Gough Electric v. Labyrinth Lumber Ltd.

2001BCSC0535 Citation: Gough Electric v. Labyrinth Lumber and Bell Date: 20010409 2001 BCSC 535 Docket: S001005 Registry: Vancouver

IN THE SUPREME COURT OF BRITISH COLUMBIA BETWEEN: GOUGH ELECTRIC, DIVISION OF GUILLEVIN INTERNATIONAL INC.

PLAINTIFF AND: LABYRINTH LUMBER LTD. AND DAYNA ROY BELL

DEFENDANTS

REASONS FOR JUDGMENT

OF THE

HONOURABLE MADAM JUSTICE KIRKPATRICK Counsel for Plaintiff: I.G. McKenzie Counsel for Defendant, Dayna Roy Bell: B.T. Hara Dates and Place of Trial: March 29 and April 3, 2001 Vancouver, BC [1] The plaintiff, Gough Electric, Division of Guillevin International Inc. ("Gough") seeks judgment against the defendant, Dayna Roy Bell ("Bell") in the amount of $24,119.79 as at January 31, 2000, together with service charges at the contract rate of 26.8 percent per annum to the date of judgment pursuant to a guarantee dated November 21, 1994. [2] Of the $24,119.79 claimed by the plaintiff, $1,449.01 represents purchases from Gough Electric Ltd. The balance represents purchases from Fleck Bros. Ltd. ("Fleck").

FACTS [3] The facts are not seriously in issue. [4] In 1987, Guillevin International Inc. ("Guillevin") acquired Gough Electric Ltd., which sells wholesale electrical materials, and Fleck which sells wholesale safety and industrial products. Guillevin operated the two companies as distinct divisions in order to capitalize on the goodwill associated with the companies. [5] In October 1994, Bell incorporated the defendant, Labyrinth Lumber Ltd. ("Labyrinth"). Bell was the sole shareholder of the company. Labyrinth's business was the re-manufacturing of wood products. It operated a plant in Castlegar, British Columbia. Bell supervised the day to day operations of the plant. Ken Sookeroo ("Sookeroo") was responsible for the administration of the company. [6] On November 8, 1994 Bell applied to Gough for a charge account in Labyrinth's name. The terms of credit in the charge account agreement include a verification agreement, which reads: Every transaction indicated or referred to in any notice, statement, confirmation or other communication and every statement of account shall be deemed and treated as authorized and correct and as ratified and confirmed by the customer unless Gough Electric Division of Guillevin International Inc. receives from the undersigned written notice to the contrary within fifteen days upon receipt of such notice, statement, confirmation of other

communication forwarded by Gough Electric Division of Guillevin International Inc. to the customer by prepaid mail. [7] The charge account agreement also contains a contract of guarantee between Gough and Bell which provides as follows: In consideration of Gough Electric Division of Guillevin International Inc. dealing with, and from time to time advancing credit to the above customer in any capacity I/we the undersigned, do hereby jointly and severally unconditionally guarantee to Gough Electric Division of Guillevin International Inc. the payment, whenever due, of any amounts payable, from time to time, by the Customer to the said Gough Electric Division of Guillevin International Inc. or any moneys or accounts that may hereafter become due and owing during the term of the guarantee herein AND FURTHER I/WE the undersigned do jointly and severally guarantee the faithful performance of any and all agreement now existing or which may hereafter be entered into between the Customer, and Gough Electric Division of Guillevin International Inc. in respect of the Customer dealing with the said Gough Electric Division of Guillevin International Inc. or of any security or collateral in connection therewith. It is expressly understood and agreed that the liability of the undersigned shall be a continuing liability and shall not be limited but shall include the full indebtedness at any

