Van Der Merwe & Anor v IIG Capital LLC

Mr and Mrs Van Der Merwe have been in business together for 30 years. They began their business careers in South Africa but moved to the UK in 2002. Before their move they had formed a company, together with other investors, to market flowers and to export vegetables abroad. On their move to the UK they bought a company called Hurst Parnell & Co Ltd, which was in the vegetable business. But they realised that its business had not been well run. So in 2004 they formed a new company called Hurst Parnell Import & Export Ltd (“HPIE”) to import fresh fruit and vegetables under the “Fair Lady” brand. Mr and Mrs Van Der Merwe are directors of HPIE. It is registered in England and Wales.

In 2004 Mrs Van Der Merwe came across IIG Capital LLC (“IIG”), a company registered in New York and carrying on business there. She understood that it was interested in financing business start ups by trade finance and invoice discounting. IIG began affording finance to HPIE. However, the relationship had its ups and downs and Mr and Mrs Van Der Merwe transferred HPIE’s business to Barclays. But in 2006 IIG recaptured HPIE’s financing and a series of documents were entered into. All the documents were executed on the same day: 30 June 2006. One of those documents is at the heart of this dispute.

The first of the relevant documents is a loan agreement made between IIG and HPIE. The loan agreement contains a number of warranties given and obligations undertaken by HPIE. These include (for example) warranties about the accuracy of HPIE’s accounts and financial statements (clause 8); obligations to provide regular accounts (clause 10.1); obligations to maintain insurance (clause 10.1.9); obligations not to enter into transactions otherwise than in the normal course of business (clause 11.4) and not to make loans to affiliates (clause 11.6). Clause 27.1 of that agreement said that the agreement was to be governed by New York Law. The second of the relevant documents was a debenture granted over the assets of HPIE. The third was a document described as a guarantee and signed by Mrs Van Der Merwe. I will refer to it as the guarantee, without prejudice to the contention of either party. Mr Van Der Merwe signed an identical document, although it was not in evidence.

On 12 January 2007 IIG demanded US$30,303,576 from HPIE said to be due under the loan agreement; and on the same day appointed administrators over HPIE. HPIE did not pay the amount demanded; and on 16 January 2007 IIG sent letters to Mr and Mrs Van Der Merwe reciting the failure of HPIE to pay and certifying that the amount due and payable by each of them under the guarantee was US$30,303,576. The letter demanded payment within 2 days. Mr and Mrs Van Der Merwe have not paid.

The principal issue I have to decide is whether, in resisting IIG’s demand for payment under the guarantee, Mr and Mrs Van Der Merwe are entitled to raise defences that could have been raised by HPIE in resisting a demand made against it for repayment under the loan agreement. It is accepted that if they can, then whether those alleged defences are good ones can only be decided at trial. However, on an application for summary judgment Master Teverson decided that the terms of the guarantee prevented Mr and Mrs Van Der Merwe from relying on such defences. He held that once IIG had certified what was due under the guarantee Mr and Mrs Van Der Merwe were contractually bound to pay the amount certified. Mr and Mrs Van Der Merwe appeal against that decision, with the Master’s permission.

The guarantee begins by describing itself as “THIS GUARANTEE” and Mrs Van Der Merwe is described as “the Guarantor”. Recital (A) records the grant of the facility to HPIE (described as “the Borrower”) of US$23,000,000. Recital (B) says that it was a condition precedent to the grant of the facility that the “Guarantor enters into this Guarantee of the obligations of the Borrower to the Lender under the [Loan] Agreement”. Recital (C) says that the guarantee is an “all monies” guarantee.

The document contains a single definition in clause 1.2. The defined term is “Guaranteed Monies” and the definition is:

Clause 2 contains the main payment obligation and reads:

Clause 3 is headed “Preservation of Guarantee” and provides:

Clause 4.2 provided that:

Clause 5 said that the guarantee was “a continuing guarantee” and would remain in force until all sums “due from the Borrower under the Finance Documents have been paid in full”. Clause 7.3 prevented the Guarantor from asserting any set-off against the Borrower. Finally, clause 14 said that the guarantee was to be governed by English law.

