mr. Irwin was concerned that the bank might foreclose on his Kipling property, but there was no evidence that the Bank ever informed him that it would do so, or that it ever took steps to do so. As I have already noted I am suspicious that the Bank was putting pressure on him as he testified. There is, for example, no evidence that Can-Win Truck missed any payments on the line of credit; indeed, the bank statements indicate that the line of credit was slowly being paid down. Mr. Irwin also testified that it would be better for his credit going forward if he paid rather than having the Bank make a demand and forcing him to pay. After locking out Mr. Moncayo in June 2008 he decided to take unilateral action to take control of the financial affairs of Can-Win Truck and pay down Can-Win Truck’s debt. All of these actions were done primarily to benefit Mr. Irwin. Mr. Irwin was entitled to take those steps he felt necessary to preserve his business affairs, but in my view “reasonably necessary in the circumstances” does not include a circumstance where the steps are directed exclusively for the benefit of the person taking on the obligation. It would not be just and reasonable to enforce the guarantee against Mr. Moncayo, particularly since Mr. Moncayo was never given the opportunity to negotiate with the Bank to re-schedule the debt, or seek alternative financing, or simply work off the obligations. [Emphasis added.] [22] These central findings of fact attract deference in this court. [23] The trial judge expressed, at paras. 24 and 25, what he considered to be the applicable law, relying on Re Korex Don Valley ULC (2009), 52 C.B.R. (5th) 238, [2009] O.J. No. 1721 (S.C.): Thus, the law will refuse an indemnity to Can-Win Leasing unless it can be shown that in the particular circumstances of this case there was some necessity for the obligation to be assumed. Was it necessary for Mr. Irwin to cause Can-Win Leasing to assume the obligation? In my view, the answer to this question turns on two questions: first, was Can-Win Truck really unsalvageable? And second, was it necessary for Can-Win Truck? [24] The trial judge disputed, at para. 22, “the proposition that a successor could step into the shoes of the Bank and make a demand where the Bank had not done so.” [25] The trial judge found, at para. 27, that Can-Win Truck was salvageable, so the payments Can-Win Leasing made to RBC were not reasonably necessary for Can-Win Truck’s survival. He found, at para. 28, that RBC did not force Can-Win Leasing to make the payments on Can-Win Truck’s indebtedness, noting the absence of a formal demand by RBC. He said that he was “suspicious” about Mr. Irwin’s testimony that RBC was pressing for payment because Can-Win Truck had never missed a payment and the line of credit was slowly being paid down. [26] The trial judge also referred to evidence relating to R&R and stated at para. 26: Mr. Irwin admitted in cross-examination that there was about $200,000 of equity in R&R. He also stated in cross-examination that he had refused, and would continue to refuse, to give Mr. Moncayo an accounting of equity in R&R until Mr. Moncayo had settled this action. That comment does not indicate a good faith effort to deal with Can-Win Truck’s financial affairs. [27] The trial judge found, at para. 29, that Mr. Irwin’s actions in paying the debt “materially changed the risk to Mr. Moncayo,” prejudicing his interests. [28] The trial judge dismissed the action, summarizing his overall conclusion, at para. 7: Mr. Irwin’s unilateral decision to cause Can-Win Leasing to pay the debt of Can-Win Truck without notice to or consultation with Mr. Moncayo in the absence of a demand from the Bank disentitles Can-Win Leasing from collecting on the guarantee. C. THE POSITIONS OF THE PARTIES [29] Can-Win Leasing submits that the trial judge made three errors: first, in finding that a formal demand by RBC was a prerequisite to Can-Win Leasing’s recovery; second, by requiring Can-Win Leasing to prove that its payments to RBC were necessary; and third, by relying on irrelevant considerations, including the testimony concerning R&R. Can-Win Leasing argues that a demand from RBC was not required and that the trial judge erred in treating its payments as unrecoverable payments by an officious volunteer. [30] Mr. Moncayo, with the helpful assistance of duty counsel, submits that the trial judge was right to find that Can-Win Leasing paid RBC as an officious volunteer, and that such payments are therefore not recoverable from the co-guarantor. Mr. Moncayo argues that the evidence relating to R&R was relevant as to whether Can-Win Leasing’s payment was necessary for Can-Win Truck. D. THE issues [31] A demand by the creditor is not a prerequisite to the surety’s right to pay the creditor and to seek contribution from its co-surety. The issue is in what circumstances a surety is entitled to do so in the absence of default by the principal debtor, and whether those circumstances existed here. E. ANALYSIS The Applicable Principles [32] The trial judge analyzed the issues in terms of the voluntary payment by one party of another party’s debts. He referred to Re Korex Don Valley ULC, above, and Owen v. Tate, [1975] 2 All E.R. 129 (C.A.). While the principles are similar, in my view the appeal should be addressed on the basis of rights between co-sureties.