COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
The Hon. Mr Justice Newey
Strand, London, WC2A 2LL
B e f o r e :
THE RT. HON. LADY JUSTICE SMITH
THE RT. HON. LORD JUSTICE TOMLINSON
| NORTH SHORE VENTURES LTD
|- and -
|(1) ANSTEAD HOLDINGS, INC.
|(2) RUSLAN FOMICHEV
(3) VASILY PEGANOV
|Appellants/2nd and 3rd Defendants
WordWave International Limited
A Merrill Communications Company
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
John Machell (instructed by Cooke Young & Keidan) for the Appellants/2nd and 3rd Defendants
Hearing dates : 8th, 9th and 10th February 2011
Crown Copyright ©
(1) advances under the facility should be used for the purpose of the business of Anstead and four other named entities in the sale or purchase of meat or oil products in or to the Russian Federation (clause 2.2);
(2) on the first business day of each calendar month Anstead would pay to North Shore interest on the outstanding principal at the rate of 15% per annum but if default was made in payment of any amount due under the Loan Agreement interest would be paid on that amount from the date of default at the rate of 20% per annum (clause 4);
(3) advances payable under the facility should be paid to a specific account of Anstead at CIM Banque s.a (Geneva) Switzerland (Schedule 2 paragraph 8);
(4) outstanding principal should be repaid, inter alia, on the expiration of a four month notice given by North Shore at any time after the expiration of 12 months from the date of the Loan Agreement.
(1) "In consideration of North Shore executing the Loan Agreement the Guarantors hereby jointly and severally guarantee to pay to North Shore on demand (and upon the event of a default of any payment by [Anstead] under the Loan Agreement) all money and discharge the Indebtedness as primary obligor and not only as guarantor, and also agree to indemnify North Shore on demand from and against any loss it may incur as a result of or in connection with its having now or hereafter advanced any money to [Anstead] together with interest thereon and all other sums due under this Guarantee." (clause 2)
(2) ""the Indebtedness" means all [Anstead]'s present or future indebtedness to North Shore under the Loan Agreement and all [Anstead]'s other liabilities to North Shore whatsoever and wheresoever together with interest, commission, bank charges and any other costs, charges and expenses (on a full indemnity basis) charged or incurred by North Shore in enforcing this Guarantee and any other security held by North Shore from time to time." (clause 1.2)
(3) "A certificate signed by North Shore of the amount for the time being of the Indebtedness and/or the amounts due to North Shore shall be conclusive evidence for all purposes against the Guarantors unless manifestly incorrect." (clause 3.4)
(4) "The liability of the Guarantors shall not be affected nor shall this Guarantee be discharged or diminished by reason of:
[5.1 - 5.3]
5.4 the doing or the omitting to do anything on the part of North Shore that but for this provision might operate to exonerate or discharge the Guarantors from any of their obligations under this Guarantee;
5.5 and this Guarantee shall not be discharged or affected by anything that would not have discharged or affected the Guarantors liability if the Guarantors had been a principal debtor to North Shore instead of a guarantor."
"Upon advice received, which we believe to be correct, we hereby advise that the sum outstanding and due and payable by Anstead Holdings Inc to North Shore Ventures Ltd is US$34,894,207."
(1) The Guarantee was liable to be set aside by the Guarantors and/or was unenforceable against them because North Shore failed to disclose to them the facts that (a) Boris Berezovsky and his associates were being investigated by the Swiss authorities in relation to alleged embezzlement of moneys due to Aeroflot, (b) the bank accounts of Boris Berezovsky and his associates had been frozen by the Swiss authorities and (c) consequently there was a substantial risk that money paid to an associate of Boris Berezovsky in Switzerland would be frozen.
(2) In November 2004 North Shore, acting by Boris Berezovsky, and Anstead, acting by Ruslan Fomichev, agreed that the interest rate should be 15% whether or not there was default, would be paid annually and compounded only from August 2004.
