In Deutsche Bank AG v Unitech Ltd the English Court of Appeal recently heard an interlocutory appeal concerning Unitech (a guarantor), UGL (as borrower) and Deutsche Bank (as lender).  In a separate action, UGL had claimed Deutsche Bank has misrepresented the interest rate applicable to the loan, which was calculated based on an average of the London Inter-Bank Offered Rate (LIBOR).

In this action, Unitech sought to avoid guarantor liability on grounds that Deutsche Bank had failed to disclose unusual features of the loan; that Deutsche Bank had breached an implied term not to manipulate LIBOR; that performance of the loan agreement was illegal; and that the loan and guarantee were void due to breaches of UK anti-competitive law by Deutsche Bank.

First, the Court held that the guarantee contained a clause that acted as an indemnity clause.  On that basis the doctrine of unusual features did not apply as a defence to guarantor liability.  The Court held that the scope of the clause was wide enough to act as an indemnity and that Unitech had agreed to indemnify the Bank against 'any amount not recoverable from UGL for any reason'.  The Court held that the non-disclosure of unusual features was captured by this clause. 

The Court then held that although funds under the loan would be converted into Indian Rupees (making repayment of the loan illegal under Indian law), illegality was to be determined based on the place of performance of the contract, which in this case was New York.  The guarantee was not therefore void for illegality.

Finally, the Court held that an individual credit contract is not sufficiently connected with conduct said to be in breach of anti-competition provisions to make it void.  The guarantee was not void for anti-competitive conduct.

See Court decision here.