[1] [33] Having paid more than its rateable share of Can-Win Truck’s debt, Can-Win Leasing had an equitable right, independent of contract, to recover contribution from its co-sureties. However, “[t]o give rise to a right of contribution, payment must have been made by the surety in a situation where [the surety] was legally obliged to pay”: Kevin McGuinness, The Law of Guarantee, 3rd ed. (Markham: LexisNexis Canada, 2013), at p. 785. The surety is entitled to pay as soon as his or her liability arises under the terms of the guarantee: McGuinness, at p. 786. However, as McGuinness notes, doing so is “risky” because co-sureties may argue that the payment was imprudent or unnecessary. [34] In such circumstances, McGuinness suggests at p. 786: [A] surety will often wish to settle a potential claim against him[self], yet at the same time will be unwilling to prejudice any right which he may have to recover part of the payment which he is to make from his co-sureties. If a surety wishes to make a payment in settlement, he should give notice to his co-sureties of his intention to negotiate a settlement. Should the co-sureties then refuse to take part in the negotiation, a claim for contribution may then be made without fear that the co-sureties will successfully defend by challenging the propriety of the settlement. See also: David Marks & Gabriel Moss, Rowlatt on Principal and Surety, 6th ed. (London: Sweet & Maxwell, 2011), at p. 180. [35] This is because a guarantee is a secondary and contingent obligation. It is secondary to a primary obligation and it is contingent on the default of the obligor under the primary obligation: McGuinness, at p. 49. By stepping in and paying the obligation, the surety exposes the debtor, and any co-surety, to a liability they may have been able to avoid. In light of the trial judge’s conclusion that Can-Win Truck was salvageable, this is a crucial point. [36] Stewart v. Braun, [1925] 2 D.L.R. 423 (Man. K.B.), is an example of a situation in which one group of co-sureties were held to have exercised appropriate consideration for another group of co-sureties. There, some sureties settled with the creditor and looked to the other sureties for indemnity for their proportionate shares. The court found, at p. 431, they had acted reasonably: I cannot accede to defendants’ contention that the plaintiffs cannot enforce contribution on the basis of any amount unless that amount is agreed to by all the guarantors or fixed by a judgment. The plaintiffs had a right to protect their credit by preventing action; they had a right to call upon their co-guarantors—the defendants—to come forward and assist in arranging some settlement. The defendants had no right to sit back under the supposed cover of their financial insignificance, or safety, and say to their co-sureties, if you do anything with this account before judgment is obtained against you, you do so at your peril. I do not think they should be heard to state that. I hold that they have by their silence estopped themselves from disputing the amount at which the plaintiffs settled this claim: See Marshall v. Houghton (1923), 33 Man. L.R. 166, at p. 177. [37] In that case, however, the bank had called on the sureties to make payment and the defendants, although invited by the plaintiff co-sureties to discuss the issue, refused to co-operate and did nothing. [38] The purpose of the demand is to inform the surety that there has been default by the principal debtor. In the case of a guarantee payable on demand, a demand is a condition-precedent to the obligation: see Bank of Nova Scotia v. Williamson, 2009 ONCA 754, 97 O.R. (3d) 561, at para. 13. In Stewart v. Braun, it was significant that the bank had made a demand on the sureties. [39] In the case before us, the guarantees were payable on demand, but the bank had made no demand. However, that does not end the analysis. The question is whether this is one of those cases in which the primary obligor’s default is so imminent that the surety is entitled to take unilateral action. [40] Stimpson v. Smith, [1999] 2 All E.R. 833 (C.A.) is a good example of such a case. There, although the bank had not made a written demand, it made an oral demand on one of the sureties, who proceeded to negotiate and pay a settlement to the bank. The circumstances were not entirely dissimilar to this case, but one significant difference is that the bank was requiring a substantial reduction in the overdraft and was threatening to appoint a receiver. Lord Justice Gibson said, at p. 839, that the right to contribution arose, notwithstanding the absence of a written demand, given the “reality of the commercial position” facing the primary debtor. Lord Justice Judge concluded, at p. 842, that where there is “imminent” threat of loss, or where the surety is in immediate “jeopardy” and a demand can “realistically be anticipated” in the absence of a settlement, “the surety who reaches an