Case Notes on Contracts of Guarantee

• Date: 01 January 2013

Case Notes on Contracts of Guarantee

KAROLE CUDDIHY1

Introduction

This paper is concerned with the defences that may be raised when creditors

seek to enforce contracts of guarantee. In the typical example, a lender seeks

the enforcement of a personal guarantee entered into in respect of money

advanced to a company. The guarantor may be a shareholder or director of

the company (i.e. the principal debtor), or s/he may have a personal or business

connection to the principal debtor or the persons behind such company. The

Irish courts have seen a veritable f‌lood of such cases in the last number of

years, ref‌lecting the collapse in the economy. The present paper is not an

attempt to comprehensively summarise the types of arguments that may be

raised against the enforcement of guarantees. It is rather a survey of notable

recent cases in the f‌ield.

An important distinction to note in what follows is that often in guarantee

cases the creditor will move for summary judgment. It is thus necessary to

distinguish between, on the one hand, arguments or circumstances that will

suff‌ice to get a defendant over the initial hurdle of having the matter adjourned

to plenary hearing, and, on the other hand, arguments that may ultimately

undermine or reduce the (alleged) substantive indebtedness. To add another

somewhat trite observation, it is of course the case that several of the issues

addressed herein are of general application in banking and contract law, and

are by no means specif‌ic to the law of guarantees.

By way of background, it may be useful to consider f‌irst some general

principles relating to the construction of contracts of guarantee.

Construction contra proferentem?

It is usually said that a contract of guarantee is to be strictly construed and

that any ambiguities in the document should be resolved contra proferentem

(“against the proferror”).2 A number of points need to be borne in mind in

this regard, however. First, the rule only applies “in cases of ambiguity and

where other rules of construction fail”.3 Or, as it has been put:

1 Karole Cuddihy, BCL, LLM (Research), Barrister-at-Law

2

Danske Bank v RQB Ltd and others [2010] IEHC 347 (unreported, High Court,

McGovern J, 23 July 2010), at para.26

3

Danske Bank v McFadden [2010] IEHC 116 (unreported, High Court, Clarke J, 20

April 2010), at para.4.1 (citing St. Edmundsbury and Ipswich Diocesan Board of

Finance v Clark (No. 2) [1975] 1 W.L.R. 468)

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Case Notes on Contracts of Guarantee 81

Orthodoxy … is that [the] contra proferentem [doctrine] ought only to

be applied for the purpose of removing a doubt, not for the purpose of

creating a doubt, or magnifying an ambiguity, when the circumstances

of the case raise no real diff‌iculty. The maxim should not be used to

create the ambiguity it is then employed to solve.4

Secondly, because the origins of the doctrine lie in situations where a powerful

or dominant contractor is able to deal with the other party on a “take it or

leave it” basis,

5

different considerations may come into play when the parties

to a contract are commercial entities. As one judge was moved to remark,

albeit in a slightly different context:

There are no widows and orphans in this case and the participants are

all highly intelligent businessmen of very great experience. In the context

of an MOU being signed expressly subject to contract and all parties

being alert to and well able to consider their particular interests, and

there being little trust between them there are no bricks to build the

“very strong case” that would be needed on the facts to give rise to any

of the estoppels which the Defendant seek to rely on in this case.6

Thus, it will be important to consider the type of instrument which has in

fact been entered into. For example, there is a signif‌icant difference between

a “demand guarantee”

7

entered into by a f‌inancial institution for a fee and

an ordinary guarantee offered by a company shareholder to a bank as a

condition of money being lent to the company.8

Thirdly, and related to this, the Court in commercial cases will attempt to

give a document a construction in keeping with what has been termed “business

common sense”, rather than adopt a strained or unrealistic interpretation.9

4 M.A. Clarke, The Law of Insurance Contracts, 6th edn (London: Informa, 2009),

para.15–5, at p.444 (internal citations omitted)

5 As noted in Danske Bank v McFadden [2010] IEHC 116 (unreported, High Court,

Clarke J, 20 April 2010), para.4.1

6

Spring Finance Ltd v HS Real Company LLC [2011] EWHC 57 (Comm) (unreported,

High Court of England and Wales, His Hon. Judge Mackie QC, 20 January 2011),

para.71

7

This is a (slightly confusing) alternative description for a performance bond, which “is

not a guarantee in the true sense, but rather a particularly stringent form of contract

of indemnity”: see G. Andrews and R. Millett, Law of Guarantees, 5th edn (London:

Sweet & Maxwell, 2008), p.14

8

See WS Tankship II BV v The Kwangju Bank Ltd & Anor [2011] EWHC 3103 (Comm)

(unreported, High Court of England and Wales, Blair J, 25 November 2011), para.127

9 See the judgment of Fennelly J in Leo Laboratories Ltd v Crompton BV [2005] IESC

31 (unreported, Supreme Court, 12 May 2005), p.14 et seq. See also Dunnes Stores

Ltd v Holtglen Ltd [2012] IEHC 93 (unreported, High Court, Kelly J, 27 March 2012),

pp.33–39 (in particular paras.49–52) and Rainy Sky SA & Orsd v Kookmin Bank

[2011] UKSC 50, [2011] WLR 2900

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