The reply and defence to counterclaim of North Shore denied all those allegations. In addition North Shore relied on clauses 5.4 and 5.5 of the Guarantee in relation to the first defence and clause 3.4 thereof in relation to the second.
(1) The obligation of a creditor to make disclosure to a potential surety extended to any feature relevant to the transaction proposed to be guaranteed which the surety would not expect to exist.
(2) But such duty did not extend to a feature which the prospective surety might reasonably be expected to know.
(3) Given the judge's conclusions on the facts neither guarantor was entitled to set aside the Guarantee.
(4) In any event clauses 5.4 and 5.5 excluded any such right as either guarantor might otherwise have.
(5) Messrs Berezovsky and Fomichev did agree on behalf of North Shore and Anstead respectively to vary the Loan Agreement as alleged but their agreement was not legally enforceable for want of consideration.
(6) In any event clause 3.4 of the Guarantee precluded the Guarantors from relying on those variations to the Loan Agreement.
The Guarantors now appeal, with the permission of Mummery LJ, from the conclusions of the judge I have summarised in sub-paragraphs (2) to (6) both inclusive. By its respondent's notice North Shore challenges the conclusion summarised in sub-paragraph (1). I will deal with the issues I have summarised above in the order in which I have set them out.
"...because no bankers would rest satisfied that they had a security for the advance they made, if, as it is contended, it is essentially necessary that every thing should be disclosed by the creditor that is material for the surety to know. If such was the rule, it would be indispensably necessary for the bankers to whom the security is to be given, to state how the account has been kept: whether the debtor was in the habit of overdrawing; whether he was punctual in his dealings; whether he performed his promises in an honourable manner; - for all these things are extremely material for the surety to know. But unless questions be particularly put by the surety to gain this information, I hold that it is quite unnecessary for the creditor, to whom the suretyship is to be given, to make any such disclosure."
"...I should think that this might be considered as the criterion whether the disclosure ought to be made voluntarily, namely, whether there is anything that might not naturally be expected to take place between the parties who are concerned in the transaction, that is, whether there be a contract between the debtor and the creditor, to the effect that his position shall be different from that which the surety might naturally expect; and, if so, the surety is to see whether that is disclosed to him."
"[The case] rests merely upon this, that at most there was a concealment by the bankers of the former debt, and of their expectation, that if this new surety was given, it was probable that that debt would be paid off. It rests merely upon non-disclosure or concealment of a probable expectation. And if you were to say that such a concealment would vitiate the suretyship given on that account your Lordships would utterly destroy that most beneficial mode of dealing with accounts in Scotland."
"The mere circumstance of the parties supposing that the money was intended to be applied to a particular purpose, and the fact that it was so applied, do not appear to me to vitiate the transaction at all. If there was a stipulation that it was to be so applied, and these were the conditions upon which the money was advanced, it might have affected the transaction."
As there had been no averment of such a stipulation it was not open to Hamilton to rely "upon the mere implied existence of such an agreement". Lord Brougham agreed with the Lord Chancellor. He considered that in the absence of any allegation of fraud or deception the bank was not liable to disclose to Hamilton anything about Elles.
"...a surety is in general a friend of the principal debtor, acting at his request, and not at that of the creditor; and, in ordinary cases, it may be assumed that the surety obtains from the principal all the information which he requires: and I think that great practical mischief would ensue if the creditor were by law required to disclose everything material known to him, as in a case of insurance. If it were so, no creditor could rely upon a contract of guarantie, unless he communicated to the proposed sureties everything relating to his dealings with the principal, to an extent which would in the ordinary course of things be so vexatious and annoying to the principal and his friends, the intended sureties, that such a rule of law would practically prohibit the obtaining of contracts of suretyship in matters of business. This is well pointed out by Lord Campbell in his judgment in Hamilton v Watson 12 Clark & Fin. 118. But I think, both on authority and on principle, that, when the creditor describes to the proposed sureties the transaction proposed to be guaranteed (as in general a creditor does), that description amounts to a representation, or at least is evidence of a representation, that there is nothing in the transaction that might not naturally be expected to take place between the parties to a transaction such as that described. And, if a representation to this effect is made to the intended surety by one who knows that there is something not naturally to be expected to take place between the parties to the transaction, and that this is unknown to the person to whom he makes the representation, and that, if it were known to him, he would not enter into the contract of suretyship, I think it is evidence of a fraudulent representation on his part."