arrangement with the creditor which is not disadvantageous to the co-surety is not thereafter deprived of his entitlement to contribution” (emphasis added). [41] Generally, however, the absence of a demand on the surety is evidence that the primary debtor is not in default. The voluntary payment of the obligation by the surety may put the onus on the surety to show that he or she was not acting officiously. [42] Can-Win Leasing relies upon Manu v. Shasha (1983), 41 O.R. (2d) 685, [1983] O.J. No. 3027 (C.A.). That case is distinguishable. There, the trial judge had dismissed the co-surety’s claim for contribution on the ground of his “unclean hands” in deliberately and recklessly precipitating the demise of the business. This resulted in the bank calling its loan and realizing on the security provided by the appellant, who then sought contribution from the respondent, his business partner and co-surety. [43] This court, at pp. 687-88, described the appellant’s claim as: [F]ounded on the long established proposition that where a co-surety has paid the debt of a principal debtor, or more than his proportionate share, and is unable to recover against the principal debtor, the co-surety is entitled to contribution from his fellow co-sureties to equalize the burden. Contribution does not depend upon agreement, but upon an equity arising from the fact of the existence of co-sureties for the same debt owed to the same creditor. The underlying principle of equity is that the creditor’s remedies against the co-sureties should be applied so as to apportion the burden rateably, and if the remedies have been applied otherwise the court will correct the inequity between the co-sureties…. [Citations omitted.] [44] In reversing the trial decision, this court rejected the “clean hands” argument, holding, at p. 688 that: [T]he mutual rights of the sureties in this case are not to be determined simply by resort to the maxim that a plaintiff in equity must approach the court with clean hands. In our opinion, the surety here who was compelled to pay more than his proportionate share of a common liability is not to be debarred on that ground alone from obtaining contribution from his co-surety. [Emphasis added.] [45] Manu v. Shasha was not a case of a co-surety voluntarily discharging the principal obligation without any antecedent demand by the creditor and, in my view, it has no application to this case. [46] In light of these authorities, the question is whether this is one of those cases in which a surety, Can-Win Leasing, was justified in making a payment absent a demand by the creditor because default was imminent. If so, the payment did not prejudice its co-surety, Mr. Moncayo. If not, the payment was voluntary and discharged the co-sureties’ obligations. Discussion [47] The evidentiary portion of the trial lasted less than a day. Mr. Irwin and Mr. Moncayo were the only witnesses. Mr. Moncayo represented himself. Can-Win Leasing’s counsel chose not to cross-examine Mr. Moncayo. The documentary record was extremely thin and, as the trial judge noted, Mr. Irwin’s evidence was not corroborated by contemporaneous bank documents. Mr. Irwin adduced no expert or accounting evidence concerning the financial state of Can-Win Truck. Nor did he call evidence from RBC concerning the status of Can-Win Truck’s line of credit or to prove his allegation that he was under pressure from the bank. [48] The trial judge’s findings of fact were based on his assessment of the evidence and were rooted in the evidence. He made adverse credibility findings against Mr. Irwin, Can-Win Leasing’s only witness, and rejected important parts of his evidence. He found that Mr. Irwin had not acted in good faith in dealing with Can-Win Truck’s financial affairs. He refused to give Mr. Irwin’s business judgment more credit than Mr. Moncayo’s. Given the record, and in the absence of any evidence from the most logical independent sources – Can-Win Truck’s auditors, bankers and the consultant Mr. Irwin and Mr. Moncayo retained to assess its financial condition – the trial judge was entitled to come to these conclusions. [49] Can-Win Leasing submits that the financial condition of R&R was irrelevant and ought not to have been considered in determining that Can-Win Truck was salvageable. I disagree. [50] R&R had been set up by Mr. Irwin and Mr. Moncayo to lease out the trucks in Can-Win Truck’s inventory. The trial judge stated, at para. 30: R&R surely forms part of the mix as the Bank demanded financial statements from R&R as part of the [line of credit] agreement. R&R and Can-Win Truck had the identical officers, directors and shareholders… I cannot ignore the evidence related to R&R. Surely any perceived unfairness to Mr. Irwin is tempered by the fact that there is, by his own testimony, approximately [$]200,000 in equity in R&R that he has refused to account for. [51] In light of these findings, the trial judge was entitled to find the R&R evidence both relevant and probative to determine whether Can-Win Leasing had established that the business was unsalvageable. In turn, this supported his finding that the discharge of the loan by