time of the Customer to Gough Electric Division of Guillevin International Inc. AND FURTHER that Gough Electric Division of Guillevin International Inc. shall not be obliged to give notice to the undersigned of any further or other accounts due and owing and/or the execution of any agreements nor of the non-payment of any amounts due and owing jointly or on account of any agreement with Gough Electric Division of Guillevin International Inc. or by any other party thereto. AND FURTHER that the guarantee herein and the liability created, hereunder shall not be affected by any settlement, extension or variation of the terms of any agreement or by additional collateral security or guarantee taken or surrendered or otherwise lost or destroyed by Gough Electric Division of Guillevin International Inc. nor by any carelessness or negligence of Gough Electric Division of Guillevin International Inc. in asserting its rights against the Customer or any other person, or otherwise, nor by termination for any cause whatsoever of any right of Gough Electric Division of Guillevin International Inc. against any person. The undersigned jointly and severally agree to pay and satisfy to Gough Electric Division of Guillevin International Inc. any amount at any time due hereunder immediately upon demand without requiring any demands to be made upon or protest to be made or notice of non-payment or

no-performance to be given, or proceedings to be taken against the Customer or any other guarantor or any party primarily or otherwise liable to Gough Electric Division of Guillevin International Inc. in virtue of any of the purchases or agreements on behalf or with the Customer. [8] The credit agreement and guarantee were executed on November 21, 1994 in Castlegar. At that time there was no Fleck outlet in either Castlegar or Trail, British Columbia. [9] On January 10, 1995 Gough notified Labyrinth by a letter to Bell that it was opening an account that day with an initial credit line of $5,000. [10] Labyrinth's business did not succeed. In or about 1996 Bell sold 50 per cent of his shares to a friend, Mark Bubligz ("Bubligz"). Later, on August 26, 1997 Fjords Timber Corporation ("Fjords") purchased all of Bubligz's shares and assumed all management responsibilities of Labyrinth. Bell continued as a 50 percent shareholder. Under the agreement with Fjords, all cheques of Labyrinth in an amount greater than $500 were required to be authorized by two signatures: one from a director of the company selected by Bell; and the other from a director selected by Fjords. [11] From 1997, Bell had no management responsibilities in respect of Labyrinth. [12] Sometime in mid-1998, Labyrinth's purchases from Fleck began to be processed through the account with Gough. Bell was unaware that

purchases from Fleck were charged under the November 1994 charge account agreement. [13] Kevin Morley, Gough's credit manager, testified that at the time the credit application was executed, if Labyrinth wished to purchase on credit from Fleck it would have to make a separate application to Fleck. [14] There is no evidence that Labyrinth opened a charge account with Fleck. Nor is there any evidence that Labyrinth agreed that Fleck purchases could be processed through Labyrinth's charge account with Gough. Bell was never advised that Fleck purchases were processed through the Gough charge account and his consent to do so was never obtained. [15] Notwithstanding the absence of any formal agreement to process Fleck purchases through the Gough charge account, it is apparent that, from mid-1998, purchases from Fleck were made by Labyrinth which were invoiced, processed, and paid through Labyrinth's charge account with Gough. [16] At no time did Labyrinth ever challenge or deny any of the charges processed through its charge account with Gough. [17] Labyrinth enjoyed success in the first two years after Fjords took over management of the company. However, on February 29, 2000 the company filed a Notice of Intention to Make a Proposal under the Bankruptcy & Insolvency Act, R.S.C. 1985, c. B-3. One week prior to that filing, Bell notified Gough that he would not be personally responsible for any further debts on behalf of Labyrinth. [18] According to Gough's internal accounting records, the amount owed by Labyrinth to Gough as at January 31, 2000 was $24,119.79. The credit limit is shown to be $5,000.

DECISION [19] Counsel for Gough asserts that the existence of the verification agreement and the evidence that no one has ever disputed any of the charges processed on Labyrinth's charge account with Gough is determinative of the plaintiff's claim. Gough says that an agreement to allow purchases from Fleck to be processed on Labyrinth's charge account with Gough must have existed and can be inferred from the fact that payments for Fleck purchases were made through the charge account. If such agreement did not exist, Gough says that someone at Labyrinth would have complained, at which time Gough would have insisted on the execution of a separate credit application and guarantee with Fleck. [20] Counsel for Gough relies on the decision in Gough Electric Ltd. v. G.S. Electric Ltd., [1987] B.C.J. No. 1979 (Q.L. (Co. Ct.), in which the court followed the decision in Arrow Transfer Ltd. v. Royal Bank of Canada (1972), 4 W.W.R. 70 (S.C.C.) in finding that the debtor company could not dispute the invoices and statements received after the period provided for in the verification agreement. [21] However, in the case at bar, Bell does not challenge the invoices provided by Gough to Labyrinth. He simply says that he was not aware of, and had not consented to, Fleck purchases being processed through the Gough charge account. [22] Counsel for Bell notes that the verification agreement in