Thus the creditor's obligation of disclosure to the surety extends to a transaction between creditor and debtor not naturally to be expected from the obligation the surety is guaranteeing, but no further.
"Lord Campbell, it is true, takes as his example of what might not be naturally expected an unusual contract between creditor and debtor whose debt the surety guarantees, but I take it this is only an example of the general proposition that a creditor must reveal to the surety every fact which under the circumstances the surety would expect not to exist, for the omission to mention that such a fact does exist is an implied representation that it does not. Such a concealment is frequently described as "undue concealment."
"the creditor is not bound to volunteer information as to the general credit of the debtor or anything else which is not part of the transaction itself to which the suretyship relates: and on this point there is no difference between law and equity."
I will return to these statements later when considering counsel's submissions on this appeal.
"...the necessity for disclosure only goes to the extent of requiring it where there are some unusual features in the particular case relating to the particular account which is to be guaranteed."
Bankes LJ noted that the test laid down in Hamilton v Watson had been expressed in slightly different terms by Vaughan Williams LJ in London & General Omnibus Co. Ltd v Holloway but indicated his preference for the formulation of Lord Campbell in the former.
"It is a well-established principle that, stated shortly, a creditor is obliged to disclose to a guarantor any unusual feature of the contract between the creditor and the debtor which makes it materially different in a potentially disadvantageous respect from what the guarantor might naturally expect. The precise ambit of this disclosure obligation remains unclear."
Lord Scott of Foscote, with whom Lords Bingham and Hobhouse agreed, dealt with the same point in general terms in paragraphs 185 to 188. In paragraph 188 he said:
"...in my opinion, the obligation should extend to unusual features of the contractual relationship between the creditor and the principal debtor, or between the creditor and other creditors of the principal debtor, that would or might affect the rights of the surety...
"346 In my opinion, the ranking agreement between the company, the bank and SWIFT falls within the general proposition expressed by Vaughan Williams LJ in London General Omnibus Co Ltd v Holloway  2 KB 72, 79 (see paragraph 187 above). A surety who pays off the creditor is entitled to be subrogated to the rights of the creditor in respect of the debt in question. And if the creditor, in order to discharge the debt, has recourse to security provided by the surety, the same applies. So, in the present case, if Mrs Bennett had paid the bank the £150,000, or if the bank had obtained payment by realising its security over 15 Elthiron Road, Mrs Bennett would have been entitled to the benefit of the Bank's rights against the company in respect of the £150,000. These rights would have included the bank's rights under its fixed and floating charges. But those rights were subject to the ranking agreement.
347 Moreover the ranking agreement reduced the amount of the company's assets that would be available for the payment of the company's debts to the bank and correspondingly increased the likelihood that the bank would make a call on Mr Bennett or Mrs Bennett, or both, under the guarantee and would enforce its security over 15 Elthiron Road. The ranking agreement did affect the rights of Mrs Bennett as surety.
348 In my opinion, the bank ought to have disclosed to Mrs Bennett, or to the solicitor acting for her, the existence of the ranking agreement.
349 The deputy judge thought that the facts regarding the valuation of the factory premises should also have been disclosed by the bank. Here, I do not agree. It is, I think, up to an intending surety to satisfy himself about the value of the principal debtor's assets or the principal debtor's credit worthiness.
350 The bank's obligation to disclose the existence of the ranking agreement arose, in my opinion, under the general law applicable to suretyship contracts. Mr Jarvis, counsel for the bank, accepted that if the bank had an obligation to disclose the ranking agreement and if Mrs Bennett and Mr Parkyn were on 1 October 1991 unaware of it, Mrs Bennett was entitled to have the legal charge set aside."