Can-Win Leasing was premature and prejudicial to Mr. Moncayo. [52] If the surety was not acting under legal obligation, it was simply a volunteer and no right to contribution arose. That is precisely what happened here. The trial judge found Can-Win Leasing had not established that failure of business was imminent. Can-Win Leasing has failed to demonstrate he made a palpable and overriding error in so doing. I therefore accept the trial judge’s finding that Can-Win Leasing was acting solely as a volunteer and had no right of contribution from its co-sureties. [53] I appreciate the policy rationale for permitting a co-surety to “stop the bleeding” when failure of the business is inevitable or where, as in Stimpson, there has been a verbal demand on the surety. However, there is great potential for abuse when this rationale is extended to circumstances in which it is not established that default is imminent. [54] That abuse occurred here. Mr. Irwin decided that he wanted to get out of the business. He did so by taking control of the business, excluding Mr. Moncayo from it, and causing Can-Win Leasing to pay off the company’s banker. He did the latter without notifying Mr. Moncayo or discussing alternatives, including the prospect of liquidating the business. This deprived Mr. Moncayo of the opportunity to work the debt down in an orderly way or to liquidate the company so as to maximize its contribution to the debt. It also deprived Mr. Moncayo of the ability to look to Can-Win Truck for the discharge of its primary obligation. On the evidence the trial judge accepted, this was clearly prejudicial to Mr. Moncayo. [55] Requiring the surety to give notice of his intentions to the co-sureties, and to give them an opportunity to participate in the discharge of the obligation, promotes the efficient winding up of the business and the equitable allocation of its outstanding liabilities. Absent evidence of an imminent default, courts should promote that type of conduct and not the unilateral action that occurred here. [56] Finally, RBC’s assignment of the security to Can-Win Leasing, seven months after the $500,000 payment, could not resuscitate Can-Win Leasing’s lost right of contribution. Although in this case Can-Win Leasing and RBC negotiated an assignment agreement, s. 2 of the Mercantile Law Amendment Act, R.S.O. 1990, c. M.10, provides that every co-surety who pays the principal’s debt is entitled to an assignment of any security held by the creditor in respect of the debt, and to stand in the place of the creditor to obtain indemnification from a co-surety. Effectively, every co-surety who comes before the courts seeking contribution is entitled to an assignment of the guarantee by operation of law. [57] If an assignment from the creditor is capable of wiping the slate clean such that a co-surety is entitled to contribution regardless of the manner and circumstances in which the debt was repaid, then s. 2 would have the effect of overturning the common law rule that, to give rise to a right of contribution, payment must have been made by the surety in a situation where he was legally obliged to pay. [58] In my view, neither the assignment agreement nor s. 2 should be interpreted in this manner. Normally, legislative provisions are not meant to be exhaustive and are therefore presumed not to displace the common law: Ruth Sullivan, Construction of Statutes, 5th ed. (Markham: LexisNexis Canada, 2008), at pp. 261-62, 431-32. [59] Moreover, s. 2(3) of the Mercantile Law Amendment Act provides that “[n]o co-surety … is entitled to recover from any other co-surety … more than the just proportion to which, as between themselves, the last-mentioned person is justly liable.” This provision limits the scope of an assignment under s. 2(1) to the amount for which the co-surety is “justly liable”. The assignment does not extend the co-surety’s liability beyond the “just proportion” owed pursuant to the equitable doctrine of contribution: see Abakhan v. Halpen, 2008 BCCA 29, 250 B.C.A.C. 277. As the voluntary payment of the debt by Can-Win Leasing had the effect of discharging the other sureties, Mr. Moncayo was not “justly liable” to Can-Win Leasing for any amount. The assignment did not alter this important fact. F. Summary and Disposition [60] In my view, Can-Win Leasing has not demonstrated a palpable and overriding error in the trial judge’s conclusion that Can-Win Truck was salvageable. Can-Win Leasing failed to establish that a default by Can-Win Truck on the RBC line of credit was sufficiently imminent that it was justified in unilaterally paying the debt without notice to its co-surety, Mr. Moncayo. Because Can-Win Leasing did not establish that fact, its voluntary payment discharged Can-Win Truck’s debt and thereby released Mr, Moncayo. [61] For these reasons, I would dismiss the appeal. [62] Mr. Moncayo is entitled to his costs of this appeal, which I would fix at $12,500 all-inclusive. “G.R. Strathy J.A. “I agree K. Feldman J.A. Lauwers J.A. (dissenting): [63] I have read my colleague’s reasons. In my respectful view, this appeal should be allowed. The appellant has demonstrated that