this case refers only to Gough as a division of Guillevin and argues that at the time the charge account agreement was made Gough and Fleck operated as separate companies with separate accounting systems. The application for charge account, which also contains the credit agreement and the guarantee, prominently features the name "GOUGH ELECTRIC" with much smaller reference to "Division of Guillevin International Inc." There is no reference at all to Fleck. Bell also notes that in the payments remitted to Gough there is no mention of Fleck or Guillevin. Lastly, Bell contends that the form of invoice by which the purchases from Fleck were claimed does not signify that the items purchased were from Fleck. The only allusion to Fleck is in the company's design logo which appears faintly in a light blue background on the invoice. That, Bell asserts, is insufficient notification to anyone as to the source of the purchases. Bell says there was consequently insufficient information to permit him to dispute any of the invoiced items. [23] Bell says that if there was an agreement between Labyrinth and Gough to allow Fleck purchases to be processed through the Gough credit account, such agreement as entered into between Bell's successor in management, Fjords, and Gough, increased the risk to Bell without his knowledge or consent. Bell thus argues that there was a material alteration to the

original agreement, and a consequent enlargement of his risk, thereby relieving Bell from liability under the guarantee. [24] In support of his position, Bell relies on two decisions. The first relates to the general law of guarantee governing the discharge of a surety in circumstances where there has been a material change to the original agreement: Holland-Canada Mortgage Co. v. Hutchings, [1936] S.C.R. 165 at 172: A surety has always been a favoured creditor in the eyes of the law. His obligation is strictly examined and strictly enforced. "It must always be recollected," said Lord Westbury in Blest v. Brown (1862) 4 De G.F. & J. 367 at 376, in what manner a surety is bound. You bind him to the letter of his engagement. Beyond the proper interpretation of that engagement you have no hold upon him. He receives no benefit and no consideration. He is bound, therefore, merely according to the proper meaning and effect of the written engagement that he entered into. If that written engagement is altered in a single line, no matter whether it be altered for his benefit, no matter whether the alteration be innocently made, he has a right to say, "The contract is no longer that for which I engaged to be surety: you have put an end to the contract that I guaranteed, and my obligation, therefore, is at an end." Apart from any express stipulation to the contrary, where the change is in

respect of a matter that cannot "plainly be seen without inquiry to be unsubstantial or necessarily beneficial to the surety," to use the language of Rowlatt, The Law of Principal and Surety, 2nd ed. (1926) p. 102, the surety, if he has not consented to remain liable notwithstanding the alteration, will be discharged whether he is in fact prejudiced or not. Holme v. Brunskill (1877) 3 Q.B.D. 495. [25] The second decision relied upon by Bell is E-Z Fiberglass Products Ltd. v. Harris (1994), 97 B.C.L.R. (2d) 378 (C.A.) which held that, in the circumstances of that case, material alterations in the terms of credit between the creditor and the debtor required the agreement of the guarantors. [26] Bell's argument cannot succeed. The verification agreement, the credit agreement and the guarantee are all contained in the same document. Bell must be taken to know the terms of the verification agreement which are incorporated by reference into the guarantee. Bell abandoned day to day control of Labyrinth some time in 1997, before the commencement of the practise of processing Fleck purchases on the Gough charge account. No one has ever challenged the purchases. It is reasonably certain that such purchases (which form the majority of purchases) would have been challenged if they had not been consented to by the company, of which Bell was a 50 per cent shareholder. It is also reasonably