In paragraph 347 Lord Scott of Foscote concluded that the ranking agreement affected the rights of the surety, Mrs Bennett, and should have been disclosed accordingly.
"First, the obligation of a creditor to make disclosure to a prospective guarantor need not, even in the case of a guarantee for a loan, be limited (as was [Counsel for North Shore]'s submission) to features of the contract between the creditor and the principal debtor. In London General Omnibus Company Ltd v Holloway, Vaughan Williams LJ treated Lord Campbell's reference (in Hamilton v Watson) to "whether there be a contract between the debtor and the creditor, to the effect that his position shall be different from that which the surety might expect" as "only an example of the general proposition that a creditor must reveal to the surety every fact which under the circumstances the surety would expect not to exist". Vaughan Williams LJ's remarks were, moreover, quoted with apparent approval by Lord Scott in both the Etridge and Estate of Imorette Palmer cases. In Etridge, Lord Scott also said that the disclosure obligation of a creditor should "at least" extend to unusual features of "the contractual relationship between the creditor and other creditors" as well as of that between the creditor and the principal debtor, and the House of Lords concluded that a ranking agreement ought to have been disclosed in Bank of Scotland v Bennett. Further, it would, as it seems to me, be surprising if a loan creditor never had to disclose anything other than a feature of the contract between himself and the principal debtor: as is pointed out in O'Donovan and Phillips, "The Modern Contract of Guarantee", 2003 English edition, at paragraph 4-13, "it would be somewhat odd if the creditor was obliged to disclose an unusual contractual term of the principal agreement, but not the fraudulent practices of the principal". Moreover, I find it difficult to see why there should be a difference of principle between fidelity and other guarantees. I agree with [Counsel for the Guarantors] that a fidelity guarantee does not differ in commercial character from other species of guarantee. While, therefore, I can well understand why, in the case of a guarantee for a loan, a creditor should not normally be taken to have made any representation as to anything other than the contract between creditor and principal debtor, there appears to be no good reason for a special rule of law to that effect. On balance, I consider that the better view is that even a loan creditor can have an obligation to disclose an unusual feature other than of the contract with the principal debtor."
"Secondly, a creditor need not, on the other hand, disclose anything which the prospective guarantor could reasonably be expected to know. A creditor is not, as it seems to me, to be taken to have made a representation in respect of a matter unless he could expect the guarantor not to know it. The fact that a loan creditor is not normally under an obligation to disclose matters bearing on the principal debtor's creditworthiness can be explained on this basis. "The bank or other creditor cannot reasonably be taken as affirming, by mere silence respecting earlier dealings, the financial ability of the person whom the proposed surety is asked to guarantee" because "the probable reason for requiring a guarantee is dissatisfaction with the customer's credit" (to quote from Kennedy LJ in the London General Omnibus case, at 87); in other words, the guarantor can be expected to know that there is reason for concern as to the principal's creditworthiness. Likewise, in Behan v Obelon Proprietary Ltd the creditor "was entitled to assume that the [surety] was aware of [her co-surety's] financial position" (see 330). Again, in Shivas v Bank of New Zealand the creditor was not obliged to disclose matters with which a surety could have been expected to be familiar as the principal debtor's accountant or which the other co-plaintiff could have been expected to discover from her co-trustee."
"And, quite apart from the finding made by the primary judge, there is the circumstance that, generally speaking, a co-surety as well as the creditor may reasonably be expected to make his or her own inquiries about the financial worth or standing of another co-surety and to form an opinion on the basis of those inquiries. In this situation information possessed by the creditor concerning the financial worth or standing of one co-surety could not ordinarily be regarded as information about an unusual and unexpected feature of the transaction which would require disclosure by the creditor to the other co-surety."
Accordingly the conclusion was that there was no duty to disclose because the fact relied on was not "unusual". I agree with counsel for the Guarantors that this case does not warrant any exception from the duty to disclose once it has arisen.
