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Effect of "conclusive evidence" clause in deed of guarantee

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Amy Edwards

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01 October 2010

Carey Value Added SL (formerly Losan Hotels World Value Added I SL) v Grupo Urvasco SA [2010] EWHC 1905 (Comm), 23 July 2010

In the case of Carey Value Added SL (formerly Losan Hotels World Value Added I SL) v Grupo Urvasco SA, Blair J considered the wording used in a guarantee in order to identify the nature of the obligations of the guarantor.

It was a question of substance, not form, as to whether a guarantor undertook a primary or secondary liability. Outside the banking context there is a presumption against an instrument being construed as an on-demand bond. The judgment contains a useful analysis of wording used in guarantee obligations. Of crucial importance was the wording in the "conclusive evidence" clause. The wording was not specific enough to be construed as certifying the amount due and payable by the guarantor and the guarantee was therefore not an on-demand bond.

In this summary judgment application, Blair J analysed the wording in a guarantee to see whether it constituted an on-demand bond, obliging the guarantor to pay regardless of any defences available between the primary obligor and the claimant. The judgment provides a very useful guide to the factors that a court will take into account when deciding whether or not an instrument is an on-demand bond.

Under a deed of guarantee and indemnity (the deed), Grupo Urvasco AS (guarantor) guaranteed the obligations of its subsidiary Grupo Hotelero Urvasco (borrower) under a loan agreement between the borrower and the claimant, Value Added SL (claimant). As the claimant was an investment fund rather than a traditional lender, the financing was provided by a sale and leaseback transaction in relation to the hotel which the borrower was developing rather than by traditional loan finance. This element of the transaction was provided for in a sale and purchase agreement (the SPA) between the borrower and the claimant.

Following an alleged default within the terms of the loan agreement, the claimant ceased advancing monies and sought repayment of the sums already advanced from the borrower and from the guarantor under the deed. The guarantor submitted that the borrower had the right to rescind the SPA and the exercise of this right cancelled the indebtedness under the loan agreement. Alternatively, the guarantor asserted that the borrower had substantial claims against the claimant for breaches of the loan agreement which the guarantor was entitled to set off against any sums due to the claimant. The claimant contended that on its true construction, the deed was in the nature of a demand bond, thereby creating a primary, independent obligation on the guarantor. Thus, the claimant argued, no defences available to the borrower were available to the guarantor in defence of the claimant’s claim under the deed.

The relevant provisions of the deed read as follows:

"2.   [The Guarantor] irrevocably and unconditionally:

(a)   guarantees to the Losan Entities [that is the claimant] punctual and complete performance by the Obligors [that is the borrower] of the Guaranteed Obligations;

(c)   undertakes with the Losan Entities to be responsible as primary obligor for any failure by an Obligor to perform, discharge or fulfil 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 or 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 [sic] 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."

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

A matter of substance, not form

The key question is whether the guarantor was assuming a secondary liability dependent on the primary liability of the borrower, or whether it was assuming a primary liability independent of the liability of the borrower.

Blair J observed that it is not a matter of the label that has been attached, but a question of the substance of the obligations. 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. 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.

Presumption against demand bond outside banking context

The absence of language appropriate for a demand bond in a transaction outside the banking context creates a strong presumption against the interpretation of the instrument as a demand bond. The use of words such as "on-demand" does not in itself have the effect of creating a demand bond. On the other hand, the avowed purpose of the instrument and the overall context of the contractual arrangements may be relevant in determining whether an "on-demand" type liability has been created.

Construction of the deed

Blair J considered several features of the deed, comparing the wording used with the wording of the on-demand bond in IIG Capital Llc v Van Der Merwe [2008] 2 All ER (Comm) 1173.

Certification and conclusive evidence provision

The critical provision was the certification and conclusive evidence provision.

In IIG Capital, the relevant clause 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".

Clause 20.6 of the Deed of Guarantee and Indemnity provided that: "Any certification or determination by [the claimant] of a rate or amount under any Transaction Document or this deed is, in the absence of manifest error, conclusive evidence of the matters to which it relates".

Blair J held that there is a major difference between a certificate as to "amount" and a certificate as to "amount due and payable". He did not consider it appropriate to construe the clause so as to include the absent words. Clause 20.6 should be construed as referring to the amount advanced, not amounts due and payable immediately. In so far as there is any ambiguity in clause 20.6, it should be resolved in favour of the guarantor. On that basis also, a certificate under clause 20.6 is not conclusive evidence as to liability.

Definition of "Guaranteed Monies"

Under the Deed, the definition of Guaranteed Monies was "all obligations of the Obligors under or in connection with the Transaction Documents".

In IIG Capital the definition of Guaranteed Monies was " … includes not only those monies which HPIE [the borrowers] actually owe IIG but also monies expressed to be due, owing or payable" by HPIE to IIG" [emphasis added].

The wording in the deed was not as wide as the definition of "guaranteed obligations" in IIG Capital. The words "expressed to be due" pointed to a wider liability on the part of the guarantors, ie that their liability was not necessarily co-extensive with that of the borrowers.

Clause 2(d)

Clause 2.1(d) creates an obligation on the guarantor to indemnify the claimant. However the clause is qualified by the proviso that the amount in question shall be equal to the amount that the claimant would otherwise have been entitled to recover under the Loan Agreement. This is more akin to the language of co‑extensive liability, and not indicative of the unqualified liability which arises under a demand bond.

In contrast, in IIG Capital, the on-demand bond provided that "if the Guaranteed Moneys were not paid in full on their due date, it would immediately upon demand unconditionally pay them to the lender".

Blair J concluded that the guarantor had demonstrated that it was certainly arguable that the deed was not an instrument which contained language appropriate to an on-demand bond. The presumption against it being a demand bond had not been rebutted. The claimant was therefore not entitled to summary judgment.

Comment: This judgment, albeit in the context of a summary judgment application, provides a clear warning to anyone involved in the negotiation of guarantees. If a party is seeking an on-demand bond then the wording of the instrument will need to be carefully checked. In particular:

  • use of language such as "liable as primary obligor/principal debtor" will not necessarily be enough;
  • the court will look at the instrument in its entirety to determine whether the wording used is consistent with making the guarantor liable on a primary basis;
  • outside the banking context, there is a presumption that a guarantee is not an on‑demand bond; and
  • guarantees will be construed in favour of the guarantor in the case of any ambiguity.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.