the trial judge made both palpable and overriding errors in his assessment of the evidence, and legal errors warranting this court’s intervention. [64] The motion judge’s conclusion is based on a basic legal error: he assumes that the appellant was legally obliged to continue to finance Can-Win Truck even after its principal, Mr. Irwin, concluded that the business was not viable. It was commercially unreasonable for the motion judge to find that Mr. Moncayo could hold Mr. Irwin’s direct and indirect assets to ransom. Before attending to this error, I am obliged to set out some additional facts. (1) Factual Background [65] In 2006, Can-Win Truck entered into new credit facility arrangements with RBC. Mr. Irwin and Mr. Moncayo personally guaranteed the RBC loans to Can-Win Truck: each had signed a Guarantee and Postponement of Claim for $900,000. Can-Win Leasing, a company owned exclusively by Mr. Irwin, signed a further Guarantee and Postponement of Claim for $1.5 million. As additional security, in March 2006 Can-Win Leasing provided a collateral mortgage to RBC over the Kipling Avenue real property on which its business was located, in the amount of $975,000, as well as an investment portfolio valued at approximately $750,000. Mr. Irwin effectively provided to RBC, directly and indirectly through Can-Win Leasing, total security in excess of $4.1 million. (2) Can-Win Truck’s Financial Deterioration [66] Market conditions deteriorated in 2007 and 2008. The economy slowed, and, in the words of the respondent, who represented himself at trial, Can-Win Truck “lost a substantial amount of money.” By June 2007, the company owed RBC nearly $800,000 and had sustained a loss of approximately $117,000 over the previous six-month period. It was Mr. Irwin’s evidence that the company’s fortunes did not improve after this time. [67] In January 2008, Mr. Irwin and the respondent met to discuss Can-Win Truck’s future. Mr. Irwin wanted to wind-up the company. The respondent wanted to carry on. The two decided to retain a consultant to determine whether the respondent could take over the company. By month’s end, Can-Win Truck’s line of credit remained fully drawn. In March 2008, Mr. Irwin insisted that all company cheques be signed by him. [68] The consultations, which began in April 2008, were unsuccessful. Although Mr. Moncayo wanted to take over the business, he was, according to Mr. Irwin, “willing to put up nothing.” Mr. Irwin, for his part, was not prepared to continue to finance the company. [69] Mr. Irwin testified that, in April and May 2008, he was “getting a lot of pressure from the Royal Bank” and was worried that RBC would foreclose on Can-Win Leasing’s Kipling Avenue property. According to Mr. Irwin, RBC was “threatening”. He explained, in cross-examination, that RBC had advised him it would be better for him to pay down the debt before a formal demand was made on the guarantors. [70] In June 2008 Mr. Irwin changed the locks on Can-Win Truck’s premises, which effectively barred Mr. Moncayo from the property and from any continued participation in the business. He explained that he took this step because Mr. Moncayo had unilaterally moved inventory from the site, and had thereby lost his trust. (3) Can-Win Leasing’s Payment to RBC [71] As of August 2008, Can-Win Truck owed RBC almost $700,000. Mr. Irwin caused Can-Win Leasing to pay down just over $500,000 of Can-Win Truck’s debt to RBC. In March 2009, Can-Win Leasing made an additional payment to RBC of about $178,000, extinguishing Can-Win Truck’s debt. In exchange, Can-Win Leasing obtained an assignment of RBC’s right, title and interest in Can-Win Truck’s debt, and the security that RBC held, including the guarantees. [72] On July 24, 2009, the appellant made a formal demand of the respondent on the guarantee. [73] It is common ground that RBC did not at any time make a formal demand for payment of Can-Win Truck or of the guarantors. Analysis (1) Is a Demand by the Creditor an Essential Prerequisite to a Surety’s Right to Pay the Creditor and Seek Contribution from a Co-surety? [74] The right to contribution arises when one co-surety has paid more than its fair share of the common obligation: Fox v. Royal Bank of Canada, [1976] 2 S.C.R 2, at p. 7. A surety is typically notified by way of demand that there has been a default on the loan by the principal debtor. Where, as here, the guarantee is payable on demand, the demand is a condition precedent to the enforcement of the obligation by the creditor: Bank of Nova Scotia v. Williamson, 2009 ONCA 754, 97 O.R. (3d) 561, at para. 13. But the absence of a demand by the lender has not been treated as displacing a surety’s right of indemnity from the principal debtor, as Geraldine Andrews and Richard Millett note in Law of Guarantees, Sixth ed. (London: Sweet & Maxwell, 2011), at p. 455: [O]nce there is default by the principal, or the guaranteed liability crystallises for any other reason, the surety can make payment and look to the principal for reimbursement, without waiting for a claim to be made against him. Payment at that stage will not prejudice his right to an indemnity on the basis