North Shore Ventures Ltd v Anstead Holdings, Inc & Ors

A creditor taking a loan guarantee must disclose unusual features of the contractual relationship between the creditor and debtor, or between the creditor and the debtor’s other creditors, which may disadvantage the surety. The duty does not extend to every material fact affecting the commercial risk.

A contractual compromise is assessed objectively and provides consideration through the parties’ mutual concessions. A certificate of indebtedness subject to a manifest-error exception cannot bind guarantors to an amount calculated under superseded contractual terms. The error need not be conclusively demonstrable when the certificate is issued.

North Shore Ventures Ltd lent $50m to Anstead Holdings Inc under an agreement providing for interest and default interest. Anstead’s owners, Mr Fomichev and Mr Peganov, jointly and severally guaranteed its indebtedness. Following repayment of the principal and part of the interest, North Shore claimed substantial further interest and obtained judgment against the guarantors.

Newey J, in [2010] EWHC 1485 (Ch), rejected defences based on non-disclosure and an alleged variation of the interest terms. He held that the parties had agreed the variation but that it lacked consideration. He also treated North Shore’s certificate of indebtedness as conclusive.

The guarantors appealed. The central questions concerned the scope of a creditor’s duty of disclosure, the enforceability of the November 2004 variation, and whether the certificate prevented reliance on that variation.

1. The appeal was allowed in part. The judgment sum was to be reduced from $52,508,734 to the indebtedness calculated under the Loan Agreement as validly varied in November 2004. That sum was to be agreed or, failing agreement, certified by a Master of the Chancery Division.

2. The Chancellor held that a loan guarantee is not a contract of utmost good faith. Following Hamilton v Watson and Royal Bank of Scotland v Etridge (No 2), the creditor’s duty is confined to unusual features of the contractual relationship between creditor and debtor, or between the creditor and other creditors of the debtor. It does not extend to every matter that may be material to the surety’s assessment of risk. North Shore therefore had no duty to disclose the investigation of Mr Berezovsky or the risk that associated funds might be frozen. Smith LJ agreed. Tomlinson LJ agreed with the Chancellor’s reasoning on this issue.

3. Although unnecessary to the result on disclosure, the Chancellor concluded that a creditor cannot escape an existing duty merely because it reasonably, but incorrectly, believes that the surety knows the unusual fact. Actual knowledge may prevent proof of reliance, but a mistaken belief by the creditor does not extinguish the duty.

4. The November 2004 exchanges objectively disclosed a final agreement varying the interest terms. The judge had erred by reverting to the parties’ subjective intentions when considering whether consideration existed. The mutual compromise of the dispute about interest supplied adequate consideration. Smith LJ agreed that the correct objective analysis led inevitably to that conclusion.

5. The certificate of indebtedness had been calculated under the original interest terms rather than the binding varied terms. It was therefore manifestly incorrect and did not prevent the guarantors from establishing the true, lower indebtedness. The error did not have to be conclusively demonstrable when the certificate was issued; its premise could first be established through judicial determination. All three members of the court agreed that this ground disposed of the certificate issue. Tomlinson LJ preferred not to decide the wider question whether a certificate confined to the amount due could be conclusive about the legal existence of the debt.

1. Court of Appeal (Civil Division): In [2011] EWCA Civ 230, unanimously allowed the guarantors’ appeal in part and directed that liability be recalculated under the effective November 2004 variation.
2. High Court, Chancery Division: Newey J, in [2010] EWHC 1485 (Ch), rejected the guarantors’ defences and ordered them to pay $52,508,734.