North Shore Ventures Ltd v Anstead Holdings, Inc & Ors

The claimant, North Shore Ventures Ltd (“North Shore”) was incorporated in the British Virgin Islands in January 2003. It was and is owned and controlled by Mr Boris Berezovsky or his daughter Ms Ekaterina Berezovskaya. By an agreement in writing made on 14th March 2003 (“the Loan Agreement”) between North Shore (1) and the first defendant Anstead Holdings Inc (“Anstead”) (2) North Shore granted to Anstead a dollar term loan facility in an aggregate amount of $50m. The terms of the loan facility included the following:

Anstead had been incorporated in the British Virgin Islands in 2000. It was owned and controlled by Mr Ruslan Fomichev and Mr Vasily Peganov. The former was a business associate of Mr Boris Berezovsky. By a Deed of Guarantee and Indemnity (“the Guarantee”) made on 14th March 2003 between Messrs Fomichev and Peganov (“the Guarantors”) (1) and North Shore (2) it was provided that:

Between 3rd April and 2nd June 2003 Anstead drew down $27m. On 23rd July 2003 Anstead drew down the remaining $23m. On 7th August 2003 the latter sum was transferred to a new account of Anstead with CIM Banque (account no:604.869). On 26th September 2003 a sequestration order was made in respect of that account by the Federal Swiss Public Prosecutor. $5m were released on 2nd October 2003. On 1st February and 1st August 2005 North Shore demanded repayment of the respective sums of $20m and $30m. A further $4,452,976 was released from the sequestration on 16th July 2007 and the balance on 12th December 2007. By the latter date the whole of the principal amount of $50m had been repaid by Anstead to North Shore together with $7,177,076 interest.

On 28th May 2008 solicitors for North Shore demanded payment by Anstead on or before 6th June 2008 of further sums alleged to be due under the Loan Agreement amounting in all to $34,894,207. The calculation enclosed with the letter demonstrated that the claim related to interest at 15% and default interest at 20% compounded monthly from 4th April 2004 to 27th May 2008. On 30th May 2008 the same solicitors wrote to each of the Guarantors claiming the like sum from each of them as guarantors under the Guarantee. Enclosed with those letters were copies of the letter dated 28th May 2008 sent to Anstead, including the calculations, and a document dated 30th May 2008 issued by the sole director of North Shore, Mainstay Services Ltd purporting to be a certificate of indebtedness. The latter document stated:

No further payments to North Shore were made by Anstead or the Guarantors. On 20th August 2008 the claim form in this action was issued by North Shore against Anstead and each of the Guarantors claiming the aggregate sum due under the Loan Agreement and Guarantee of $35,393,008. On 27th February 2009 North Shore obtained judgment in default of defence against Anstead for $35,393,008. As against the Guarantors the action proceeded to trial on the basis of a re-amended defence and counterclaim dated 22nd March 2010. The defences thereby raised included the following:

The action was heard by Newey J over 13 days between 19th March and 20th April 2010. For the reasons given in his judgment handed down on 21st June 2010 he rejected both defences and ordered the Guarantors to pay $52,508,734 (being $34,894,207 principal and $17,614,527 interest) to North Shore. His reasons, so far as relevant to this appeal were:

The judge concluded in paragraph 100 of his judgment that North Shore knew the relevant facts (there being no dispute as to their existence) it is alleged that it should have disclosed to the Guarantors but did not. He also concluded that Mr Fomichev (paragraph 175(iii)-(vii)) knew and that Mr Peganov might be reasonably expected to know (paragraph 175(ix) and (x)) of those facts. In the light of his conclusion on the law, summarised in paragraph 6(2), the judge held that neither guarantor was entitled to set aside the Guarantee. On this appeal the Guarantors contend that the judge’s conclusion summarised in paragraph 6(2) is wrong in law with the consequence that the facts should have been, but were not, disclosed by North Shore to Mr Peganov. Accordingly, Mr Peganov is entitled to set aside the Guarantee and, as it was always intended to be a joint and several guarantee, Mr Fomichev is entitled to do so too. North Shore responds by asserting that the judge was wrong in his conclusion summarised in paragraph 6(1) with the consequence that there was no obligation on North Shore to disclose any of the facts relied on to either Guarantor.

