Van Der Merwe & Anor v IIG Capital LLC

A guarantee’s legal effect depends on the obligations created by its wording, read as a whole and in its factual and commercial context. Outside the banking sphere, there is a strong presumption that an undertaking to pay on demand creates secondary liability rather than an independent primary obligation. That presumption may be displaced by sufficiently cogent indications in the instrument. A conclusive certification clause can be decisive where it certifies what is due and payable under the guarantee, rather than merely what is due under the underlying contract. The court should give the words their ordinary meaning and assess the combined effect of all relevant provisions. Where the guarantee permits recovery of sums exceeding the underlying liability, the payer may recover the excess through an accounting or restitutionary claim.

IIG Capital LLC financed Hurst Parnell Import & Export Ltd under a loan agreement. The appellants, who were the company’s directors, executed guarantees in favour of IIG. After IIG demanded repayment from the company and appointed administrators, it certified sums as due under the guarantees and demanded payment from the appellants.

On an application for summary judgment, Master Teverson held that the guarantees required payment of the certified amount and prevented the appellants from raising defences available to the company under the loan agreement. The appellants appealed with permission. The central issue was whether the instruments imposed primary, on-demand liability or merely secondary liability dependent on the company’s actual liability.

1. The appeal was dismissed. The guarantees required the appellants to pay the amounts certified by IIG, subject only to manifest error.
2. The court should not begin by assigning the instrument a label such as guarantee, indemnity or demand bond. It should determine what obligations the parties created by construing the instrument as a whole, against the background known to the parties. The overall effect governs.
3. Outside the banking context, an undertaking to pay on demand carries a strong presumption against independent primary liability. The presumption is not conclusive. It may be displaced by sufficiently cogent indications in the wording, read in its commercial context, with the words given their ordinary meaning.
4. Several provisions cumulatively displaced the presumption. The definition of “Guaranteed Monies” included sums expressed to be due, the appellants undertook liability as principal obligors, the obligation was to pay on demand, and clause 4.2 made IIG’s certificate conclusive and binding save for manifest error.
5. Clause 4.2 was not confined to the amount stated in the certificate. A certificate of an amount “due and payable under this Guarantee” necessarily addressed liability under the guarantee. Since the definition extended to sums expressed to be due by the borrower, the appellants could not rely on the underlying borrower’s alleged defences at the certification stage.
6. The absence of a counter-security, the unlimited potential liability and the appellants’ status as private individuals were potentially relevant, but the contract’s wording and combined effect prevailed. If payment later exceeded the amount actually due from the borrower, the appellants could recover the excess directly or through the borrower.

1. High Court (Chancery Division): Master Teverson granted summary judgment in substance by holding that the guarantees prevented reliance on defences available to the borrower. Mr Justice Lewison dismissed the appellants’ appeal.