When surety bonds are issued, underlying indemnity agreements provided to the surety are required. These indemnity agreements ensure that obligations—whether in construction, commercial contracts, or other ventures—are met, and they provide security to the party relying on that performance. The Guarantee Company of North America v. Raeside offers valuable insight into how surety rights work, and what can happen when the obligations under an indemnity agreement are not fulfilled.

Case Overview

This case revolves around the estate of Vernon S. Bates, who died without a will (intestate) in Michigan. Mr. Raeside, a cousin of Mr. Bates, sought to manage the estate as the personal representative. To do so, the Michigan court required him to post a bond of $4,000,000. A bond like this acts as a safeguard, ensuring that the estate’s assets are properly handled. GCNA issued the bond to Mr. Raeside, who signed a General Indemnity Agreement (GIA) with GCNA.

Mr. Raeside distributed around $7,000,000 to maternal heirs, keeping $500,000 for himself. Later, paternal heirs came forward, claiming part of the estate. The Michigan Probate Court found that Mr. Raeside had improperly distributed funds and ordered him to return the money (a process called disgorgement). When Mr. Raeside failed to comply with this order, GCNA sought collateral under the terms of the GIA.

GCNA applied for summary judgment, asking the court to compel Mr. Raeside to post collateral amounting to $3,585,000 to cover potential liabilities. Mr. Raeside argued that he didn’t understand the indemnity provisions in the GIA, and relief from forfeiture (arguing the financial demand was unfair). The court rejected these defenses and upheld GCNA’s right to enforce the GIA.

The Court’s Decision

The court found that GCNA had fully complied with its obligations under the GIA for two reasons:

1. Setting up a Reserve: The GIA required Mr. Raeside to post collateral if GCNA set up a reserve to cover potential liabilities. After the Michigan court ordered disgorgement and Mr. Raeside failed to return the funds, GCNA established a reserve of $3,585,000 to protect itself against losses and legal fees. This reserve triggered Mr. Raeside’s contractual obligation to post an equal amount in collateral.
2. Proactive Protection: The court noted that the GIA allowed GCNA to demand collateral even before any actual loss occurred. This is a common feature in indemnity agreements, as it ensures that the surety has financial protection in place when a potential liability arises. Since GCNA followed the GIA’s terms by setting up a reserve and properly demanding collateral, the court found no genuine issue that required a trial.

Unsuccessful Defenses: Non Est Factum + Relief from Forfeiture

Non Est Factum

Mr. Raeside claimed he did not fully understand the GIA when he signed it, invoking non est factum, which allows a person to escape liability if they were fundamentally mistaken about the nature of the contract. However, the court dismissed this defense for two main reasons:

1. No Misrepresentation: There was no evidence that GCNA misled Mr. Raeside or that he misunderstood the contract’s basic terms. In fact, Mr. Raeside had the opportunity to read the agreement, which clearly stated it was an indemnity agreement, but he chose not to.
2. Carelessness: The court found that Mr. Raeside’s failure to read or seek legal advice about the GIA was due to his own negligence. Citing Marvco Color Research Ltd v. Harris, [1982] 2 S.C.R. 774, the court reiterated that negligence in understanding contractual terms is not enough to avoid liability.

Relief from Forfeiture

Mr. Raeside also sought relief from forfeiture, arguing that enforcing the collateral demand would impose a severe financial burden on him and his spouse. The court denied this defense for the following reasons:

1. Discretionary Remedy: The court emphasized that relief from forfeiture is granted sparingly and typically only in cases where enforcing the contract would lead to inequitable results. In this case, Mr. Raeside’s conduct—especially his failure to comply with the court’s disgorgement order—was deemed unreasonable.
2. Failure to Meet Criteria: The court concluded that Mr. Raeside’s actions did not meet the high standard required for relief from forfeiture, as he failed to demonstrate that GCNA’s demand was unjust or unfair.

Takeaways

This case highlights the importance of understanding and complying with indemnity agreements. When such an agreement is in place, the surety's rights are strongly protected, and defenses like non est factum or relief from forfeiture require substantial proof to succeed. It serves as a clear reminder that negligence or failure to meet contractual obligations can result in significant financial liabilities for those involved in any industry where indemnity agreements are required.

If you’re dealing with complex surety and/or indemnity agreements, it’s critical to seek legal advice. Contact Anthony Burden orJordan Lalonde in Calgary, Ryan Krushelnitzky in Edmonton, or any member of Field Law's Construction Group for guidance and assistance in this area.

Link to decision: The Guarantee Company of North America v. Raeside, 2024 ONSC 4902