It is not in dispute that a creditor is under some duty of disclosure to a prospective surety, the issue is its extent. It is also common ground that the extent of the duty is to be ascertained from the line of cases to which we and the judge below were referred. They are, in chronological order, Hamilton v Watson (1845) 12 Cl & F 109; Lee v Jones (1864) 17 CB(NS) 481; London & General Omnibus Co. Ltd v Holloway [1912] 2 KB 72; Smith v Bank of Scotland 1997 SC (HL) 111; Royal Bank of Scotland v Etridge (No.2) [2002] AC 773 and Palmer v Cornerstone Investments & Finance Co.Ltd [2007] UKPC 49. In the course of argument two other cases were referred to which I will mention at the appropriate chronological point. They are National Provincial Bank v Glanusk [1913] 3 KB 335 and Lloyds Bank Ltd v Harrison (1925) Legal Decisions affecting Bankers Vol.4 p.12. Before referring to any of them it is appropriate to make the trite observation that the judgments must be read as a whole and in the light of the facts of that particular case. I do so because there was a tendency in the course of argument to select specific passages and subject them to the scrutiny more appropriate to a statute.

In Hamilton v Watson (1845) 12 Cl & F 109 the debtor, Elles, already owed his bank £750. Elles obtained a further loan of £750 from his bank guaranteed by Hamilton. Hamilton was not told of the previous loan or unsatisfied demands for its repayment. The amount of the second loan was used to repay the first. The bank then demanded repayment from Hamilton. He refused to pay. He contended that the guarantee was void “as all the circumstances of the dealings between the parties had not been communicated to him”. The Lord Ordinary rejected this defence and Hamilton appealed. A majority of the Court of Session agreed with the Lord Ordinary. The Lord Justice Clerk dissented on the ground that there had been a secret agreement or understanding between the Bank and Elles whereby a fraud had been practised on Hamilton. Hamilton appealed to the House of Lords. Counsel for Hamilton submitted that the creditor is “bound to communicate to the proposed surety every information, which, in relation to the suretyship, it may be material for him to know”. Later he submitted “all the circumstances which affect his liability must be communicated to him”. Although the report states that counsel for the respondent accepted that the principle of law was not in dispute his submission was to the effect that the duty to disclose was limited to “something which affected the very nature of the contract entered into by the surety”.

The appeal was rejected by the Lord Chancellor and Lords Brougham and Campbell. Lord Campbell started his speech by observing that to accept the principle for which counsel for Hamilton contended would be to ‘knock up’ normal bank loans guaranteed by a third party if the creditor had to make the alleged disclosure:

Having thus rejected the submission for Hamilton Lord Campbell then proceeded to state the affirmative proposition that:

He then explained the application of that principle in these words:

The Lord Chancellor agreed. He considered that:

I have quoted from these speeches at some length so as to demonstrate what appear to me to be the propositions the case establishes. They are (1) the creditor is obliged to disclose to the surety any contract or other dealing between creditor and debtor so as to change the position of the debtor from what the surety might naturally expect, but (2) the creditor is not obliged to disclose to the surety other matters relating to the debtor which might be material for the surety to know. This is consistent with the fact that a contract of guarantee is not ordinarily a contract uberrimae fidei, such as insurance, whereunder the insured is required to disclose all facts material to the risk, see Seaton v Heath [1899] 1 QB 782.

The second case is Lee v Jones (1864) 17 CB(NS) 481. In that case Jones had guaranteed to Lee payment of any balance due to them by their agent Packer. Jones sought to set aside the guarantee on ground of fraud by Lee. The fraud alleged was the failure of Lee to disclose that Packer had not properly accounted to Lee for sums due in respect of previous transactions. The judge had concluded that the allegation was not enough to justify seeking the verdict of a jury and had entered judgment for Lee. Jones appealed. His appeal succeeded on the ground that the facts relied on were enough to leave the issue of fraudulent concealment to the jury. Blackburn J said:

The third case, and the one to attract the most comment from counsel, is London & General Omnibus Co. Ltd v Holloway [1912] 2 KB 72. In that case Lee was employed by the bus company in a position which involved receiving money on their behalf. The bus company required him to obtain a fidelity bond from a third party. The bond was given by Holloway, a relative of Lee, without either the bus company or Lee disclosing the fact that Lee had previously misappropriated money due to the bus company. The bus company then sued Holloway to recover further sums misappropriated by Lee. The Lord Chief Justice gave judgment for Holloway. The bus company appealed. The appeal was dismissed.

