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The information available is current as of the date it was written only and does not represent the legislative and jurisprudential changes in effect since its inception.
Bonding is a contract by which a person binds himself to a creditor to discharge the debtor's obligation, if the debtor does not satisfy it. The Quebec Civil Code , which came into force in 1994, has not changed most of the rules of this contract. However, the 1994 codification introduced some new rules that significantly changed the relationship between the creditor and the guarantor.
The obligation to inform
The creditor now has an obligation to respond to any request for information from the surety, both at the time of signing the contract and afterwards. The information requested must relate to the obligation of the principal debtor, the nature and the terms of the obligation and the state of its execution. The creditor did not provide general information about the creditworthiness of the principal debtor.
The obligation to inform
The fundamental distinction between the obligation to inform and the obligation to inform is the unsolicited nature of the information provided to the surety. The disclosure requirement could be broadly defined as the obligation of the creditor to keep the surety informed of facts that may affect it, such as the assumption of the debtor's obligations by a third party, the extension of the term of that obligation, the special agreements entered into with the debtor and the exercise of his rights against the debtor.
The disclosure requirement will vary depending on the degree of commitment of the surety in the debtor's business. It is clear that in respect of a guarantor who is a shareholder and director of the debtor, this duty to inform the creditor will be limited. This duty, however, will be much greater for the creditor in respect of any bond that is not directly incurred in the debtor's affairs, such as a bond of convenience or the surety of a debt that are subsequently assumed by another debtor.
The impossibility to waive in advance the benefit of subrogation
The person who pays the debt to which he is liable, with or for others, is subrogated (acquires all the rights of the creditor against the debtor) by the effect of the law in the creditor's rights. When paying the debtor's debt, the guarantor must, therefore, be subrogated in the rights of the debtor's creditor, but also in the securities held by the debtor. Ancier. In the case of suretyship, it is even provided that the suretyship is extinguished when the subrogation to the rights of the creditor can no longer, by reason of the latter, be effected in favor of the surety . This extinction is however limited to the extent of the damage suffered.
Prior to 1994, it was customary in commercial bonds to waive the benefit that had, for all intents and purposes, become ineffective. The waiver of the subrogation benefit allowed the creditor to perform as he saw fit the securities he held on the debtor's assets without having to worry consequences for the surety. The creditor was therefore assured of having an effective remedy against the surety in the event of a loss. By this simple provision, the Quebec legislature has come to rebalance the relationship between the creditor and the guarantor in a marked way.
Under the old Code, the bond was a transferable bond to the heirs of the surety. The law now provides that the death of the guarantor terminates the bond for future debts but that the suretyship will remain only for debts incurred up to the date of death.
The end of the duties of the surety
The security which is attached to the performance of particular functions terminates when these functions cease. Some decisions refused to apply this provision to the shareholder who sold his shares because he had not been shown that the bond was attached to the exercise of his shares. functions. In one case reported, however, the accountant of a corporation that had taken out a security for the obligations of the corporation was discharged from any obligation as of the date of its surrender. It should be noted that the creditor had not been notified of this resignation.
It appears to us that, in commercial matters, bonding linked to a particular function will be exceptional. Moreover, the new guarantees specifically provide that the bond of a director, for example, is not related to the performance of his duties.
The possibility of excluding certain means of defense in bail
The defense that the principal debtor could oppose the action of the creditor should in principle benefit the surety. The new Code makes it possible to exclude specific defenses. It appears that the legislator intended to take into account the commercial practice of maintaining the security in force notwithstanding the nullity of the debtor's undertaking that may result from the absence of representative power, or the debtor's incapacity to commit to the creditor.
The surety's action before the expiration of the term of the principal obligation
The guarantor may sue the principal debtor as soon as the term of the bond is discharged. It is very rare for a surety to exercise this right in practice. This right exists despite the term extension granted by the creditor to the debtor. It should also be noted that the term extension granted by the creditor does not release the bond.
However, when the surety is sued, it invokes the creditor's failure to notify him of the term extension, which may have deprived him of the right to force repayment at the end of his term. . What is new, however, is the right of the guarantor to sue the principal debtor even before the term is expired when the guarantor is at higher risk because of loss suffered by the debtor or a fault committed by him ".
The right to unilaterally regulate the suretyship
The guarantee granted to cover future or indefinite debts or for an indefinite period shall, after three years, entitle the surety to terminate it by giving sufficient notice to the debtor, the creditor or the other sureties. The surety will be held with the existing debts the date of receipt of the notice.
Commercial surety bonds frequently provide for the surety's right to revoke a bond at any time by giving notice to the creditor. This new provision of the Act merely extends this practice to all guarantees but incorporates a three-year time limit and adds the requirement to give sufficient notice to other parties affected by this act. revocation.
In the case of a specified debt with a term and period of amortization, the position of the creditor will not change significantly upon receipt of the notice. The deposit will remain bound until full refund.
In the case of an opening of credit, for example, the situation is likely to be problematic since it is the very essence of these contracts that the debtor reduces his obligations towards the creditor and obtain new advances on a regular basis. In order to benefit from the suretyship in respect of the surety who resigns his undertaking, the creditor must, therefore, cease any advance upon receipt of the notice.
Bonding of the obligations of a lease
The law now provides that the security, and therefore the security given by a third party to guarantee the performance of the lessee's obligations, does not extend to the renewed lease. This article now applies to all leases. It should be noted that the renewal of a lease made pursuant to a renewal option contained in this lease does not constitute a renewal within the meaning of the law.
Provisions governing membership contracts
The contract of adhesion is a contract the essential stipulations of which were imposed by one of the parties or drawn up by it, on its behalf or at its instructions, and which could not be discussed freely. It goes without saying that the vast majority of current guarantees for financial institutions should fall into this category.
In the case of a bond in respect of a particular debt, the contract between the creditor and the principal debtor constitutes an external clause when the bond has not been subscribed within the indenture. the obligation of the principal debtor to the creditor. Certain clauses of the contract could, therefore, be unenforceable against the guarantor if the creditor did not take the precaution of giving adequate notice of the guarantor of all the terms of the debtor's commitment to the credit. Ancier.
The law also provides that a clause that would be illegible or incomprehensible to a reasonable person could be void if the party who adheres to a contract is prejudiced. This article seems to be aimed at contracts whose content is written in small characters or clauses whose text itself is highly debatable.
The law also provides that any clause that disadvantages the consumer or the member in an excessive and unreasonable manner, taking into account what is required by good faith, is unreasonable. This article allows the courts to intervene to cancel or reduce the obligations of a surety under a consumer contractor in the case of a contract of adhesion.
The most important legislative change introduced by the new Code is the inability of the surety to waive in advance the benefit of subrogation and the right to information. These two rights of the surety, to which the general obligation to act in good faith of the creditor is superimposed, will be decisive in the relationship between the creditor and the guarantor. We have to admit that the new bail law therefore requires the active participation of the creditor to preserve his rights.