Factual and Procedural Background
This appeal arises from the judgment of Judge Lewison dated 13th November 2007, dismissing an appeal from a summary judgment granted by Master Teverson on 19th September 2007. The summary judgment was awarded in the sum of $31,882,541.96 against the Appellants, directors of Company A, in favor of Company B. Company B had entered into a loan agreement with Company A, and the Appellants executed deeds of guarantee in favor of Company B. The Appellants sought to rely on defences available to Company A, including expert evidence of foreign law requiring good faith and reasonable notice of demand, which Company B disputed on grounds that the guarantees excluded such defences. The Master and Judge Lewison agreed with Company B’s construction of the guarantees. Permission to appeal was granted due to potential wider ramifications of the security instrument's construction.
The loan agreement, governed by foreign law, was made between Company B and Company A, with the Appellants providing guarantees. Company B demanded repayment from Company A and, upon non-payment, demanded payment from the Appellants under the guarantees. The guarantees were described as "all monies" guarantees and contained provisions that the Appellants were principal obligors, not mere sureties, with payment obligations triggered upon demand supported by a certificate from authorized officers of Company B.
Legal Issues Presented
- Whether the deeds of guarantee executed by the Appellants imposed a primary liability independent of the liability of Company A, or a secondary liability dependent on Company A's liability.
- Whether the Appellants could rely on defences available to Company A under the loan agreement, including those arising under foreign law implying a covenant of good faith and fair dealing requiring reasonable notice of demand.
- The proper construction and effect of conclusive evidence clauses within the guarantees, particularly relating to certificates of amounts due.
- The extent to which the Appellants might have remedies against Company A, including rights of indemnity or subrogation, in the event of overpayment under the guarantees.
Arguments of the Parties
Appellants' Arguments
- The Appellants relied on foreign law, under which a covenant of good faith and fair dealing implied a requirement that Company B give reasonable notice of demand, which had not been given.
- They contended that the guarantees should be construed as imposing a secondary liability, allowing them to raise defences available to Company A.
- It was argued that if the demand was excessive, the Appellants should be entitled to challenge the certificate of amount due on grounds of manifest error.
- They submitted that the law would not imply an indemnity from Company A to the Appellants for any overpayment, and the Appellants should be allowed to raise any such claims now.
Company B's Arguments
- Company B argued that the guarantees imposed a primary obligation on the Appellants as principal obligors, excluding defences available to Company A.
- They submitted that the language of the guarantees, including the conclusive evidence clause, clearly required payment upon demand supported by a certificate, save for manifest error.
- Company B contended that any right of indemnity or subrogation against Company A was a matter between the Appellants and Company A and should not affect Company B's right to enforce the guarantees.
- They emphasized the commercial context and the clarity of the guarantee's language, asserting that the Appellants should have protected themselves against any risk of overpayment.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Holme v Brunskill (1878) 3 QBD 495 |
Defences available to a guarantor as secondary obligor. |
Referenced by Appellants to support reliance on defences available to the primary obligor; court found it inapplicable due to the primary liability language in the guarantees. |
| Marubeni Hong Kong and South China Limited v Mongolian Government [2005] 1 WLR 2497 |
Distinction between primary and secondary liability in guarantees; presumption against interpreting guarantees as demand bonds outside banking context. |
Guided the court's approach to construction of the guarantees, confirming the presumption against demand bond interpretation unless clear language displaces it. |
| Bache v Banque Vernes [1973] 2 Lloyds Rep 437 |
Validity and effect of conclusive evidence clauses in guarantees. |
Supported the enforceability of the conclusive evidence clause in the guarantees, binding the guarantors to amounts certified absent manifest error. |
| Trafalgar House Limited v General Surety Co [1996] 1 AC 199 |
Distinction between guarantee and on-demand bond; requirement for clear language to exclude normal suretyship incidents. |
Applied to analyze whether the guarantees imposed primary or secondary liability; court found no clear language excluding normal legal consequences of suretyship. |
| Workington Harbour & Dock Board v Trade Indemnity Co Ltd (No 2) [1938] 2 All ER 101 |
Requirement for damages to be established in guarantee claims; normal legal incidents of suretyship. |
Quoted to illustrate the principle that guarantees usually require proof of damages, relevant to interpreting the guarantees' language. |
| Hyundai Shipbuilding & Heavy Industries Co Ltd v Pournaras [1978] 2 Lloyd's Rep 502 |
Clear and unambiguous language required to exclude normal legal incidents of suretyship. |
Referenced to support the necessity of clear language to displace normal legal consequences; the guarantees did not contain such clear language. |
| Cargill International SA v BSFIC [1998] 2 All ER 406 |
Indemnity and rights of recovery between guarantors and principal obligors. |
Relied upon by Company B to argue that the Appellants would have a right to indemnity from Company A for payments made under the guarantees. |
| Invensys plc v Automotive Sealing Systems Ltd (8 November 2001) |
Interpretation of "manifest error" in conclusive evidence clauses. |
Distinguished by the court because the certificate in the instant case did not require reasons, limiting scope for manifest error challenge. |
Court's Reasoning and Analysis
The court began by emphasizing the importance of construing the guarantee documents as a whole and without preconceptions about their nature. It acknowledged the presumption against construing guarantees as demand bonds outside the banking context, relying on established authority. However, the court found that the operative language of the guarantees, particularly clause 2.1, unequivocally imposed a primary obligation on the Appellants as principal obligors, not merely as sureties.
The conclusive evidence clause (clause 4.2), stating that a certificate from authorized officers of Company B as to the amount due would be binding except in cases of manifest error, was pivotal. The court agreed with the lower courts that the clause rebutted the presumption against demand bonds and bound the Appellants to pay the certified sum on demand.
The court considered the Appellants' argument that manifest error could be raised to challenge the certificate but found no merit in this argument, noting the absence of any requirement for reasons to accompany the certificate, which limited the ability to demonstrate manifest error.
Regarding the Appellants’ contention that they should not be liable without a corresponding right of indemnity from Company A, the court found it strongly arguable that such a right of indemnity or subrogation would exist in law or equity. Nonetheless, the court held that the guarantees themselves clearly required payment of the certified amount regardless of such arrangements, and it was the Appellants’ responsibility to protect themselves accordingly.
The court also noted that the Appellants had not sought a stay of enforcement pending trial on the underlying defences of Company A, which would have required detailed consideration of the strength of those defences under foreign law.
In summary, the court upheld the construction that the Appellants assumed a primary, unconditional obligation to pay the amounts certified by Company B, and the defenses available to Company A were excluded by the terms of the guarantees.
Holding and Implications
The court DISMISSED THE APPEAL, affirming the judgment that the Appellants are liable under the deeds of guarantee as principal obligors for the amounts certified by Company B.
The direct consequence is that the Appellants must pay the sums demanded under the guarantees without recourse to defences available to Company A. The court did not set new precedent but confirmed established principles regarding the construction of guarantees, particularly the effect of conclusive evidence clauses and the distinction between primary and secondary liability. The decision underscores the importance for guarantors to carefully consider and protect their position when entering into guarantees described as primary obligations.