Article

Factual Summary: To assure repayment of loans to enable Borrower to engage in startup financing of exporters, Lender/Beneficiary required company Directors to provide "Deeds of Guarantee". An excerpted text of these Guarantees from the opinion is given below.

When Borrower failed to repay the loan as due, Beneficiary made demand on the Guarantors for US$30,303,576. When Guarantors failed to honor their guarantees, Beneficiary sued them for wrongful dishonor. The trial court entered summary judgment for Beneficiary. On appeal, the judgment was affirmed.

Legal Analysis:

1. Independence; Independent Guarantee

Guarantors argued that the undertaking was not an "on demand guarantee" but one under which they were secondarily liable and entitled to notice of any demand on the principal debtor. Waller, LJ, noted agreement that "it ultimately depends on the true construction of the agreement whether a particular label is the right one to apply to any instrument" and that the instrument must be read as a whole. The Judge noted agreement among the authorities that emphasize "the context in which any instrument comes into being is important. Thus performance bonds given by banks are almost invariably construed as imposing a liability on the bank to pay, whatever dispute there may be on liability under the underlying contract". The Judge quoted from Carnwath LJ in Van Der Merwe v. IIG Capital LLC, [2007] EWHC (Ch) 2631 (Eng.), that performance bonds "have been accepted by the courts as the equivalent of irrevocable letters of credit". The Judge also noted a strong presumption against deeds of guarantee being treated as demand bonds in a non-banking context.

The Judge also noted that "[t]here is no doubt that in a contract of guarantee parties may, if so minded, exclude any one or more of the normal incidents or suretyship. However if they choose to do so clear and unambiguous language must be used to displace the normal legal consequence of the contract..." The Judge accepted that "there is a presumption against [deeds of guarantee] being demand bonds or guarantees" and that "the documents must be looked at as a whole". The Judge recognized that Clause 3 (below) related to a secondary undertaking and that "there are other terms which appear in what [the Judge] would call normal guarantees given to banks in relation to a customer's indebtedness".

Looking to what he described as the "operative language" of the undertaking, the Judge made several observations. Under Condition 2.1 (below), the Judge found that Guarantor agreed "'as principal obligor'" and "'not merely as surety'" that "if. . .the guaranteed moneys are not paid in full on their due date. . .[Guarantor] will immediately upon demand unconditionally pay to the Lender (IIG) the Guaranteed moneys which have not been so paid'". The Judge noted that "the guaranteed monies are defined as 'all moneys and liabilities. . .which are now or may at any time hereafter be due, owing or payable or expressed to be due owing or payable, to the Lender from or by the borrower...'" Accordingly, the Judge observed that "[t]he obligation to pay monies 'expressed to be due' 'upon demand' 'unconditionally' as 'principal obligor' and 'not merely as surety' would indicate that [Guarantors] were taking on something more than a secondary obligation". With regard to Clause 4.2 which provided that "A certificate in writing signed by a duly authorised officer...stating the amount at any particular time due and payable by the Guarantor. . . shall save for manifest error, be conclusive and binding on the Guarantor for the purposes hereof", the Judge agreed with the trial judge that "[a]ny presumption has by the language used been clearly rebutted and "[a]part from manifest error, the [Guarantors] have bound themselves to pay on demand as primary obligor the amount stated in a certificate pursuant to clause 4.2".

The Judge stated that an exception to Guarantors' obligation would arise only if a "manifest error" occurred as stipulated in Clause 4.2. The Judge defined "manifest error" as one which is "obvious or easily demonstrable without extensive investigation". In agreement with the trial judge, he determined that there had been no such error in the certificate.

The Judge also described the provisions in Clause 4.2 as a "conclusive evidence clause". The Judge stated that such clauses were to be strictly construed but were enforceable.

2. Guarantees, Indemnity

Guarantors argued that the undertakings did not provide for them to be indemnified by the principal debtors and, so, should not be primary. The Judge stated: "I am not persuaded that the company would not be bound to indemnify the [Guarantors]. It seems to me that where a loan agreement requires the giving of guarantees whether on-demand guarantees or only secondary liability guarantees of that loan, a call and payment of what is found to be due from the guarantors will lead almost certainly to a right of indemnity from the company if the guarantee has to be paid. Furthermore I am inclined to the view that even if there is no express contract negotiated between the [Guarantors] and the company it is strongly arguable that the [Guarantors] will have a remedy against the company and in my view if the company refused to seek return of the overpayment, the guarantors would have a right of subrogation by which they could force IIG to pay back sums found to have been overpaid". He also observed that "strictly what precise mechanism there might be for repayment is not the most relevant question when considering what the guarantees themselves require".