"…a bank as creditor is bound to disclose to the intending surety only something which has taken place between the bank and its customer which would not normally be expected."
He cited in support of that proposition the passage from the judgment of the Master of the Rolls in Lloyds Bank Ltd v Harrison (1925) which I have quoted in paragraph 19 above. On page 364 Tipping J concluded:
"It must not be overlooked in the present case that one of the plaintiffs was not only an intending surety but also the accountant of the company whose bank account was to be guaranteed. To suggest in those circumstances that the bank had a wider duty of disclosure is an unattractive proposition because the bank would have had every reason to expect that Mr Falloon [one of the plaintiffs] in his capacity as accountant of the company was fully familiar with the company's financial position or could make himself familiar if he wished. The bank was also entitled in my view to take the view that Mrs Shivas [the other plaintiff] as the co-trustee could, if she had wished, have made an appropriate inquiry of Mr Falloon as to the company's position and as to the risks inherent in the transaction of guarantee into which she was being requested to enter. What I am saying is that the bank's duty of disclosure must be assessed against what the bank might reasonably have expected the intending guarantors to know already or to be able to ascertain without difficulty should they have been minded to do so."
Given the earlier reference to the extent of the duty, in my view, the concluding sentence must be read as an application of the general principle and not an exception from it.
"276. In the course of 2004, Mr Berezovsky asked Mrs Nosova [a close business associate of his] to become involved with matters relating to the loan to Anstead. On 27 October 2004, she sent Mrs Rapp [the finance director of Anstead] a calculation in which Anstead's liability was assessed by reference to the Loan Agreement. That led to Mr Fomichev's protest that the "loan was at 15 % but not 20% Compound" (see paragraph 225 above), following which Mrs Nosova told Mr Fomichev on 1 November that in her opinion (see paragraph 226 above):
"... what you still have to negotiate with [Mr Berezovsky] is:
1. Whether you pay or not on the frozen money
2. Whether the interest is only compounded or we also have to increase the interest rate as provided for by the agreement."
277. On 11 November 2004, Mrs Nosova sent Mr Jacobson [a solicitor acting for North Shore], with copies to Mr Fomichev and Mrs Rapp, an email in which she said:
"Could you, please, ask to recalculate the interest on 50 mio loan on the following principles:
Interest to be paid once a year 15 % p.a. depending on the dates of disbursements and their corresponding amounts, two weeks of delay of paying the interest grace period, after 2 weeks 15 % to be accrued also on the amount of overdue interest.
The issue of whether interest will be charged or not on the frozen money will be addressed later."
278. Mrs Nosova said in evidence that her email "wasn't meant as a variation of the loan agreement". "Mr Berezovsky offered this," she said, "as just a step to move forward so that they start repaying." It was, she said:
"... goodwill of Mr Berezovsky that didn't find any response because ... they still didn't pay the monies they were owing".
Similarly, Mr Berezovsky said that he "did not intend to forego North Shore's right to interest on the frozen money or to finally agree the interest rate but thought these issues should be 'parked' so that undisputed money could at least start to be paid". He said that he did not remember what had happened in November 2004, but that he knew what was not agreed and that was "not to make step back". For his part, Mr Fomichev thought that he must have spoken to Mr Berezovsky but could not remember exactly what was said.
279. In contrast, Mr Jacobson said that, as far as he was concerned, this was "the final resolution". He agreed that, had he understood the terms to represent a temporary concession, he would have been concerned in correspondence with Anstead to reserve North Shore's right to claim additional interest. He said that he had not seen Mrs Nosova's 1 November email to Mr Fomichev."
"Mr Berezovsky and Mrs Nosova both gave evidence to the effect that no contractual variation was intended. However, the Courts adopt an objective approach when determining whether a contractual agreement has been concluded. Here, Mr Jacobson understood the terms of the 11 November email to represent a "final resolution", and I am prepared to accept that an objective observer would have made the same assumption."
