North Shore Ventures Ltd v Anstead Holdings, Inc & Ors

Factual and Procedural Background

The Plaintiff, Company A, incorporated in the British Virgin Islands in January 2003 and owned by individual A or individual B, entered into a written Loan Agreement dated 14th March 2003 with the first Defendant, Company B, also incorporated in the British Virgin Islands in 2000 and owned by individuals C and D. Under the Loan Agreement, Company A granted Company B a $50 million dollar term loan facility with specified terms regarding use of advances, interest rates, payment accounts, and repayment conditions.

Individuals C and D guaranteed the obligations of Company B under the Loan Agreement by a Deed of Guarantee and Indemnity executed on the same date. The Guarantee included joint and several liability provisions, definitions of indebtedness, a conclusive evidence clause for certificates issued by Company A, and clauses limiting discharge or diminution of the Guarantors' liability.

Between April and July 2003, Company B drew down the full $50 million. Subsequent sequestration orders affected certain bank accounts holding the loaned funds. Company A demanded repayment of principal and interest on several occasions, and by December 2007, Company B had repaid the principal with interest totaling over $7 million.

In May 2008, Company A demanded further sums totaling approximately $34.9 million, calculated as interest and default interest compounded monthly from April 2004 to May 2008. Similar demands were made on the Guarantors, accompanied by a certificate of indebtedness issued by the director of Company A.

After no payments were made, Company A issued a claim form in August 2008 against Company B and the Guarantors. Judgment in default of defence was obtained against Company B for the claimed sum. The action against the Guarantors proceeded to trial, where they raised defences including non-disclosure of material facts by Company A and an alleged variation of the Loan Agreement concerning the interest rate and calculation method.

The trial before Judge [Newey] took place over thirteen days in March and April 2010. The judge rejected the Guarantors' defences and ordered them to pay over $52 million to Company A. The Guarantors appealed with permission, challenging several of the judge's conclusions, while Company A cross-appealed on the duty of disclosure issue.

Legal Issues Presented

1. What is the extent of the duty of disclosure owed by a creditor to a prospective guarantor in relation to unusual features of the contractual relationship between the creditor and debtor?
2. Whether the Loan Agreement was validly varied in November 2004 to alter the interest terms and, if so, whether that variation was supported by consideration.
3. Whether clause 3.4 of the Guarantee precludes the Guarantors from relying on the alleged contractual variation as a defence to the claim.
4. Whether the certificate of indebtedness issued by Company A was manifestly incorrect and thus not conclusive evidence of the amount owed.

Arguments of the Parties

Appellants' (Guarantors') Arguments

• The Guarantee should be set aside or is unenforceable due to Company A's failure to disclose material facts, including investigations and freezing of accounts related to individual A and associates, which posed a substantial risk to the loaned funds.
• The interest rate under the Loan Agreement was varied by agreement between Company A and Company B in November 2004 to a fixed 15% payable annually without default interest or monthly compounding.
• The certificate of indebtedness issued by Company A was manifestly incorrect as it did not reflect the variation and thus should not be conclusive evidence of indebtedness.

Respondent's (Company A's) Arguments

• Company A denied the allegations of non-disclosure and relied on exclusion clauses in the Guarantee (clauses 5.4 and 5.5) to preclude any defence based on non-disclosure.
• The alleged variation of the Loan Agreement was not legally binding due to lack of consideration.
• Clause 3.4 of the Guarantee rendered the certificate of indebtedness conclusive evidence of the amount owed, precluding reliance on any variation.
• Company A contended that no duty to disclose the alleged facts arose because they were not unusual features of the contractual relationship or were known to the Guarantors.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by examining the duty of disclosure owed by the creditor to the Guarantors. It reviewed a line of established authorities, emphasizing the principle from Hamilton v Watson that the creditor's disclosure obligation is limited to unusual features of the contractual relationship between creditor and debtor that the surety would not naturally expect. The court rejected the broader duty suggested by the trial judge, concluding that the duty does not extend beyond such unusual features.

Applying this principle, the court found that the facts the Guarantors claimed should have been disclosed—investigations and freezing of assets related to individual A—were not unusual features of the contractual relationship and thus no duty to disclose arose. The court also held that if the Guarantors knew or were reasonably expected to know these facts, the issue of non-disclosure did not arise.

Regarding the alleged November 2004 variation of the Loan Agreement's interest terms, the court applied the objective test for contract variation and concluded that a valid variation was made, supported by consideration in the form of a compromise of dispute between the parties. This reversed the trial judge's finding that no consideration existed.

On the effect of clause 3.4 of the Guarantee, which provides that a certificate of indebtedness issued by Company A is conclusive evidence of the amount owed, the court held that such clauses must be strictly construed in favor of the Guarantors. The Guarantors agreed to pay the actual indebtedness of Company B, not simply the amount certified. The certificate was limited to quantum and could not conclusively determine the existence or legal effect of contractual variations.

The court found that the certificate was manifestly incorrect on its face because it did not reflect the valid variation reducing the indebtedness. Accordingly, the Guarantors were entitled to rely on the variation as a defence and to challenge the amount certified.

In summary, the court allowed the appeal in part, reducing the Guarantors' liability to approximately $32 million, reflecting the effect of the valid variation, and rejecting the broader duty of disclosure advanced by the trial judge.

Holding and Implications

The court's final decision was to ALLOW THE APPEAL IN PART. The Guarantors' liability under the Guarantee was reduced from approximately $52.5 million to about $32 million, reflecting the valid contractual variation of the Loan Agreement's interest terms in November 2004.

The court reaffirmed the established principle that a creditor's duty to disclose to a prospective guarantor is limited to unusual features of the contractual relationship that the guarantor would not naturally expect. It rejected any broader duty to disclose general risks or facts not constituting unusual contractual features.

The decision clarifies the scope of disclosure obligations in guarantee contracts and confirms that conclusive evidence clauses in guarantees are strictly construed and do not preclude a guarantor from relying on manifest errors such as valid contractual variations not reflected in certificates.

No new precedent was set beyond the application and clarification of existing principles. The ruling directly affects the parties by adjusting the Guarantors' financial liability and confirms the limits of disclosure duties and the effect of certificate clauses in guarantees.