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Cite as: [2011] EWCA Civ 230, [2011] Bus LR 1036, [2012] Ch 31, [2011] 3 WLR 628, [2011] 2 Lloyd's Rep 45

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		Neutral Citation Number: [2011] EWCA Civ 230
		Case No: A3/2010/1673(A)

IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
The Hon. Mr Justice Newey
[2010] EWHC 1485 (Ch)

Royal Courts of Justice
Strand, London, WC2A 2LL

09/03/2011

B e f o r e :

THE CHANCELLOR OF THE HIGH COURT
THE RT. HON. LADY JUSTICE SMITH
THE RT. HON. LORD JUSTICE TOMLINSON
____________________

Between:

	NORTH SHORE VENTURES LTD	Respondent/Claimant
	- and -
	(1) ANSTEAD HOLDINGS, INC.	1ST Defendant
	(2) RUSLAN FOMICHEV (3) VASILY PEGANOV	Appellants/2nd and 3rd Defendants

____________________

(Transcript of the Handed Down Judgment of
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____________________

Francis Tregear QC and Paul Sinclair (instructed by Enyo Law LLP) for the Respondent/Claimant
John Machell (instructed by Cooke Young & Keidan) for the Appellants/2nd and 3rd Defendants
Hearing dates : 8th, 9th and 10th February 2011
____________________

HTML VERSION OF JUDGMENT
____________________

The Chancellor:

Introduction

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:

(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.

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:

(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."

(clause 5)

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:

"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."

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:

(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.

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:

(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.

Duty of Disclosure of creditor to surety

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:

"...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."

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

"...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."

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

"[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 Lord Chancellor agreed. He considered that:

"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.

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:

"...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.

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:

"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."

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:

"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.

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:

"...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.

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]:

"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...

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:

"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 [1912] 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.

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:

"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."

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:

"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."

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:

"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.

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:

"…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.

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.

Variation of the Loan Agreement

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:

"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."

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

"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."

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:

"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".

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.

Clause 3.4 of the Guarantee

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:

"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.

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:

"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.

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

"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."

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.

Conclusion

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.

Lady Justice Smith:

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.

Lord Justice Tomlinson :

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:-

"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 . . ."

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.