Counsel for the Guarantors focused on the judgment of Vaughan Williams LJ. After reciting the facts and referring to Lee v Jones and Hamilton v Watson, Vaughan Williams LJ added:

Neither Farwell LJ nor Kennedy LJ specifically concurred in that statement. At page 87 Kennedy LJ approved a statement in Pollock’s Principles of Contract 8th Ed.p.568 that:

Chronologically the next cases are National Provincial Bank v Glanusk [1913] 3 KB 335 and Lloyds Bank Ltd v Harrison (1925) Legal Decisions affecting Bankers Vol.4 p.12. In the former Horridge J rejected the contention that the guarantor of an overdrawn account was discharged from liability because the bank had not disclosed to the surety its suspicions that its customer was defrauding the surety. In the latter the Court of Appeal agreed with the judge that the creditor bank was under no duty to disclose to a surety for a bank account that the debtor was substantially overdrawn and in financial difficulties. The Master of the Rolls having referred to both Hamilton v Watson and London & General Omnibus Co. Ltd v Holloway stated that:

Smith v Bank of Scotland 1997 SC (HL) 111, a decision of the House of Lords, concerned a guarantee given by a wife to the bank to secure the overdraft of her husband’s business. Lord Clyde, with whom the other members of the Judicial Committee agreed, considered that the duty of disclosure by a creditor to a prospective surety extended to “some fact in the relationship between the creditor and the debtor which is material to the risk and...would not be expected to exist”.

Royal Bank of Scotland v Etridge (No.2) [2002] AC 773 concerned a number of cases similar to that in Smith v Bank of Scotland. Lord Nicholls of Birkenhead said [81]:

In paragraph 310 and following Lord Scott of Foscote considered the case of Bank of Scotland v Bennett. In that case Mrs Bennett sought to avoid a guarantee she had given to a bank for the account of her husband’s company. The bank had in its possession a valuation of the property charged by the husband and wife to secure that guarantee and a ranking agreement whereunder the bank’s charge was postponed to the charge given to another creditor. Neither was disclosed by the bank to the wife. Lord Scott, with whom the other members of the Judicial committee agreed, concluded:

Finally I should refer briefly to Palmer v Cornerstone Investments & Finance Co.Ltd [2007] UKPC 49. In that case the Privy Council applied the dicta of Lord Campbell in Hamilton v Watson and Vaughan Williams LJ in London General Omnibus Co Ltd v Holloway to determine whether the power of the court to validate certain transactions avoided by the Moneylenders Act of Jamaica should be exercised.

Newey J considered those and other cases at some length in paragraphs 101 to 118 of his judgment. He then expressed his conclusions on the issue I have summarised in paragraph 6(1) in paragraph 119 in the following terms:

Counsel for North Shore submits that the judge was wrong to extend the duty of disclosure beyond a duty to disclose anything unusual, that is to say not to be expected, in the transaction between the creditor and the debtor. He suggests that the judge blurred the distinction between fact and risk and went beyond what the authorities warranted. He submits that the principle expounded by Vaughan Williams LJ in London General Omnibus Co Ltd v Holloway, which I have quoted in paragraph 17 above, was not intended to widen the test formulated in Hamilton v Watson but to paraphrase it. He relies on the statement of Lord Scott of Foscote in Royal Bank of Scotland v Etridge (No.2) para 346, quoted in paragraph 22 above, as indicating that the House of Lords did not regard Vaughan Williams LJ as having widened the scope of the duty beyond that formulated by Lord Campbell in Hamilton v Watson.

Counsel for the Guarantors submits that the judge was right for the reasons he gave. In addition he contends that the matters not disclosed clearly concerned the commercial transaction between North Shore and Anstead because if the advance was sequestrated it would not be available to the borrower. He maintains that the principle established in Hamilton v Watson was widened by Vaughan Williams LJ in London General Omnibus Co Ltd v Holloway and that it was that principle which was applied by Lord Scott of Foscote in Royal Bank of Scotland v Etridge (No.2).

