ONCA Clarifies When Lenders Must Consider Undue Influence in Special Relationships

In Bank of Montreal v. Utility Engineers Corp., 2025 ONCA 311, the Ontario Court of Appeal (“ONCA”) dismissed the guarantor’s appeal because, among other findings, the respondent bank had no duty to explain the underlying loan’s details to the appellant in the circumstances, and the appellant’s claim of non est factum (not my act) did not apply.

Bank of Montreal (“BMO”), the respondent, granted a $500,000 overdraft facility to Utility Engineers Corporation (“Utility”). Utility’s loan was secured and was personally guaranteed by both Mr. Meleknia and Ms. Songhorigakien. Ms. Songhorigakien, the appellant, is the mother of Mr. Meleknia. Both Mr. Meleknia and Ms. Songhorigakien were officers of Utility, and Ms. Songhorigakien was also a director and 50% shareholder of Utility.

Utility defaulted on its loan and BMO made a formal demand for payment of the entire outstanding amount under the facility. BMO later issued a statement of claim against Utility, Mr. Meleknia and Ms. Songhorigakien. BMO obtained default judgments against Utility and Mr. Meleknia.

Ms. Songhorigakien defended the action. BMO moved for summary judgment. Ms. Songhorigakien argued, among other things, that BMO was required to explain the loan documents to her and that she did not know she was signing a personal guarantee. The motion judge granted the motion for summary judgment.

Ms. Songhorigakien appealed this decision. On appeal, Ms. Songhorigakien argued, among other things, that (a) the motion judge erred in finding that BMO was under no duty to ensure she understood the consequences of the personal guarantee, and (b) the motion judge erred in finding that the defence of non est factum did not raise a serious issue requiring trial.

Clarifying the Lender’s Duty to Explain Guarantee Terms

Two key points of Ms. Songhorigakien’s argument were that (i) her relationship to Mr. Meleknia constitutes a “special relationship” giving rise to a duty for BMO to inquire about presumed undue influence, and (ii) she had no prospect of financial gain flowing from the loan.

The motion judge considered the special relationship argument and found there was no special relationship giving rise to a duty for BMO to inquire about undue influence. In upholding the motion judge’s decision, the ONCA cited its prior decision in Rose-Terra Investments Inc. v. Chetti, 2024 ONCA 427, where it clarified that a familial relationship does not automatically give rise to an actual or constructive presumption of undue influence; to ground such a presumption, the transaction must be manifestly disadvantageous.

The court also rejected Ms. Songhorigakien’s argument that she did not stand to benefit from the loan. In this case, the court noted that as a director, officer and 50% shareholder of Utility, Ms. Songhorigakien stood to benefit from the loan.

Viability of the Appellant’s Non Est Factum Defence

The appellant further argued that the motion judge erred in applying the test for non est factum. In claiming that she did not know what she was signing, the appellant highlighted that she is an immigrant, has limited proficiency in English and spent the majority of her life as a stay-at-home mother.

The motion judge rejected this argument. Ms. Songhorigakien is a licensed real estate broker and has experience dealing with standard form agreements of purchase and sale for property. The court agreed that Ms. Songhorigakien was a relatively sophisticated party and refused the appellant’s argument that the motion judge erred in not applying the non est factum defence. As such, the court noted that she ought to have known that the guarantee documentation went beyond that required to open a regular bank account. Although she did not seek legal advice, the court noted “that was her failure.”

Key Takeaways

This case provides helpful guidance for lenders and obligors alike as it relates to providing personal guarantees of loans.

First, it serves as a reminder that a close familial or personal relationship is not enough to give rise to a duty for a lender to inquire about the prospect of undue influence, and that guarantors cannot rely on this relationship alone to have their guarantees set aside when a lender seeks to enforce upon it. Regardless of the relationship between the borrower and the guarantor, a presumption of undue influence will only arise if the transaction is manifestly disadvantageous. Based on the decision above, it is unlikely that the underlying transaction will be seen to be manifestly disadvantageous where the personal guarantor is an officer, director and shareholder of the corporate borrower and stands to benefit from the loan as a result.

Second, personal guarantors should be prudent in seeking independent legal advice. Courts will determine whether a party ought to have understood the loan documents being provided based on the experience and relative sophistication of such party. Any failure by a relatively sophisticated personal guarantor to clarify genuine questions or concerns regarding an underlying transaction are likely to be attributed to such personal guarantor. While the failure by a personal guarantor to obtain independent legal advice is unlikely to be enough to set aside their guarantee, obtaining this advice can help to limit surprises in the event of enforcement.

The Financial Services Group at Aird & Berlis LLP will continue to monitor developments related to the enforcement of personal guarantees and lender obligations. Please reach out to the authors or a member of the group for more information.