Article

Note: Grupo Hotelero Urvasco (Borrower/ Subsidiary) developed a hotel site with financing from Carey Value Added, S.L. (Lender/Beneficiary) through a sale and lease-back transaction that was implemented through the following agreements: (1) a Loan Agreement in which Lender/Beneficiary agreed to advance up to UK£70,000,000 in various tranches to Borrower/Subsidiary; (2) a Sale and Purchase Agreement where Lender/Beneficiary purchased shares in Borrower/Subsidiary and applied any sums due under the Loan Agreement to the purchase price with Borrower/Subsidiary's right to repurchase in seven years; and (3) a Deed of Guarantee and Indemnity between Lender/ Beneficiary and Borrower/Subsidiary's parent company Grupo Urvasco, S.A. (Parent/Guarantor).

Lender/Beneficiary disbursed EUR 48 million to Borrower/Subsidiary but ceased paying tranches, claiming that Borrower/Subsidiary had defaulted on the Loan Agreement through delays. Borrower/ Subsidiary claimed that Lender/Beneficiary was in default on the Loan Agreement for the outstanding tranches and therefore rescinded the Sale and Purchase Agreement, canceling Borrower/ Subsidiary's indebtedness under Loan Agreement.

Lender/Beneficiary demanded money from Borrower/Subsidiary under Loan Agreement and from Parent/Guarantor under Deed of Guarantee. When Parent/Guarantor refused, Lender/Beneficiary sued Parent/Guarantor and moved for summary judgment. The High Court of Justice, Queen's Bench Division, Commercial Court, Blair, J., denied summary judgment.

Borrower/Subsidiary argued that the Deed of Guarantee and Indemnity "does not give rise to obligations akin to those imposed by a performance bond." Borrower/Subsidiary pointed to the requirement in the Sale and Purchase Agreement which entitled it to rescind the Agreement "without liability of any kind" and excused it from repaying the loan with the exception of the initial disbursement when there was a failure to advance funds. Parent/ Guarantor contended that this provision operated with respect to claims under the Deed of Guarantee and Indemnity.

Lender/Beneficiary contended that the provision was penal and unenforceable and that the notice was not given until after a demand had been made under the Deed of Guarantee. It also pointed to a clause in the Deed which provided that the obligations of Parent/Guarantor "will not be affected by "any unenforceability, illegality or invalidity of any obligation of any person under the Transaction Documents or any other document or security"."

The Judge noted that "unless the right is expressly excluded, a guarantor can prima facie avail himself of any right of set off possessed by the primary debtor against the creditor".

Lender/Beneficiary argued that the right of set off did not apply where the Deed of Guarantee and Indemnity functions as the equivalent of a "performance bond". Lender/Beneficiary's barrister, Mr. Miles QC pointed out "that characterisation in this regard is bedevilled by terminology, and the Deed is best described, he says, not as a performance bond but as a "demand bond". It is not, however, a matter of the label attached, but a question of the substance of the obligations. (This point is common ground.) The distinction is, he submits, between a primary, independent obligation, and a secondary obligation. He submits that the Deed in this case created a primary, independent obligation, so that the principal debtor's defences are unavailable for set off."

Lender/Beneficiary relied on IIG Capital LLC v. van der Merwe [2008] 2 All E.R. (Comm) 1173 where Waller L.J., opined that the presumption against treating a non bank undertaking as a demand guarantee was overcome by the following terms:

"as principal obligor" "not merely as surety" that "if . . . the guaranteed moneys are not paid in full on their due date . . . it (the guarantor) will immediately upon demand unconditionally pay to the Lender (IIG) the Guaranteed moneys which have not been so paid". The Guaranteed moneys 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 . . . ". The obligation to pay moneys "expressed to be due" "upon demand" "unconditionally" as "principal obligor" "not merely as surety" would indicate that the Van Der Merwes were taking on something more than a secondary obligation.

32. Clause 4.2 then provides 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".

Lender/Beneficiary argued that the issue in the case was whether Parent/Guarantor assumed a secondary liability or a primary independent liability. The Judge agreed in the sense that is was necessary to determine the nature of the Guarantor's obligations under the Deed.

Guarantor's Barrister, Mr. Hapgood QC, argued that Lender/Beneficiary's argument was subject to "a profound conceptual flaw" . . . "to say that someone is primarily liable begs the question of the content of that primary liability. To say that someone is primarily or secondarily liable is meaningless, since it depends on the definition of the liability in question, and in either case, the liability may be co-extensive with that of the underlying debtor and, he submits, is in this case. As to demand bonds, typically these are short instruments (unlike the present Deed of Guarantee and Indemnity), since there is no need for the extensive language found in guarantees to preserve the beneficiary's rights in case of variation of the underlying contract and so forth (this is to be found in clause 6 of this Deed)."

The Judge opined that "the difference between secondary liability and primary liability is not in itself decisive." He noted that "the language of primary and secondary liability is routinely found in the same contracts, and is not in itself a guide to the content of the liability. Thus it has been said, in my view rightly, that the mere incorporation of a principal debtor clause will not usually suffice in itself to determine the nature of the contract. To take the familiar distinction between a guarantee and an indemnity, a principal debtor clause will not automatically convert one into the other (Andrews and Millett, The Law of Guarantees, 5th edn. (2008), 1-014." He noted that "on-demand guarantees or performance bonds" are not guarantees or indemnities but properly analogized to LCs, quoting Gold Coast Ltd v. Caja de Ahorros del Mediterraneo [2002] 1 All ER (Comm) 142 and Edward Owen Engineering Ltd v. Barclays Bank International Ltd [1978] QB 159. Quoting Gold Coast, he noted "There is no standard nomenclature by which such an instrument can automatically be classified however, and the authorities make it clear that the nature of the instrument in question is a matter of construction of the instrument as a whole without any preconceptions as to what it is (Gold Coast at [15], IIG at [7])."