that the payment was “voluntary” or premature. If the guarantee is to “pay on demand”, the surety’s right to pay the creditor and seek an immediate indemnity will not be prejudiced if he fails to wait for the demand, even though in such a case the demand is a condition precedent to his liability. [Emphasis added.] [75] The same principle has been applied to the right of contribution as between co-sureties. In Stimpson v. Smith, [1999] 2 All E.R. 833, the Court of Appeal of England and Wales unanimously held that the absence of a formal demand does not displace the right of contribution. The case concerned a settlement by one surety in the absence of a written demand by the bank. Lord Justice Judge, at p. 841, cited the earlier case of Thomas v. Notts Incorporated Football Club Ltd., [1972] 1 All E.R. 1176, at p. 1182, for the proposition that the right to contribution cannot turn on the existence of a demand: The principle is that the surety is entitled to remove the cloud which is hanging over him. It would be strange indeed, as it seems to me, if he can do that when no demand is required, notwithstanding there is no present likelihood of any attempts to recover against him, and yet when his liability arises as between himself and the creditor only on demand, he cannot seek to remove the cloud until it has started to rain, especially as the provision in the contract of suretyship that the creditor must make a demand on the surety is clearly a provision for the benefit of the surety. [76] Lord Justice Judge continued, at p. 842: [O]nce the stage has been reached where a demand in accordance with the formal terms of the guarantee can realistically be anticipated in the absence of a negotiated settlement, the surety who reaches an arrangement with the creditor which is not disadvantageous to his co-surety is not thereafter deprived of his entitlement to contribution. [77] The merits of this approach to the absence of the creditor’s demand are particularly apparent in this case. The function of a demand is to provide notice to the guarantor that it will be called upon to meet its obligations. The demand gives the opportunity to the guarantor “to marshal the funds necessary” to satisfy the obligation: Williamson, at para. 13. As the court in Stimpson acknowledged, notice and opportunity benefit the guarantor. [78] In this case, the factual circumstances obviated the need for a demand. Mr. Moncayo knew that Can-Win Truck’s finances were in decline. He knew that Mr. Irwin, whose personal assets were most significantly at risk, was neither obliged nor prepared to carry on with the business. Mr. Moncayo was in no position to take the necessary steps to salvage the business himself. The consultations undertaken in an effort to save the business were not successful. Mr. Moncayo thus had ample notice that a demand was virtually inevitable. [79] My colleague acknowledges that even in the absence of a demand from the creditor, a co-surety will nonetheless be entitled to indemnification by its fellow guarantors if default by the primary obligor is imminent or a demand can “realistically be anticipated” (Stimpson, at p. 842). However, he defers to the motion judge’s conclusion that default was not imminent in the circumstances. [80] In my view, deference is not warranted. The motion judge made a palpable and overriding error in making this finding. He based it on the mistaken assumption that Mr. Irwin was legally required to continue to finance Can-Win Truck. Mr. Irwin had significantly more at stake than Mr. Moncayo; he was entitled to make the unilateral decision to stop financing the company. When he did so, default was imminent and inevitable. Mr. Irwin’s decision, and Mr. Moncayo’s inability to assume the necessary financing obligations, precluded a finding that Can-Win Leasing was “salvageable”. (2) Was Can-Win Leasing’s Payment to RBC Premature and Prejudicial to the Respondent? (a) Principles [81] There is no basis here, where there is a guarantee and the appellant and respondent stand in the relationship of co-sureties, for the application of Korex or Owen v Tate. The appellant was in no sense a volunteer, let alone an officious volunteer. [82] The principle that is applied to co-sureties is, nonetheless, somewhat similar. In the absence of a formal demand from the creditor, it remains open to a co-surety to establish that there should be no right of contribution on the basis that the payment to the creditor was premature and was prejudicial to the co-surety’s interests. In Stimpson, at p. 839, Lord Justice Gibson acknowledged this possibility in the following terms: [P]ayment of the guaranteed debt without the prior consent of the co-guarantor or a court order imposing liability on the co-guarantor to pay a contribution does not shut out the co-guarantor from arguing that the payment was officious or voluntary and that no contribution should be required. That paying co-guarantor takes the risk, as [counsel] conceded, that it might be established that no contribution is due. [83] In my view, it is not enough for a surety seeking to avoid contribution to allege, without more, that the