certain that if they had been challenged, Fleck would have insisted on a fresh credit agreement and guarantee. [27] It appears that Bell's chief complaint is that he was unaware of the practise and now seeks to challenge it. I find, however, that the verification agreement and the case law cited to me prevents such challenge. Bell knew or ought to have known of the verification agreement and the impact it would have upon the company and, through the guarantee, upon him. Bell evidently made no inquiries in respect of Labyrinth's accounts during the period that the company enjoyed considerable success. He was apparently content to leave that to Fjords. The verification agreement places the onus on the customer to make inquiries. It does not, as Bell would have it, place the onus upon Gough to inform customers of potential challenges or to obtain the customer's consent to credit purchase matters. [28] Insofar as the guarantee is concerned, I conclude that the decision in E-Z Fiberglass, supra, does not assist Bell. That decision turned on the specific wording of the guarantee in that case which importantly included the phrase "on such terms of credit as shall be agreed upon from time to time." It was in reference to that phrase that the court was able to limit the terms of credit to the time at which the guarantee was executed and delivered. There is no credit limit in the

guarantee in the case at bar. Indeed, Bell's guarantee is clearly unlimited except insofar as it is limited to the "full indebtedness at any time of the Customer to Gough Electric Division of Guillevin International Inc." [29] The guarantee further provides that Gough is not obliged to give notice to Bell of "any further or other accounts due and owing and/or the execution of any agreements... ." Thus, although there is no evidence of execution of an agreement concerning the processing of the Fleck purchases through the Gough charge account, the language of "any further or other accounts" is sufficiently large to include the transactions concluded by Labyrinth. [30] The language of the guarantee is very broad. Bell does not contend that the guarantee was limited to $5,000. Indeed, there is no evidence to support a contention to the contrary. I conclude that the guarantee is unlimited in scope and that Bell is consequently liable for the amount claimed. [31] The passage in Canadian Imperial Bank of Commerce v. Shire (2000), 80 B.C.L.R. (3d) 285 (C.A.); 2000 BCCA 528 applies with force here. There, Esson J.A. held, at 292-293: Personal guarantees of Bank indebtedness often have harsh consequences. In many cases, they are entered into at the outset of a corporate venture in an atmosphere of optimism and are then forgotten about by the guarantors. While things go well, they are

largely ignored by the Bank but they remain in its file available to be used when things go wrong. A guarantee unlimited in amount creates a particular risk for the guarantor. As Mr. Justice Taggart said in 1987, it may be that the law should limit the use of such guarantees. But the law today remains as it was then. Unless and until the law is changed, the only protection for individuals is to not execute an unlimited guarantee and to never lose sight of the fact that, whether limited or not, that potentially deadly weapon is in the Bank file. [32] Gough seeks post-judgment interest at the contract rate of 26.8 per cent, based on the provision in the credit agreement that interest on a judgment "shall be computed at the same rate and in the same manner as herein provided until the said judgment shall have been fully paid or satisfied." [33] Gough further relies on the decision in Heller-Natofin (Western) Ltd. v. Carlton Developments Ltd. (1979), 16 B.C.L.R. 64 (S.C.) which permitted interest to be charged at the rate provided in the mortgage. [34] Bell relies upon the decision in Misley v. 420746 B.C. Ltd. (1997), 46 B.C.L.R. (3d) 166 (C.A.) wherein the court held that, at para. 18: Neither party provided any authority for the proposition that parties to an agreement are entitled to contract out of the post-judgment interest rate provided for in the Act. The wording and

structure of the Act suggests otherwise. Whereas the Act specifically provides that the parties can contract out of the pre-judgment rate of interest provided for in Part 1 of the Act, there is no such provision in Part 2 of the Act dealing with post-judgment interest. [35] Although it does not appear that the court was referred to the decision in Heller-Natofin, I accept the ruling in Misley and find that Bell is obliged to pay post-judgment interest pursuant to the Court Order Interest Act, R.S.B.C., c. 79. [36] In the result, Gough is awarded judgment against Bell in the amount of $24,119.79 together with interest at 26.8 per cent to the date of judgment, post-judgment interest pursuant to the Act, and costs at Scale 3. "P.A. Kirkpatrick, J." The Honourable Madam Justice P.A. Kirkpatrick