"However, it seems to me that there was no consideration for any variation. [Counsel for the Guarantors] suggested that consideration was to be found in the compromise of a dispute as to liability. I doubt, though, whether that is how the parties viewed matters. The chances are, I think, that Mr Berezovsky agreed to take less interest, not by way of compromise of any legal dispute, but as a concession. In this context, the evidence of Mr Berezovsky and Mrs Nosova is significant. It indicates that Mr Berezovsky saw himself as making a concession to Anstead: as Mrs Nosova said, this was "goodwill of Mr Berezovsky".
"I would only add this: this commercial practice (of inserting conclusive evidence clauses) is only acceptable because the bankers or brokers who insert them are known to be honest and reliable men of business who are most unlikely to make a mistake. Their standing is so high that their word is to be trusted. So much so that a notice of default given by a bank or a broker must be honoured. It ranks as equivalent to, if not higher than, the certificate of an arbitrator or engineer in a building contract. As we have repeatedly held, such a certificate must be honoured, leaving any cross-claims to be settled later by an arbitrator. So if a banker or broker gives a notice of default in pursuance of a conclusive evidence clause, the guarantor must honour it, leaving any cross-claims by the customer to be adjusted in separate proceedings."
Whatever the force of that statement in 2011 it cannot apply to North Shore. Megaw LJ recognised that such a certificate would not be conclusive in cases of fraud or mistake on the face of the certificate. Scarman LJ relied on the fact that there was nothing to preclude a subsequent adjustment between debtor and creditor. For my part I do not consider that the decision in Bache precludes a conclusion in this case that the certificate does not prevent the Guarantors relying on the November variation to the Loan Agreement as a partial defence to the claim from North Shore. However in view of the dictum of the High Court of Australia in Dobbs v National Bank of Australasia 1935 53 CLR 643, 651 to which Tomlinson LJ has referred and my conclusion in relation to the third of the steps to which I have referred, and to which I now turn, I would not determine this part of the appeal on the ground that the certificate cannot be conclusive as to the existence and effect of the variation.
"Absent, perhaps, an arithmetical error, North Shore would not have arrived at a figure as large as that certified without (a) including interest on the frozen money or (b) compounding with monthly rests and using the stated default rate. It would thus have been possible to infer without reference to the schedule that the figure given in the certificate must be incorrect if Anstead was not liable to North Shore for interest on the frozen money or calculated using monthly rests with a 20% default rate."
That statement was made in the context of his earlier conclusion that there had been no variation of the Loan Agreement. But I read it as clear justification for a conclusion that if there had been a variation then there was a manifest error. Given that I would hold that there was a variation enforceable in law, then it follows, as I would hold, that there is a manifest error on the face of the certificate. In those circumstances there is no need to consider whether it is permissible to look at the calculation enclosed with the certificate and letter of demand.
"Provisions such as clause 3.4 may be open to criticism (see e.g. O'Donovan and Phillips, "The Modern Contract of Guarantee", English edition, at paragraph 5-107), but their validity has been accepted by the Courts. It would, as it seems to me, run counter to the evident intention of such clauses for it to be open to a guarantor, faced with (say) an application for summary judgment founded on a certificate, to argue that it would be seen at the conclusion of a lengthy trial that the certificate was wrong on the basis of arguments like those which Mr Fomichev and Mr Peganov have advanced in the present case in relation to the Loan Agreement. In the circumstances, the certificate was not "manifestly incorrect" when it was issued and so provided conclusive evidence of the amount due to North Shore under the Guarantee."
Lady Justice Smith:
Lord Justice Tomlinson :
"It is not easy to see how the amount can be certified unless the certifier forms some conclusion as to what items ought to be taken into account, and such a conclusion goes to the existence of the indebtedness. Perhaps such a clause should not be interpreted as covering all grounds which go to the validity of a debt – for instance illegality. . . But the manifest effect of the clause was to provide a ready means of establishing the existence and amount of the guaranteed debt and avoiding an enquiry upon legal evidence into the debits going to make up the indebtedness. The clause means what it says . . ."