I acknowledge the care with which the judge approached the problem but I cannot agree with his conclusion. First, I do not accept that the proper principle was widened by Vaughan Williams LJ in London General Omnibus Co Ltd v Holloway. In the passage I have quoted from his judgment in paragraph 17 above Vaughan Williams LJ appeared to be seeking merely to apply the principle recognised by Lord Campbell. Indeed he would have been if the words “between the parties who are concerned in the transaction” had been inserted between “every fact” and “which under the circumstances” where they appear in the dictum of Vaughan Williams LJ. Further neither of the other two members of the court agreed with his formulation. Indeed if Vaughan Williams LJ meant what counsel for the Guarantors submits that he meant it is contradicted by the passage in the judgment of Kennedy LJ I have quoted in paragraph 18 above.

Second, the formulation of the principle by the Court of Appeal in Lloyds Bank Ltd v Harrison, to which I have referred in paragraph 19 above, and by Lord Nicholls of Birkenhead and Lord Scott of Foscote in Royal Bank of Scotland v Etridge (No.2) paras 81 and 188, quoted in paragraph 21 above, is that of Lord Campbell in Hamilton v Watson and not that of Vaughan Williams LJ. Further the conclusion of the House of Lords in Bank of Scotland v Bennett applied the principle enunciated by Lord Campbell in Hamilton v Watson because the ranking agreement did affect the rights of the surety in a manner not to be expected in the transaction between the creditor and the debtor. That is the conclusion of Lord Scott in paragraph 347 to which I have already referred. In addition the formulation of the principle by Lord Nicholls of Birkenhead, quoted in paragraph 21 above is that of Lord Campbell in Hamilton v Watson.

Third, the comment by the authors of “The Modern Contract of Guarantee” on which Newey J placed some reliance does not appear to me to take full account of the conclusion of Horridge J in National Provincial Bank v Glanusk [1913] 3 KB 335 to which I have referred in paragraph 19 above. It is well established that a guarantee is not, as such, a contract uberrimae fidei. Consequently the creditor is not obliged to disclose all matters relevant to a decision of the surety whether or not to enter into the guarantee. In addition the duty of disclosure is an essential element in proving a misrepresentation inducing the contract of guarantee where no other ground exists. But if, as the authors predicate, the creditor knows of the fraudulent practices of the debtor but does not disclose them he may thereby become a party to the fraud or convert what otherwise might be an innocent representation into an actionable misrepresentation. In short I see no reason why the scope of the duty of disclosure should be extended to take account of the hypothetical case posed by the authors.

Newey J expressed doubt as to the validity of the apparent distinction between fidelity and loan guarantees and used that as a reason for extending the duty of disclosure arising in the case of the latter to what he considered to be the duty in the case of the former. For my part I am not sure that there is such a distinction as the request for a fidelity guarantee must carry with it an implied representation, quite apart from any duty of disclosure, that the employer believes the employee to be honest. That would be an actionable misrepresentation if the employer had insufficient grounds for that belief. But, be that as it may, the restriction on the duty of disclosure in the case of a loan guarantee is well established and justified by commercial necessity as illustrated by Lord Campbell in his speech in Hamilton v Watson.

For these reasons I do not agree that the grounds given by Newey J in paragraph 119 of his judgment justify his conclusion. The Guarantee was not a contract uberrimae fidei but was a loan guarantee. The authorities are clear that in such a case the duty of disclosure does not go further than the limit set by Lord Campbell in Hamilton v Watson and by Lord Scott of Foscote in Royal Bank of Scotland v Etridge (No.2) para 188. Accordingly there is no duty to disclose facts or matters which are not unusual features of the contractual relationship between the creditor and the debtor, or between the creditor and other creditors of the debtor.

It is not disputed that the matters on which the Guarantors rely, summarised in paragraph 5(1) above, are not unusual features of the contractual relationship between the creditor and the debtor, or between the creditor and other creditors of the debtor. It follows that North Shore was not under any duty to disclose them to the Guarantors. It also follows that the issues of (1) whether the duty of disclosure extends to matters the creditor reasonably considers that the guarantor already knows, (2) the effect of clauses 5.4 and 5.5 of the Guarantee and (3) whether we should infer that the Guarantors relied on any representation arising from a breach of the duty to disclose do not arise. However I should say something about the first of them because it was submitted by counsel for North Shore that that limitation to the duty applied even to the narrower duty for which he contended.