payment in question was “officious”. A surety seeking to avoid contribution must establish prejudice. If there is no prejudice, then the surety seeking to avoid contribution will have been enriched by the impugned payment, and the objective of contribution – being the prevention of unjust enrichment in the context of a common obligation – will be defeated. This approach is consistent with the statement of Lord Justice Judge in Stimpson, at p. 842, that “the surety who reaches an arrangement with the creditor which is not disadvantageous to his co-surety is not thereafter deprived of his entitlement to contribution” (emphasis added). [84] Focusing the analysis on prejudice to the surety also reflects commercial realities. A guarantor may wish to satisfy his obligation under the guarantee for any number of reasons. Unless doing so is prejudicial to the interests of a co-surety, I see no compelling reason to restrict the paying surety’s right of contribution. To borrow the analogy referred to in Stimpson, where the storm is inevitable, there is no reason to discourage a surety in such a case from removing the cloud before it rains. In this case, the storm was plainly inevitable. (b) Application [85] In evaluating the appellant’s right to contribution in this case, I am especially mindful of the general principle that the court ought not to substitute its judgment for the business judgment of the parties. See, for example: Laxey Partners Ltd. v. Strategic Energy Management Corp., 2011 ONSC 6348, 108 O.R. (3d) 440, at paras. 74-76 (business judgment rule requires courts to defer to business decisions of directors and officers); Re Olympia & York Developments Ltd. (1993), 12 O.R. (3d) 500 (Gen. Div.) (not the court’s function to descend into negotiating arena and substitute its judgment for business judgment of CCAA plan participants); and Keeping v. The Queen, 2001 FCA 182, [2001] F.C.J. No. 899, at para. 5 (not the place of the courts to second-guess the business acumen of a taxpayer). [86] There is no doubt that Mr. Irwin was well within his rights to conclude that the business was not viable, and to take steps to protect his assets. As I noted earlier, there is an underlying sense in the trial judge’s reasoning that Mr. Irwin was somehow obliged to continue to finance the business personally and through Can-Win Leasing. That was not his legal obligation. [87] In my view, the trial judge committed a palpable and overriding error by substituting his business judgment for the business judgment of the party whose assets were most at risk. In doing so, he overlooked considerable evidence as to Can-Win Truck’s overwhelmingly poor financial health, referring laconically only to “evidence that Can-Win Truck was losing money.” In fact, Can-Win Truck’s losses were substantial. It sustained a loss of approximately $117,000 in just the first six months of 2007, resulting in negative retained earnings of about $170,000. Mr. Irwin testified that, by February 2008, there was a net shortfall of $493,000. Mr. Irwin and Mr. Moncayo discussed ways to salvage the business in April 2008. Although the respondent wanted to take over the business, he was, according to Mr. Irwin, “willing to put up nothing.” Mr. Irwin had lost trust in Mr. Moncayo. Mr. Irwin, for his part, was not prepared to continue to finance the company. Meanwhile, the RBC line of credit was fully drawn. In short, the record painted a bleak picture of Can-Win Truck’s prospects. [88] There is no evidence to support the trial judge’s finding that the appellant’s payments to RBC materially changed the respondent’s risk in this doomed business. It was doomed by Mr. Irwin’s understandable and legitimate decision not to continue to finance the venture. That is what changed the risk to Mr. Moncayo. The respondent has not established that he suffered prejudice as a result of the payments made by Can-Win Leasing to RBC, apart from the obligation to pay his share. There is, in my view, no legal basis for the right of contribution between co-sureties to be eliminated here, contrary to the trial judge’s conclusion. Without the right of contribution, the respondent would be unjustly enriched at the expense of Can-Win Leasing. [89] I note here that although the trial judge was “suspicious” of Mr. Irwin’s testimony on the issue of pressure from RBC, he did not expressly reject it. The trial judge was skeptical, in part, because Mr. Irwin testified that RBC pressure came in April and May 2008, but the first payment by Can-Win Leasing was not made until August 2008, about three months later. In my view, little can be inferred from this delay, given the sum of money at issue. It is entirely plausible, even probable, that Can-Win Leasing did not have a half-million dollars in cash immediately available. The trial judge was also skeptical of Mr. Irwin’s testimony because small payments to RBC were made between January and June 2008. I would not view these payments as in any way inconsistent with pressure from RBC. If anything, they lend further support to Mr. Irwin’s position that the bank was anxious about the debt, and Can-Win Truck obliged by making minor payments. [90] The trial judge discounted, at paras. 