We all say we know the consequences of signing a legal document. We would say it means that we have entered into a binding contract according to its terms. This is so whether we have read the terms or not. Yes, there may be defences available such as a non est factum (not my deed), mistake, or fundamental breach. But those are all hard defences to make out.
What if there were, according to us, verbal terms or statements made at the time of signing that lead us to believe that a certain understanding was in effect. What if that understanding was contradictory to the written terms of the contract? Can we rely on a verbal understanding to escape liability? The answer is unfortunately no.
In 1969, the Supreme Court of Canada (SCC) decided Bank of Montreal v. Hawrish. There, a lawyer had signed a guarantee for the existing and future indebtedness of a company he was invested in. The upper limit was the sum of $6,000.00. The company went bankrupt and the bank sued on the guarantee.
The defence was a verbal agreement said to have been made to the lawyer when he signed the document. The assistant manager of the company was said to have assured the lawyer that the bank would only be relying on the guarantee for the then-existing indebtedness and would further release him from the guarantee once the bank obtained a joint guarantee from the directors of the company. Those directors then gave the bank new guarantees.
He won at trial but lost in the Court of Appeal. He appealed to the SCC.
His argument was as follows:
- That the contemporaneous verbal agreement found by the trial judge neither varied nor contradicted the terms of the written guarantee but simply provided by an independent agreement a manner in which the liability of the appellant would be terminated; and
- That oral evidence proving the making of such agreement, the consideration for which was the signing of the guarantee, was admissible.
The SCC dismissed the appeal. The court relied on the 1913 decision of the UK Court of Appeal Heilbut, Symons & Co. v. Buckleton which stated as follows:
It is evident, both on principle and on authority, that there may be a contract the consideration for which is the making of some other contract. “If you will make such and such a contract, I will give you one hundred pounds,” is in every sense of the word a complete legal contract. It is collateral to the main contract, but each has an independent existence, and they do not differ in respect of their possessing to the full the character and status of a contract. But such collateral contracts must from their very nature be rare. The effect of a collateral contract such as that, which I have instanced would be to increase the consideration of the main contract by 100 £., and the more natural and usual way of carrying this out would be by so modifying the main contract and not by executing a concurrent and collateral contract. Such collateral contracts, the sole effect of which is to vary or add to the terms of the principal contract, are therefore viewed with suspicion by the law. They must be proved strictly. Not only the terms of such contracts but the existence of an animus contrahendi on the part of all the parties to them must be clearly shown. Any laxity on these points would enable parties to escape from the full performance of the obligations of contracts unquestionably entered into by them and more especially would have the effect of lessening the authority of written contracts by making it possible to vary them by suggesting the existence of verbal collateral agreements relating to the same subject matter.
The lawyer could not succeed with his arguments on the ground that the collateral agreement allowing for his discharge cannot stand as it clearly contradicted the terms of the guarantee bond which stated that it was a continuing guaranty.
This decision remains the law in Canada and was recently quoted with approval by the Ontario Court of Appeal in Fung v. Decca Homes Limited (ONCA) (2019), in which one party argued that a verbal agreement made consecutively with the execution of a written agreement served to modify the terms of the written agreement. The Court of Appeal found that this is acceptable only in situations where the terms of the verbal agreement do not contradict those set out in the written contract.
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