Comment:

1. It is surprising that such a detailed analysis should be required regarding the character of the undertaking. That it is necessary results from the use of a device, a guarantee, which is inherently ambiguous. One wonders that parties do not either use standby letters of credit as to which there is no ambiguity or use a form or rely on rules such as ISP98 that would have made their independent character unambiguous.

The Terms of the Guarantee from the Text of the Opinion:

The following is Mrs. Van Der Merwe's guarantee. The Judge noted that Mr. Van Der Merwe's was identical:

"I can again take the description and relevant terms from the judge's judgment. He describes Mrs Van Der Merwe's guarantee but it is common ground that Mr Van Der Merwe's was in identical terms: 6. The guarantee begins by describing itself as "THIS GUARANTEE" and Mrs Van Der Merwe is described as "the Guarantor". Recital (A) records the grant of the facility to HPIE (described as "the Borrower") of US $23,000,000. Recital (B) says that it was a condition precedent to the grant of the facility that the "Guarantor enters into this Guarantee of the obligations of the Borrower to the Lender under the [Loan] Agreement". Recital (C) says that the guarantee is an "all monies" guarantee.

7. The document contains a single definition in clause 1.2. The defined term is "Guaranteed Monies" and the definition is:

"(i) all moneys and liabilities (whether actual or contingent) which are now or may at any time hereafter be due, owing, payable, or expressed to be due, owing or payable, to the Lender from or by the Borrower (ii) all interest... costs, commissions, fees and other charges and expenses which the Lender may charge against the Borrower; and (iii) all legal and other costs, charges and expenses which the Lender may incur in enforcing or obtaining, or attempting to enforce or obtain, payment of any such moneys..."

8. Clause 2 contains the main payment obligation and reads:

"In consideration of the Lender agreeing to enter into the Agreement, the Guarantor as principal obligor and not merely as surety unconditionally and irrevocably:

2.1 guarantees to the Lender the due and punctual payment of the Guaranteed Moneys and agrees that, if at any time or from time to time any of the Guaranteed Moneys are not paid in full on their due date... it will immediately upon demand unconditionally pay to the Lender the Guaranteed Moneys which have not been so paid

2.2 As an original and independent obligation under this Deed, the Guarantor shall

2.2.1 indemnify the Lender and keep the Lender indemnified against any loss... incurred by the Lender as a result of a failure by the Borrower to make due and punctual payment of any of the Guaranteed Monies..."

9. Clause 3 is headed "Preservation of Guarantee" and provides:

"3.1 The Lender shall be at liberty without thereby affecting its rights hereunder at any time at its absolute discretion and with or without the consent or knowledge of or notice to the Guarantor:

3.1.1 to give time to any Obligor for the payment of all or any sums due or payable under the Agreement or any other Finance Document;

3.1.2 to neglect or forbear to enforce payment of all or any sums due or payable under the Agreement or any other Finance Document and (without prejudice to the foregoing) to grant any indulgence or forbearance to and fail to assert or pursue or delay in asserting or pursuing any right or remedy against any Obligor thereunder;

3.1.3 to accept, vary, exchange, renew, abstain from perfecting, or release any other security now held or to be held by it for or on account of the Financial Indebtedness;

3.1.4 to amend, add to or vary the terms of the Finance Documents;

3.1.5 to compound with, accept compositions from and make any other arrangements with any other Obligor.

3.2 This Guarantee and the rights of the Lender hereunder shall not be affected by:

3.2.1 the appointment of a receiver, trustee or similar officer of any other Obligor, its undertaking or all or any of its or his asset.

3.2.2 Any alteration of the status of any other Obligor or any defective or irregular exercise of the powers of the Borrower to raise finance

3.2.3 The insolvency, bankruptcy, death, incapacity, winding up, liquidation or dissolution of any other Obligor;

3.2.3 Any failure by the Lender to take any other security for all or any part of the indebtedness agreed to be taken by the Lender pursuant to the Finance Documents or any total or partial invalidity, voidability or unenforceability of any such security;

3.2.4 The doing by the Lender of anything referred to in clause 3.1 above; or

3.2.5 Any other act or circumstance which (apart from this provision) would or might constitute a legal or equitable defence for or discharge of a surety or guarantor, and this Guarantee may be called and/or enforced without steps or proceedings first being taken against any other Obligor."

10. Clause 4.2 provided that:

"A certificate in writing signed by a duly authorised officer or officers of the Lender stating the amount at any particular time due and payable by the Guarantor under this Guarantee shall, save for manifest error, be conclusive and binding on the Guarantor for the purposes hereof."

11. Clause 5 said that the guarantee was "a continuing guarantee" and would remain in force until all sums "due from the Borrower under the Finance Documents have been paid in full". Clause 7.3 prevented the Guarantor from asserting any set-off against the Borrower. Finally, clause 14 said that the guarantee was to be governed by English law."

[JEB/as]

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