The Master summarised IIG’s case as being that liability under the guarantee arose upon service on Mr and Mrs Van Der Merwe of a demand in proper form, without the need to prove any liability under the underlying loan agreement. His general approach to construction was that he should construe the guarantee in its factual and commercial setting without any preconceptions as to what it was. Having said that, he took into account the fact that Mr and Mrs Van Der Merwe were private individuals rather than banks. This brought into play “a strong presumption” against interpreting the guarantee as if it were “a performance bond or on demand guarantee issued by a bank”. He then asked himself whether there were sufficient indications in the wording of the guarantee construed in its factual and commercial context to displace that presumption. He decided that there were. In essence, the Master held that there were six features of the overall transaction that led to that conclusion. They were:

the fact that IIG and HPIE were in different jurisdictions;

the fact that the parties provided that the loan agreement was to be governed by New York law whereas the Guarantees were to be governed by English law;

the inclusion in clause 2 of the guarantees of a “principal debtor” clause;

the express inclusion in clause 2 of the guarantees that the Lender is paid “immediately upon demand unconditionally”;

the reference in the definition of the “Guaranteed Moneys” to the words “or expressed to be due, owing or payable”;

the presence of clause 4.2 in the context of the guarantees read as a whole.

Sometimes it is necessary to decide whether an agreement falls within a particular legal category. For example statutory security of tenure may be conferred on someone who is a tenant, but not on someone who is not. Or the application of the assets of an insolvent company under insolvency legislation may differ according to whether a security is a fixed charge or a floating charge. In this kind of case, the ultimate inquiry is whether the rights and obligations created by an agreement fall within the legal category created by an external rule of law; in other words whether a particular label is the right one to attach to the instrument in question. In such a case, as Lord Millett explained in Agnew v Commissioner of Inland Revenue [2001] 2 A.C. 710 the process has two stages:

In the present case there is no external rule of law which is dependent on the particular label that is attached to the instrument. The question is: what rights and obligations have the parties created by the words of the instrument, construed in its factual and commercial context? In other words, I am concerned with the first stage only of the two-stage process.

Although both Mr Collings QC, who appeared for Mr and Mrs Van Der Merwe, and Mr McGrath, who appeared for IIG, recognised that the correct interpretation of the instrument in issue depended on its own wording and context, I was nevertheless referred to a number of decided cases.

I begin with Gold Coast Ltd v Caja de Ahorros del Mediterraneo [2003] 1 All ER (Comm) 142. The instruments in issue were refund guarantees given by ten Spanish banks in support of a buyer’s obligation to make potentially refundable payments under a shipbuilding contract. Condition 1 of the guarantee said:

Condition 5 said that variations or waivers would not affect the liability of the guarantors. Tuckey LJ said that there was no standard practice in relation to the nature of such guarantees. In other words the question was one of construction rather than classification. He accepted the submission that the instrument should be construed “by looking at it as a whole without any preconceptions as to what it is” (¶ 15). He pointed out that the payment condition required a certificate but made no reference to arbitration or underlying liability under the shipbuilding contract. Provided, therefore, that the bank certified a default, the guarantors had to pay. However, he also said that condition 5 gave the guarantors their best point, although it did not tip the balance. Hale and Simon Brown LJJ agreed.

Mr Collings relied in particular on the decision of the Court of Appeal in Marubeni Hong Kong Ltd v Mongolian Government [2005] 1 WLR 2497, which the Master also took as his starting point.