It is necessary to appreciate the limits to the relevance of this issue. If the undisclosed matter was a usual feature of the transaction then the duty of disclosure never arose. Further if the surety did know of the unusual matter not disclosed then the point does not arise because the failure of the creditor to disclose that matter could not have constituted a misrepresentation on which the surety relied. So the point is only relevant to a case where the undisclosed matter was both an unusual feature of the transaction and unknown to the surety. In that event I do not understand the justice of excusing the creditor from his obligation of disclosure because he reasonably believed that the surety did know. Surely the risk should lie on the creditor, as counsel for the Guarantors contends, not on the Guarantors as counsel for North Shore submits.

Newey J upheld the submissions of counsel for North Shore but in the context of the wider duty for which counsel for the Guarantors had contended. His reasons, set out in paragraph 120 of his judgment, were:

Counsel for the Guarantors submits that neither of the cases to which the judge referred supported the proposition he upheld. The first in time is Behan v Obelon Proprietary Ltd (1985) 157 CLR 326. In that case the creditor, Obelon, knew that one of two sureties, Mr Freeburn, had no assets but did not tell the other, the appellant. Mr Freeburn negotiated the transaction guaranteed both on his own behalf and on behalf of the appellant so as to be her agent. Consequently the creditor was entitled to assume that the appellant knew of the financial position of Mr Freeburn. The defence of non-disclosure raised by the appellant when sued on her guarantee was rejected. The High Court of Australia concluded that:

In the other case, Shivas v Bank of New Zealand [1990] 2 NZLR 327, Tipping J considered on pages 362 to 364 the ambit of the duty of disclosure. At page 363 he recognised the duty to be:

For these reasons I would reject the submission of counsel for North Shore that if the duty of disclosure has arisen because the feature of the transaction to be guaranteed is “unusual” the creditor is absolved from his duty of disclosure because he reasonably believes that the surety knows of it already. The authorities on which the judge relied do not appear to me to justify that conclusion. If the belief of the creditor turns out to be not well founded then, in my view, he should suffer the consequences not the surety.

I turn then to the issues summarised in paragraph 6(5) and (6). Both relate to issues in relation to a variation in the interest provisions of the Loan Agreement. I take the relevant facts from paragraphs 276 to 279 of the judgment of Newey J:

On that evidence the judge, having noted that neither Mr Berezovsky nor Mr Fomichev had any real recollection of their conversation, concluded [281]:

Notwithstanding the contrary submission of counsel for North Shore I read that paragraph as a clear conclusion that there was an agreement between Mr Berezovsky and Mr Fomichev to effect the contractual variation. The judge correctly adopted the objective test and accepted that the agreement was intended to be “the final resolution” of the issue to which the solicitor, Mr Jacobson had referred. That is sufficient.

But the judge continued in paragraph 282:

Counsel for the Guarantors submits that the judge’s conclusion is wrong. Having correctly applied the objective test in paragraph 281 he wrongly reverted to a subjective test in paragraph 282. He submits that there was ample consideration as a matter of law in the mutual promises or actual forbearance by Anstead not to claim that the outstanding debt was payable with simple interest at 15% and by North Shore that it was payable with default interest of 20% compounded monthly. Counsel for North Shore did not contend to the contrary. His contention was to the effect that the agreement was not by way of variation of the Loan Agreement. But for the reasons I have given I do not accept that submission. Accordingly, I conclude that there was a contractual variation by the agreement made in November 2004 supported by adequate consideration. In my view the judge was wrong to conclude that it was not.

The final issue is that summarised in paragraph 6(6) above. Does clause 3.4 of the Guarantee preclude the Guarantors from relying on the contractual variation of the Loan Agreement agreed between North Shore and Anstead in November 2004? This was not an issue on which the judge expressed a view. In the light of the order in which he considered the issues, he had dealt with the effect of clause 3.4 of the Guarantee in paragraphs 183 to 193 before considering the evidence and submissions made to him in relation to the alleged variation in November 2004. Nor in the light of his conclusions on the alleged variations did he need to return to the effect of the certificate in the light of an effective variation.

I have set out the material parts of the Guarantee in paragraph 2 above. The terms of the certificate given by North Shore in purported application of clause 3.4 of the Guarantee are set out in paragraph 4 above. It is not suggested that the variation discharged the Guarantee. Clause 5.1 clearly precluded any such consequence. What counsel for the Guarantors does submit is that (1) the obligation undertaken in the Guarantee is, as a matter of construction, to pay what Anstead was liable for under the Loan Agreement, (2) whether or not the Loan Agreement had been varied is a question of law not of quantum and so not within the proper scope of a certificate under clause 3.4 but, in any event, (3) the certificate is clearly vitiated by manifest error.