The Judge also stated that "the absence of language appropriate to a demand bond in a transaction outside the banking context creates a strong presumption against the interpretation of the instrument as a demand bond (Marubeni at [30], and IIG at [8] to [9]). Plainly, the use of words such as "on demand" do not in themselves have the effect of creating a demand bond (IIG [2008] 1 All ER (Comm) 435 at [25]). On the other hand, the avowed purpose of the instrument (Hyundai Shipbuilding & Heavy Industries Co Ltd v Poumaras [1978] 2 Lloyd's Rep 502 at 508) and the overall context of the contractual arrangements (Centeon at p. 66) may be relevant in determining whether on-demand type liability has been created. Outside the banking context, IIG is an example of a case which, on the language in question, the presumption referred to in Marubeni was rebutted."

Arguing that the Deed of Guarantee and Indemnity was a "Demand Guarantee", Lender/ Beneficiary noted the following points: i. the obligations are described as being "primary" and by way of "indemnity" and uses the terms "primary obligor" and "on demand", to request payment immediately on demand even if the obligation guaranteed becomes unenforceable; ii. a provision makes certification of the amount due conclusive; and iii. a "range of other terms":

By clause 3.2, the indemnities referred to in the Deed are, "continuing obligations of [Parent/ Guarantor], separate and independent from the other obligations of [Parent/Guarantor] and shall survive the termination of this deed of any Transaction Document [which includes the Loan Agreement]". Thus, it is said, any link between the liability under the Loan Agreement and liability under the Deed is severed. By clause 6(g) of the Deed, the obligations of [Parent/Guarantor] under the Deed are not affected by any act, omission, matter or thing which, but for clause 6, would reduce, release or prejudice any of its obligations under the Deed, including, and whether or not known to it or [Lender/ Beneficiary] (or others), any unenforceability, illegality or invalidity of any obligation of any person under the Transaction Documents or any other document or security. Thus, it is submitted, even if [Lender/Beneficiary] is unable to enforce the Loan Agreement, the Deed of Guarantee and Indemnity remains enforceable. By clause 20.4 of the Deed, all monies payable by [Parent/ Guarantor] under the Deed:

". . . shall be paid in full without set-off or counterclaim of any kind and free and clear of, and without any deduction or withholding of any kind . . ."

Parent/Guarantor noted that the undertaking is not named an "on demand bond"; is expressly stated to be supplemental to the Sale and Purchase Agreement; does not use the phrase "'unconditionally' and 'not merely as a surety'"; is limited to the amount that could have been recovered under the Loan Agreement.

The Judge concluded that "The crucial point in my view, in agreement with [Lender/Beneficiary], is as to the effect of the certification and conclusive evidence provision." Pointing to Bache & Co (London) Ltd v. Banque Vernes et Commerciale de Paris S.A. [1973] 2 Lloyd's Rep 437, the Judge noted the significance of a "conclusive evidence clause". The Judge also referred to The Modern Contract of Guarantee by O'Donovan and Phillips:

Conclusive evidence clauses will be interpreted strictly, with any ambiguity being resolved in favour of the guarantor. Thus, the clause will not readily be construed as being conclusive of the legal existence of the indebtedness or as precluding the guarantor relying on any equitable set off since this operates to reduce or extinguish the claim itself.

The fact that conclusive evidence clauses are strictly construed also means that the guarantor may raise arguments as to whether the document served upon him can properly be described as a "certificate" or "statement" and as to whether the person who has signed the certificate comes within the class of persons authorised to do so.

In conclusion, the Judge stated "[Parent/ Guarantor] has demonstrated, in my judgment, that it is well arguable that this is not an instrument which contains language appropriate to a demand bond. Further, it is a transaction outside the banking context, and subject to the presumption expressed in Marubeni against the interpretation of the instrument as a demand bond. That presumption is not in my view rebutted. I consider that [Parent/Guarantor] has a real (in the sense of a realistic as opposed to fanciful) prospect of successfully defending the claim. It follows that [Lender/Beneficiary] is not entitled to summary judgment."

The following excerpt of the text of the Deed of Guarantee and Indemnity appeared in ¶25:

"[Grupo Urvasco] irrevocably and unconditionally:

(a) guarantees to the Losan Entities [that is Carey] punctual and complete performance by the Obligors [that is Grupo Hotelero Urvasco] of the Guaranteed Obligations;

(b) [this has to do with the lease of the property]

(c) undertakes with the Losan Entities to be responsible as primary obligor for any failure by an Obligor to perform, discharge or fulfill for whatever reason any of the Guaranteed Obligations when due and promptly on demand by any Losan Entity:

(i) fully, punctually and specifically perform or procure to be performed the relevant Guaranteed Obligations as if it were itself a direct and primary obligor to the Losan Entities in respect of such Guaranteed Obligations and be liable as if the Transaction Documents had been entered into directly between the Guarantor and the Losan Entities;

(ii) pay the amount of any Guaranteed Obligation which has not been paid by the relevant Obligor and without any deduction of withholding; and

(d) undertakes with the Losan Entities to indemnify any of them immediately on demand against any cost, loss or liability suffered and expenses incurred by any Losan Entity:

(i) in consequence of an Obligor's failure to perform any of its obligations under the Transactions Documents;

(ii) if any obligation guaranteed by the Guarantor is or becomes unenforceable, invalid or illegal.

The amount of the cost, loss or liability shall be equal to the amount which that Losan Entity would otherwise have been entitled to recover under the Transaction Documents."

26. "Guaranteed Obligations" are defined as in clause 1.1 as "all obligations of the Obligors under or in connection with the Transaction Documents".

[JEB/mcp]

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