In Marubeni a Hong Kong company agreed to supply a Mongolian company with textile plant and machinery. A form of guarantee was provided by the Mongolian Government. The relevant terms of the letter were as follows:

Refinancing arrangements were entered into between the two companies. The Mongolian Government contended that the arrangements amounted to a material variation, so that its obligations were discharged. This contention succeeded at first instance and the Claimant appealed. Counsel described the issue that arose on the appeal as follows:

The argument for Marubeni was that where in international transactions a bond or guarantee is expressed to be payable upon demand, in the absence of clear words indicating that liability under it is conditional upon the existence of liability on the part of the account party in connection with the underlying transaction, the guarantee is intended and should be construed as an independent guarantee entitling the beneficiary to payment simply against an appropriately worded demand accompanied by such other documents (if any) as the guarantee may require. (¶ 13) This argument was said to be supported by previous caselaw. The opposing argument for the Mongolian Government was that outside the field of first demand instruments or performance bonds issued by banks, the courts have not been willing, in the absence of clear words, to interpret documents in which a party undertakes obligations in relation to an agreement between two other parties as imposing unconditional primary liability. The mere fact that the obligation of the guarantor is expressed to be to pay "on demand", and without conditions, is insufficient to create primary liability. (¶ 17) This argument was also said to be supported by previous caselaw. It will be seen, however, that the argument all turned on the effect to be given to the obligation “to pay to you upon your simple demand all amounts payable under the agreement.”

Carnwath LJ referred to difficulties of terminology and referred to the (almost) indiscriminate use of the phrases “performance bond”, “performance guarantee”, “demand guarantee”, “demand bond” and “first demand bond”. He referred to a contrast between an “independent guarantee” and a “true contract of guarantee” or suretyship. The former imposes a primary liability while the second imposes a secondary liability. This discussion seems to me to focus on what is the appropriate label to attribute to different kinds of document. Carnwath LJ then said (¶ 23) that it cannot be assumed that cases relating to banking instruments provide a useful guide to construing guarantees given outside the banking sphere. Commenting on the previous caselaw cited in support of Marubeni’s argument Carnwath LJ said (¶ 28):

Commenting on the Gold Coast case Carnwath LJ said:

Thus in the opinion of Carnwath LJ the fact that a bank certificate was the trigger for payment was a “clear indication” that the obligation to pay was independent (i.e. a primary obligation).

Carnwath LJ then considered the letter in the appeal before him. He pointed out that it described itself as a guarantee, although that was not decisive. He said that there was no language in the letter appropriate to a demand bond; and that the transaction was outside the banking context. That created a strong presumption against Marubeni’s interpretation. Marubeni’s interpretation, it will be recalled, was that where in international transactions a guarantee is expressed to be payable upon demand, in the absence of clear contrary words it should be construed as an independent guarantee entitling the beneficiary to payment simply against an appropriately worded demand. Thus what Carnwath LJ is saying is that outside a banking context there is a strong presumption against giving the words “on demand” the effect of creating an independent primary obligation. Carnwath LJ then considered the effect of such a presumption. He said (¶ 31):

Three points emerge from this passage. First, the question is whether there are “sufficient indications” to displace the presumption. But since the presumption is a strong one, the indications must themselves be cogent. Second, although Carnwath LJ refers to indications in “the wording of the instrument”, it seems to me that some reliance could be placed, in an appropriate case, on the background to the transaction. Third, words should be given their ordinary meaning.

I was referred to previous cases on two other topics. The first was the significance of describing a surety as a “primary obligor”. In Heald v O’Connor [1971] 1 WLR 497 a surety for a company’s obligations under a debenture promised:

Fisher J said:

Commenting on that case in General Produce Co v United Bank Ltd [1979] 2 Lloyd’s Rep 255 (which contained a similar provision) Lloyd J said:

The second topic on which I was shown caselaw was the effect of a certification clause such as clause 4.2. On this I was shown the decision of the Court of Appeal in Bache & Co (London) Ltd v Banque Vernes et Commerciale de Paris SA [1973] 2 Lloyd’s Rep 437. Commodity brokers on the London Commodity Exchange demanded a bank guarantee before entering into buying and selling transactions on behalf of their customer, a French trading company. The defendants, who were the trading company's bankers, gave the guarantee which contained a conclusive evidence clause. The clause provided:

Lord Denning MR said:

Having considered previous authority, he held that such a clause was not contrary to public policy and took effect according to its terms. Megaw LJ agreed, saying that the words were “perfectly clear”. Scarman LJ also agreed. He said:

In Balfour Beatty Civil Engineering Ltd v Technical & General Guarantee Co Ltd (1999) 68 Con LR 180 the guarantor undertook to pay on first demand on receipt of a certificate:

Waller LJ said:

Commenting on this kind of clause O’Donovan and Phillips say in The Modern Contract of Guarantee English Edition (2003) (¶ 5-107):

They point out, however, that although in the case of a performance bond the issuing bank will usually have the benefit of counter-security, where the guarantor is a private person, such as a company director, there will usually be no such security.

I do not think that it is helpful to consider what label to attach to the instruments in this case. The question is: what obligations did Mr and Mrs Van Der Merwe assume by entering into them? That is to be ascertained by considering the meaning that the instruments would convey to a reasonable reader with the background knowledge of the parties. In considering that question it is necessary to pay attention to the instrument as a whole and not to dissect it into its constituent parts, even though, for the purposes of exposition, the points need to be dealt with one by one. In the end, it is the overall effect of the instrument that counts. One pointer towards a particular conclusion, not decisive in itself, may in combination with other pointers lead ineluctably towards a particular conclusion.

I begin with the background. Mr Collings points out that Mr and Mrs Van Der Merwe are individuals and company directors. They are not especially wealthy. There can never have been any expectation that they would be able to satisfy even a proportion of any demand made on the guarantees. He submits, therefore, that a guarantee payable simply on production of the relevant documents would not be equivalent to cash, which is the usual objective of a performance bond issued by a bank. I do not doubt that the ability of Mr and Mrs Van Der Merwe to pay is less than that of a bank. That is true whether the instrument imposes a primary or a secondary liability. But it does not follow that there is no advantage to IIG in having a mechanism for enforcing payment without having to investigate the underlying merits of any claim against HPIE. This circumstance brings into play the strong presumption that a guarantee under which the obligor promises to pay “on demand” does not without more impose a primary liability. But it does no more than that.

Next Mr Collings points out that HPIE is registered in England and Wales, the same jurisdiction in which Mr and Mrs Van De Merwe live and that IIG has a debenture over HPIE’s assets. Thus he says that it is not the case that the borrower is in some “difficult foreign jurisdiction” where he could evade payment. I do not consider that this is a feature of any weight. On demand bonds are well known in a purely domestic context, particularly in the context of building and engineering projects. They are not restricted to international transactions. I would not, therefore have attached the weight to this circumstance that the Master did.

Next Mr Collings points out that the liability guaranteed was simply the repayment of a loan. I cannot see that anything of significance turns on this. Lenders, just as much as suppliers of machinery, seek the comfort of security.

Mr Collings then says that there is no counter-bond from HPIE to Mr and Mrs Van Der Merwe. There is therefore no express mechanism for an eventual accounting between the parties. I am not at all sure that the absence of any arrangement between Mr and Mrs Van Der Merwe and HPIE is something of which IIG would necessarily have been aware at the date of the financing package, but no point was taken about this. I agree, therefore, that this is a potentially relevant circumstance. Mr Collings drew attention to the decision of the House of Lords in Trafalgar House Construction (Regions) Ltd v General Surety & Guarantee Co Ltd [1996] 1 AC 199 in which the House of Lords viewed with scepticism a submission that it was an implied term of a bond that any overpayment would be repaid. However, in Comdel Commodities Ltd v Siporex Trade SA [1997] 1 Lloyd’s Rep 424 Potter LJ said:

Based on this and other authorities Andrews & Millett on Guarantees (4^th ed ¶ 16-034) say in the absence of express provision to the contrary the beneficiary of a performance bond who has been paid more than his due under the underlying transaction must repay the surplus. They comment:

O’Donovan and Phillips (¶ 13-54) take a similar view, with the difference that whereas Potter LJ seems to have contemplated a claim for repayment by the party to the underlying transaction against the counter-party with the benefit of the bond, they envisage the claim for repayment being made by the person who provided the bond directly against the counter-party.