Counsel for North Shore challenged these submissions. He contended that the certificate under clause 3.4 was ‘conclusive evidence’ of the amount of the Indebtedness as defined in clause 1.2. Accordingly the covenant, as primary obligor, to pay the Indebtedness contained in clause 2 constituted the Guarantee a performance bond precluding the Guarantors from relying on any defence available to the debtor. He relied on the decision of this court in IIG Capital llc v Van der Merwe [2008] 2 AER (Comm) 1173. Further, he contended that any error in the certificate was certainly not ‘manifest’ within the meaning of that word in clause 3.4.

It is necessary to consider these rival submissions in stages. I start with the proposition, which was not disputed, that conclusive evidence clauses are to be strictly construed with any ambiguity being resolved in favour of the guarantor, see British Linen Asset Finance Ltd v Ridgeway [1999] G.W.D 2-78. The first step must be to ascertain what it is that the Guarantors agreed to pay. In my view it is clear that they agreed to pay as primary obligors the actual indebtedness of Anstead to North Shore. This is clear from the definition of indebtedness in clause 1.2 which, by clause 2, the Guarantors agreed to pay. They did not agree to pay the indebtedness as certified, rather the entitlement to certify was limited to the indebtedness for the time being.

It follows that the decision of this court in IIG Capital llc v Van der Merwe is distinguishable because in that case the terms of the guarantee were materially different. As indicated by Waller LJ in paragraph 31 the definition of ‘guaranteed moneys’ which the guarantors agreed to pay included those “expressed to be due, owing or payable, to the Lender from or by the Borrower”. He considered that this provision, with others, showed that the guarantors were undertaking more than a secondary obligation, thereby approximating a performance bond; see, by way of contrast, the decisions on such questions of construction of Blair J in Carey Value Added SL v Gruppo Urvasco [2010] EWHC 1905 and Sir William Blackburne in Vossloh A.G v Alpha Trains (UK) Ltd [2010] EWHC 2443.

The second step must be to ascertain of what the certificate was conclusive evidence. Both the terms of clause 3.4 and of the certificate show that it was the amount for the time being of the indebtedness and/or the amounts due to North Shore, namely quantum. I have great difficulty in seeing how a certificate as to ‘amount’ due could be conclusive as to either the fact of the variation or its legal effect. The former would seem to be outside any reasonable limit as to what is meant by ‘amount’, the latter is a question of law which is not a matter for evidence whether conclusive or otherwise. It would follow that in those respects the certificate is not conclusive, see, for example, Jones v Sherwood [1992] 1 WLR 277, 284-287 and Mercury Communications Ltd v Director-General of Telecommunications [1996] 1 WLR 48, 58.

In that connection we were referred to the decision of this court in Bache & Co (London) Ltd v Banque Vernes et Commerciale de Paris SA. [1973] 2 Ll.L.R 437. There a conclusive evidence clause was upheld as effective in accordance with its terms and not contrary to public policy. The dispute was as to the amount of the liability. The ground relied on by Lord Denning MR was that if the certificate was erroneous the surety could recover the excess paid by him to the creditor from the debtor. There was no such issue as arises in this case. Further I cannot see any basis on which the Guarantors could recover any excess from either North Shore or Anstead. North Shore would contend that the sum paid was properly due by the Guarantors as primary obligors under the guarantee; the latter would say that the amount of the excess was not due by Anstead to North Shore because of the variation so that there was no basis on which it could be obliged to refund the Guarantors the amount of any excess.

On the public policy aspect Lord Denning added:

The third step is to consider whether there is, as counsel for the Guarantors contends, a manifest error. A ‘manifest error’ was defined by Lewison J in IIG Capital llc v Van der Merwe [2007] EWHC 435 para 52 as one which is “obvious or easily demonstrable without extensive investigation”. His definition was approved by the Court of Appeal in the same case at paragraph 35 and applied by the judge in this case. An issue arose as to whether the manifest error might appear from the calculation enclosed with the demand letter dated 30th May 2008 or whether it must appear on the face of the certificate. In paragraph 190 of his judgment the judge concluded that:

The judge went on to observe in paragraph 192 of his judgment:

This conclusion imports a condition that there must be a manifest error at the time the certificate is given. That is said to arise from the fact that the certificate is to be conclusive evidence of the amount owing for the time being. In my view that does not follow. It is quite possible for one person to certify the existence of some fact at a particular moment in time which the other person, the recipient of the certificate, cannot verify save after the occurrence of a subsequent event. I can see no reason why the error must be manifest at the time of the certificate. Subsequent investigation shows in this case that the amount certified was that due under the unvaried Loan Agreement when in fact it should have been limited to the amount due under the Loan Agreement as varied; there was a mismatch between the relevant agreement and the certificate.

