June 15, 2023
If you sign an irrevocable direction to pay money to another person, or are the person subject to the direction to pay, you should take it seriously.
THE ISSUE
An irrevocable direction may create a contract between the person signing the direction and the beneficiary of the direction, and also bind the intermediary holding or receiving the money to honour that contract.
Like contracts generally, much turns on the wording of the document.
THE CASE
So says the Ontario Court of Appeal in Kemeny v. Callidus Capital Corporation which also discusses the circumstances in which a direction may be a guarantee. It relies on an earlier Superior Court decision, Bridgepoint Financial Services Limited Partnership I v. Galamini, in which a comment is made that the direction in issue was not a guarantee – if the person (in that case a lawyer) did not receive funds, they had no obligation to pay. The effect of the direction in Bridgepoint, as in Kemeny, was to require payment once the money was received. As the Court of Appeal points out, the comments in Bridgepoint about guarantees ultimately did not apply to the facts before the court in either case.
The Court said that the obligation of the entity signing the direction was:
if loan proceeds were advanced, it was obliged to pay the respondent’s fee directly to him out of the first advance of funds. The Irrevocable Direction was not a guarantee by the appellant of the respondent’s fee. The appellant was not required to pay the respondent’s fee out of its own pocket. …Had loan funds not been advanced, the appellant would not have had any obligation. But as loan funds were advanced, the appellant was obliged to comply with its agreement in the Irrevocable Direction to pay the respondent his fee directly from the first advance of the loan funds.
So there is a difference between a guarantee and an irrevocable direction. This is not a surprise. In theory though an irrevocable direction may contain a guarantee in some situations, which is why it is always important to pay attention to the specific wording of the document. Although a particular person may create multiple irrevocable directions in the same wording, there is no standard wording used generally in the financial industry or in law offices.
In addition to the specific wording of the document, the court will consider all of the surrounding facts and apply common sense. This will include the negotiations leading up to the signing of the irrevocable direction.
One key fact in the Kemeny reasoning was that the lender had designated the funds to pay prior debts, so that the new lender would be in first priority. Despite this, both the trial judge and the Court of Appeal ruled that the irrevocable direction governed in priority to that designation. The subsequently negotiated terms of the loan did not change the obligation under the direction.
Another feature of the decision in Kemeny is that the funds subject to the direction are treated as trust funds in the hands of the payor. That characterization creates the obligation to pay in priority to the loan contract, since the lender acts as a trustee, under a trust that requires payment under the direction out of the funds to be loaned. This applies even where it does not involve a lawyer’s trust account.
For the commercial situation to work – in this case, a consultant deferring their finder’s fee; in Bridgepoint, the repayment of a loan – the beneficiary expecting the funds needs to know that the terms of the agreement will be taken seriously, and that it will take exceptional circumstances to defeat their expectations. Otherwise, work will not be done, and funds will not be advanced.
TAKEAWAYS
- Irrevocable directions should be taken seriously;
- Irrevocable directions may be irrevocable;
- Irrevocable directions will be interpreted in accordance with their language and the surrounding circumstances;
- Irrevocable directions make create a contract;
- Irrevocable directions may also create a trust;
- Courts will interpret irrevocable directions in a manner that makes commercial sense;
- Because the language of the direction is important, it may be wise to seek experienced legal advice on the wording;
- To understand your obligations under an irrevocable direction, you should obtain legal advice both before signing, and at the time payment is required or demanded.
HOW WEILERS LLP CAN HELP YOU
The real estate and commercial transaction lawyers at Weilers LLP carry on our proud tradition of advising clients about the risks and obligations that they are undertaking before they sign a direction. We are experienced at drafting directions tailored to suit your specific needs.
If difficulties arise, we work with our clients and their other advisors to attempt to resolve the problems.
If the problems cannot be resolved on a friendly basis, then our litigation lawyers may be able to assist with damage control. They understand the importance of facts, the law of evidence, and how to achieve results in Thunder Bay courts.
If you find yourself needing advice about your risks or obligations under an irrevocable direction, it is best to seek the advice early. Feel free to give Weilers LLP a call and see if we are the right lawyers for you.