In my judgment the law has moved on from the position indicated by the Trafalgar case. If Mr and Mrs Van Der Merwe make a payment which turns out to exceed what is due from HPIE, they will be entitled to recover the overpayment either directly from IIG or indirectly via HPIE.

Mr Collings next draws attention to the fact that there is no upper limit to the amount that Mr and Mrs Van Der Merwe are potentially liable to pay. He contrasts this with the almost universal practice in performance bonds issued by banks and other financial institutions under which the liability to pay is capped. I agree that this is also a potentially relevant circumstance. Mr McGrath pointed out, however, that unlike the usual situation in which the provider of a performance bond has no involvement in the underlying transaction, in the present case Mr and Mrs Van Der Merwe were directors of HPIE and were, therefore in a position to control how much it borrowed from IIG and hence to limit their own potential liability. The weight that can be attributed to this circumstance is therefore limited.

However, taking all these circumstances together, they do lead me to the conclusion that the strong presumption referred to in Marubeni applies. This was also the Master’s conclusion. The question then is: whether there are sufficient indications in the wording to displace that presumption; and in considering that question words are to be read in their ordinary sense.

Mr Collings points out correctly that the instrument describes itself as a guarantee and Mrs Van Der Merwe as the Guarantor. The word “guarantee” crops up frequently in the detailed terms of the instrument. This in itself is of limited significance because of the variety of terminology in common use. Performance bonds are also called performance guarantees or on demand guarantees; and the familiar “guarantee” of a car or a household appliance does not connote any form of secondary liability.

The definition of “Guaranteed Monies”, however, is of considerable significance. It includes not only those monies which HPIE actually owe IIG but also monies “expressed to be due, owing or payable” by HPIE to IIG. These words point towards the conclusion that the Guaranteed Monies may extend beyond what is actually owing by HPIE to IIG; and hence that the liability of Mr and Mrs Van Der Merwe is not necessarily co-extensive with that of HPIE. Mr Collings says that these words are hidden in a definition clause and should not be allowed to override the clear wording of clause 2.1. It is true that the words are contained in a definition clause, but the very purpose of the definition clause is to define the extent of Mrs Van Der Merwe’s liability. That is what the quoted words do. Moreover, for reasons I shall explain, I do not consider that the wording of clause 2.1 is clear; at least not in the way that Mr Collings wishes to read it. On the contrary, the wording of clause 2 points against the construction for which Mr Collings contends. Mr Collings acknowledged that the quoted words must mean something. He suggested that they could be best explained as catering for the possibility that IIG and HPIE might agree a conclusive evidence clause as between themselves. Given that the loan agreement did not contain such a clause, and that the guarantee was executed contemporaneously with the loan agreement, the possibility is a remote one. Moreover, if the quoted phrase is evidence of some linkage with a conclusive evidence clause, why look further than clause 4.2 of the guarantee itself? Indeed in his oral submissions, when describing “first impressions”, Mr Collings himself said that the quoted phrase naturally took one on to clause 4.2.