Accordingly, I conclude that the Guarantors are entitled to rely on the November variation to reduce their liability to North Shore. It is not in dispute that the amount of the judgment given by Newey J in the sum of $52,508,734 should be reduced to approximately $32m.

For all these reasons I would allow this appeal to the extent of reducing the amount the Guarantors were adjudged liable to pay to North Shore by paragraph 1 of the order of Newey J to a sum to be agreed or, in default of agreement, certified by a Master of the Chancery Division as the amount of the indebtedness, as defined in clause 1.2 of the Guarantee, on the footing that the variation of the Loan Agreement made in November 2004 was effective and legally binding.

I agree with the Chancellor’s judgment and add a few words of my own only because we are disagreeing with the judge below.

On the question of the duty of disclosure of a creditor to a surety, I am satisfied that the duty is as stated by Lord Campbell in Hamilton v Watson (1845) 12 Cl & F 109 and as summarised by the Chancellor in paragraph 14 above. Mr Machell for the appellants submitted that the judgment of Vaughan Williams LJ in London & General Omnibus Co. Ltd v Holloway [1912] 2 KB 72 demonstrated that the duty is wider than that stated by Lord Campbell. I agree that, read in isolation, the passage on which Mr Machell relied does give that impression. But when the judgment is read as a whole, it is clear that Vaughan Williams LJ was in agreement with Lord Campbell’s statement of principle and intended only to restate it in slightly different words. It is clear too from the speeches of Lord Nicholls and Lord Scott in Royal Bank of Scotland v Etridge (No 2) [2002] AC 773 that the principle is as stated by Lord Campbell. It follows that I agree with the Chancellor that North Shore was not under any obligation to disclose the fact that Mr Berezovsky was under investigation by the Swiss authorities or that there was a risk that any funds associated with him might be frozen. The appeal fails on that issue.

Turning to the issue of variation of the contract between North Shore and Anstead, I agree with the Chancellor, for the reasons he gives, that there was an effective variation of contract in November 2004. Having correctly applied an objective test to the effect of the exchanges which had taken place, Newey J found that there had been an agreement to vary the interest terms as set out in the original loan agreement. The judge then held that that agreement was unsupported by consideration. He rejected the submission that consideration was to be found in the compromise of the dispute which had arisen as to the effect of the interest terms. He did so on the basis that Mr Berezovsky had not intended to compromise that dispute but had merely agreed to accept less interest out of good will, as a concession. That was, with respect, an error of law. The correct approach was to consider what a reasonable observer would have concluded. In my view, objective consideration of the evidence which the judge had accepted leads inevitably to the conclusion that the parties had compromised their dispute on interest, leaving over, for the future, their dispute about whether interest was chargeable on the frozen funds. In my judgment, the agreement to vary the interest terms was supported by consideration. Thus, Anstead’s present indebtedness is of the order of $32 million rather than approximately $52 million as contended by North Shore.

It follows that subject to clause 3.4 of the guarantee, the appellants’ liability to North Shore under the guarantee is only about $32 million. North Shore claims that the effect of clause 3.4 is that the certificate issued by it in May 2008 in the sum of $34,894,207 (which with interest would come to about $52 million) is conclusive evidence for all purposes of the sum owed by the appellants under the guarantee. Once it is accepted that the loan agreement was varied in November 2004, North Shore’s contention is seen to be most unattractive. It entails the proposition that the appellants should pay North Shore about $20 million more under the guarantee than Anstead owed under the loan agreement. The appellants can avoid this consequence only if the certificate was ‘manifestly incorrect’.

I confess that I found this issue difficult because it appeared to me, at first sight, as I think it did to Newey J, that a manifest error is one which is capable of being demonstrated by reference to the certificate itself and possibly the accompanying calculation. Certainly Newey J was of the view that the demonstration of a manifest error did not permit the kind of extensive investigation which had taken place in the course of the trial before him on the issue of whether the original loan agreement had been varied as to the interest terms. He had relied on Lewison J’s definition of a manifest error as one that is “obviously or easily demonstrable without extensive investigation”.

