MacRoberts Banking & Corporate e-update 02/07/08

GUARANTORS - BE WARNED!
IIG Capital LLC v Van Der Merwe & Anor [2008] EWCA Civ 542

This recent case serves as a reminder that great caution should always be exercised
when agreeing to grant guarantees. The case went to the Court of Appeal on 2nd April
2008 where the decision of the High Court was upheld.

The facts of the case are as follows: Mr and Mrs Van Der Merwe were directors of
Hurst Parnell Import & Export Limited (HPIE), a fresh fruit and vegetable import
company which borrowed funds from IIG Capital LLC (IIG). The Loan Agreement
documenting this loan was supported by a guarantee provided by each of Mr and
Mrs Van Der Merwe, as well as by a debenture over all of HPIE's assets. IIG
demanded repayment of the sum of $30,303,576 which was stated by IIG to be due
under the terms of the Loan Agreement. The money was not paid by HPIE and as a
result, IIG sent letters of demand to the guarantors but the money remained unpaid.

Key to the determination of the case was the argument as to whether the document
in question constituted a guarantee or a performance (or on demand) bond. The term
"guarantee" is a promise to perform a contract or to ensure that a contract is
performed following the default of the primary obligor. If said primary obligor has
defences to liability then these are equally available to any guarantor (subject to any
waiving of defences in the guarantee itself). In contrast, a performance, or on
demand, bond is a direct primary undertaking to pay a specific amount to someone
on the occurrence of a particular event, most often triggered by the production of a
notice that the underlying obligor is in default and specifying the amount due. A
classification by the court of the document in question as a guarantee would provide
the Van Der Merwes with the same defences that would have been available to HPIE
in respect of the underlying obligation under the Loan Agreement, whereas a
classification as an indemnity would rule out any such defences.

The fact that the Guarantors were individuals would usually have created a strong
presumption that what was intended was a guarantee. However, the court rebutted
this presumption because, despite the existence of such presumption and the
document being called a guarantee, the key issue in determining the nature of liability
under a document was the construction of the document itself to enable the intention
of the parties to be identified. In this case, the relevant points in construing the
document and the parties' intentions were:

• the fact that Mr and Mrs Van Der Merwe were described in the document as
  undertaking obligations as "principal obligor and not merely as surety";
• that the Guarantors were obliged to "immediately upon demand unconditionally pay
  to the Lender the Guaranteed moneys" which included not only moneys owed to IIG
  but also moneys "expressed to be due, owing or payable"; and
• that wording appeared to the effect that liability was triggered on IIG issuing a
  certificate of indebtedness which was said to be "conclusive and binding" on the
  Guarantors in the absence of "manifest error".

These provisions formed the main focus of the judgement on the basis that it was
considered that such wording inferred an intent to create an obligation to pay as
principal obligor an amount demanded by IIG and certified by IIG to be due. The
court determined that this was therefore characteristic of an on demand bond and as
such Mr and Mrs Van Der Merwe were wholly liable for the amount claimed by IIG
under the document, without resort to the defences that would have been available to
HPIE.

It should be noted that provisions in the relevant document considered by the court
are fairly standard provisions in very many documents expressed to be guarantees
and this brings into sharp focus the risks that parties granting such documents may
face in terms of potential liabilities.

There is limited authority on this subject in Scotland but it is likely that IIG Capital
LLC v Van Der Merwe will be a persuasive authority in the Scottish Courts.

If you require any further information please contact Norman Martin on 0131
229 5046

© MacRoberts LLP 2008