Mr Collings made a number of points about the detailed drafting of clause 2. He said that the phrase in clause 2.1 ‘it will immediately upon demand unconditionally pay to the lender… the Guaranteed Monies’ is not support for a construction that the guarantees are performance bonds. It would be unusual for a guarantee not to be payable upon demand. The word ‘unconditionally’ describes the verb ‘pay’ (i.e. the actual payment, not the obligation to pay). In other words payment must be made not subject to conditions. I agree that an obligation to pay on demand is not enough on its own to displace the presumption that Marubeni holds exists. That, after all, was the case in Marubeni itself. But I do not regard this form of obligation as entirely neutral. First, a typical contract of suretyship is a promise that the principal debtor will perform his contract, whereas in the present case the promise is a promise to pay the Guaranteed Monies. It is cast in the form of a primary obligation. Second, the promise in the present case is limited to payment of the Guaranteed Monies. It does not extend to the performance by HPIE of any of its other obligations under the loan agreement. Again this is consistent with an obligation to pay as a primary obligation. The usual contract of suretyship would extend to all the obligations of the principal debtor under his agreement with the creditor. Third, the promise to pay is introduced by the words “as principal obligor and not merely as surety”. Mr Collings said that these words could be explained as preventing the release of a surety by, for example, the creditor giving time to the principal debtor. It is true that in some contexts these words are not enough, on their own, automatically to transform a contract of suretyship into a contract of indemnity. But in the present case they do not appear on their own, but appear in collocation with other words and phrases. Moreover, as Mr Collings pointed out, the introductory words appear to govern both clause 2.1 and clause 2.2. The latter clause is already a contract of indemnity which imposes a primary liability. So unless the introductory words are meaningless, they must have been intended to add something to clause 2.1.

Mr Collings said that if the obligation in clause 2.1 meant what IIG said it meant, then the whole of clause 3 was superfluous. He said that in Gold Coast Tuckey LJ described a similar submission as the best point. That is also true, but in this case the point cuts both ways. It cuts both ways because Mr Collings’ explanation of the significance of the phrase “as principal obligor” would itself make clause 3 otiose. On either construction there is little, if any, part for clause 3 to play. Moreover, in Gold Coast although the point was the bank’s best one, it was not enough.

What, in my judgment, clinches the argument in IIG’s favour is clause 4.2. A certificate in the prescribed form is agreed to be conclusive and binding on Mrs Van Der Merwe save in the case of manifest error. What is it that the certificate must certify? It must certify “the amount at any particular time due and payable by the Guarantor under this Guarantee.” Mr Collings said that this form of certificate was only conclusive as to the amount. It said nothing about liability. I reject this submission for two reasons. First, the certificate certifies an amount that is both “due” and “payable”. A sum can be neither due nor payable unless there is a liability to pay it. Second, the certificate does not certify what is due under the loan agreement from HPIE to IIG. It certifies what is due under the guarantee. What is due under the guarantee extends to monies “expressed to be due” by HPIE to IIG. So the question whether HPIE is actually liable to IIG under the terms of the loan agreement (which is the defence that Mr and Mrs Van Der Merwe wish to raise) is irrelevant to the certificate. Both the Bache case and the quoted extract from O’Donovan and Phillips demonstrate the potency of a conclusive evidence clause. Its potency is all the more in this case, given that it is accompanied by:

The extended definition of “Guaranteed Monies”;

The “principal obligor” clause; and

The obligation to pay “on demand”.

Mr Collings fastened on the phrase in clause 4.2 “save in the case of manifest error”. A “manifest error” is one that is obvious or easily demonstrable without extensive investigation. Mr Collings referred to the decision of Thomas J in Invensys plc v Automotive Sealing Systems Ltd (8 November 2001). That was a case in which a certificate made by an expert was to be conclusive save in the case of manifest error. Thomas J held that the expert’s reasons could be examined in order to determine whether he had made a manifest error. But since the contract in that case provided for the expert to give reasons, Thomas J was undoubtedly right to say that the parties must have contemplated that those reasons could be examined to see whether any manifest error had been made. By contrast, in the present case the certificate was not required to contain any reasons. I did not derive any assistance from the Invensys case.

In my judgment these features of the guarantee, taken together, are sufficient to displace the presumption that Marubeni holds exists. I do not need to consider whether any of them, on their own, would have been enough; because they are not on their own.

For these reasons, which are substantially the same as those of Master Teverson, I dismiss the appeal.