On reflection I have come to the conclusion that for a party to rely on a manifest error in a certificate does not depend upon his ability to demonstrate the error immediately and conclusively. In the present case, the appellant guarantors were able to recognise immediately that the certificate was based upon the interest rates as set out in the original loan agreement and not as varied in November 2004. They could see that it was manifestly incorrect. They could not immediately demonstrate that conclusively; they could not do so until the court had determined the issue of variation. But they were right, as this court has now held. I would hold that the certificate was manifestly incorrect and was of no effect.

Accordingly, I agree with the Chancellor’s conclusions.

I too agree that the appeal should be allowed to the extent indicated by the Chancellor. I am in full agreement with his reasons save only that I would for my part prefer to rest my conclusion on the final issue, the effect of Clause 3.4 of the Guarantee, upon the short ground that the certificate upon which reliance was placed by North Shore was manifestly incorrect.

I agree that the decision of this court in IIG Capital llc v Van der Merwe is distinguishable. I also have difficulty in understanding upon what basis the Guarantors here could, in the event of payment in accordance with the certificate, recover from North Shore the difference between the amount certified and the true Indebtedness pursuant to the varied Loan Agreement as subsequently established.

It may be that the guarantors have stipulated for an express right of indemnity from Anstead but if so we know nothing about that. It is not immediately obvious to me that the Guarantors would necessarily have an implied right of indemnity against Anstead in respect of a payment for which, ex hypothesi, Anstead was not liable to North Shore. With respect to Waller LJ I am doubtful about his observation in IIG Capital at page 1183 that “payment of what is found to be due from the guarantors will lead almost certainly to a right of indemnity from the company [the principal debtor] if the guarantee has to be paid”, an observation which was I note expressed in cautious terms. It may be that Waller LJ was not intending to state, however cautiously, a general principle, but rather considered that the circumstance that the guarantors were there directors of the principal debtor company might be relevant to the implication of a right of indemnity. As it happens that relationship is formally absent here.

It may also be the case, as Lord Denning MR said in Bache & Co (London) Ltd v Banque Vernes et Commerciale de Paris SA at page 440, that Anstead could recover the overpayment from North Shore, and perhaps the Guarantors could compel Anstead to take such action. In either event, express or implied indemnity or action by Anstead for the Guarantors’ benefit, the Guarantors will of course rank only with any other creditors of Anstead. That may be a commercially acceptable result here although not for the reason identified by Lord Denning in Bache, reproduced by the Chancellor at paragraph 50 above, but rather because Anstead is both owned and controlled by the Guarantors.

As pointed out by O’Donovan and Phillips, The Modern Contract of Guarantee, English Edition, at paragraph 5-151, a conclusive evidence clause in this form may have the effect of transforming a straightforward guarantee which is not phrased in terms of a performance bond payable simply on demand without proof of default into something analogous thereto. However under a performance bond the guarantor is usually a bank or similar institution which is likely to have taken counter-security. Absent such security and absent a relationship of ownership and/or control such as here exists between guarantor and principal debtor, the consequence of entering into a guarantee in this form may be exposure to an unsecured liability significantly in excess of that of the principal debtor.

The ambit and effect of a clause such as 3.4 here is thus a question of potentially wide importance. In Dobbs v National Bank of Australasia 1935 53 CLR 643 the High Court of Australia was faced with an argument that a clause in similar form did not make the certificate conclusive of the legal existence of the debt but only of the amount. In the leading judgment Rich, Dixon, Evatt and McTiernan JJ said at page 651:-

In the light of that approach by a court of such high authority, I am reluctant to travel with the Chancellor down the road he has trodden at paragraph 48 above. In any event it is unnecessary so to do in order to dispose of this appeal in the manner which the Chancellor proposes. As the Chancellor has set out at paragraph 51 above, the judge made what appears to be a clear finding that, on the assumption that there had been a variation of the Loan Agreement in the manner contended for by the Guarantors, the certificate contained an error manifest on its face. There had been such a variation. That is sufficient to dispose of the final issue on this appeal. The certificate was manifestly incorrect and did not preclude the Guarantors from demonstrating that the amount of the Indebtedness for the time being was less than that which North Shore certified it to be.