26-28, the evidence that Mr. Irwin wanted to exit the business. He did so on the basis of a handwritten note, dated March 26, 2008, in which Mr. Irwin explained that he required signing authority on all company cheques to “control the Bank until we get the company back on its feet.” The trial judge found that this note, and particularly the reference to getting the company back on its feet, contradicted Mr. Irwin’s evidence that he wanted out of the business as of January 2008. The trial judge drew the inference that Mr. Irwin considered the business to be viable. [91] In doing so the trial judge made a chronological error and misapprehended the evidence. The attempted restructuring of Can-Win Truck was an ongoing process that failed after the date of the March note: the evidence is that the consultant hired to assist with their negotiations did not meet with Mr. Irwin and the respondent until April 2008. Therefore, on March 26, 2008 – the date of the note – there remained the possibility that the respondent would take over Can-Win Truck if in fact it could “get back on its feet.” That possibility later evaporated when it became clear that any future for the company would require Mr. Irwin’s continued financial participation, which he was entitled to refuse. As noted, this is not a case in which the payment to the creditor was premature. [92] Nor was it appropriate for the trial judge to impugn Mr. Irwin’s motives, as he did, at para. 28. The law is clear that, provided that the surety’s payment to the creditor is neither premature nor prejudicial: “[t]he fact that the surety may have ulterior motives or derive some collateral benefit from making the payment without waiting to be sued or waiting for a demand will not affect his right to claim an indemnity”: Andrews and Millett, at p. 456. See also the comments of Robins J.A. in Manu v. Shasha, at para. 14: The fact that the appellant, in the course of his business relationship with the respondent, engaged in conduct which may be described as deliberate or reckless, or as motivated by an ulterior purpose, is not in itself a sufficient ground upon which to deny the appellant, as surety, his well-recognized right to contribution. As I have noted, Mr. Irwin was not obliged to leave his assets at risk in the business. [93] In my view, the trial judge also erred in basing his conclusion that Can-Win Truck was salvageable, in part, on the state of affairs of R&R, a distinct business entity. The trial judge found, at para. 26, that Mr. Irwin had refused to provide the respondent with an accounting for R&R, which seemed to have had retained earnings. Even if Mr. Irwin’s conduct with respect to R&R was oppressive, that issue was not part of the pleadings or the relief sought by the respondent. In my view, the R&R evidence was irrelevant to whether Can-Win Truck was salvageable and to the ultimate question of whether the respondent had established that Can-Win Leasing’s payment to RBC was premature and prejudicial to his interests. As Robins J.A. observed analogously in Manu v. Shasha, at para. 14, if the respondent has a cause of action against Mr. Irwin, the result in this case does not prevent him from asserting it. [94] As for RBC’s assignment of the debt, in my view, when Can-Win Leasing made its demand on the respondent, it stood in the shoes of RBC as its assignee, and was entitled to make the demand for payment: see Westdale Construction Co. v 1189380 Ontario Ltd. (1998), 43 B.L.R. (2d) 279, [1998] O.J. No. 1719 (S.C.). The trial judge erred in law in reaching the opposite conclusion. [95] This is not to say the demand by Can-Win Leasing “resuscitated” Can-Win Leasing’s right of contribution or “wiped the slate clean”. Can-Win Leasing never lost the right to contribution. The purpose of a demand is to provide notice, and the respondent did not have to be told what he already knew. Further, as noted above, Mr. Irwin was entitled to stop financing Can-Win Truck, and to pay the debt to RBC since default became imminent, and to get contribution from Mr. Moncayo. The appellant’s demand, as RBC’s assignee, was all that was needed to enforce Mr. Moncayo’s obligation to pay. [96] Mr. Irwin was entitled under s. 2 of the Mercantile Law Amendment Act to pay out RBC and take an assignment of its security, although, as my colleague points out, he could not escape the proportional equities simply by taking that assignment Manu v. Shasha, at para. 9, per Robins J.A.; Westdale Construction Co., at paras. 7-10, per Lederman J. [97] Mr. Irwin was plainly a hard-nosed and successful businessman. While his approach may appear aggressive, in view of Mr. Moncayo’s apparent impecuniosity, that is not a factor that is relevant to the appellant’s rightful remedy. “P. Lauwers J.A.” Released: October 08, 2014 [1] At the trial, there appears to have been no whisper of Can-Win Leasing being a co-surety. The guarantee signed by Can-Win Leasing was not put in evidence. It appears from the trial judge’s reasons that the case was put to him on the basis that Can-Win Leasing was simply a third party, not a co-surety.