Reference no: EM132489149

Gary operates a restaurant business that is behind on HST remittances ($45,000), rent ($13,000) and has accounts payable accumulating for various food inventory (currently $20,000).  He needs operating funds to continuethe restaurant business.  Gary has applied to Royal Bank of Canada for financing for his restaurant business.

Before it will grant an operating line of credit to Gary, Royal Bank of Canada requires certain security. Among the security that they are seeking are a General Security Agreement over all assets of Gary's restaurant business, an assignment and postponement of any claim Gary has to salary or dividends from the restaurant business, and a Guarantee from an independent person that Royal Bank of Canada will vet.

Gary is aware that his father has significant liquid assets, including registered investments of $450,000, land and buildings worth $1,200,000, a tax free savings account containing $130,000, and cash in savings accounts of about $90,000.  His father worked hard for many years accumulating savings, investing, and spending frugally.  Gary's father is 85, wealthy, but of ill health and failing eyesight.  There are also concerns that he may be suffering early effects of dementia as he often appears confused and forgetful.

As one of 3 children, Gary believes he is entitled to part of his father's estate.  Gary tells his father that he is expanding his restaurant business, that it is doing well, but that he needs a bigger operating line of credit from his bank.  Knowing that his father is not about to willingly give him cash to support his business, and that his father will not agree to guarantee a failing business, Gary tells his father that he needs him to sign a letter of reference in order to help Gary get a short-term operating line of credit. 

Gary does not tell his father the nature of the Guarantee; only that it is a letter of reference to help to assist with the loan process.  Gary does not read the Guarantee to his father; he simply has his father sign the Guarantee at a place where Gary points.

Discuss whether the guarantee is an enforceable contract.  What might RBC do to ensure enforceability?