It is common advice that one should not agree to be a guarantor for another party unless one is fully aware of all the information regarding the primary agreement and the parties involved. A guarantor essentially undertakes to repay a liability when he is himself not the primary recipient of the benefit, thereby putting himself at risk. The law thus protects the guarantor by placing certain disclosure requirements on the creditor to ensure that the guarantor is fully apprised of all essential information.
In North Shore Ventures Ltd v Anstead Holdings Inc and others  EWHC 1485 (Ch), the English High Court had to determine the limits of a creditor’s disclosure obligations to a guarantor. The Court observed that a creditor is required to disclose all highly unusual risks, but is not required to disclose anything which the guarantor could reasonably be expected to know. Further, a guarantee can only be avoided if the non-disclosure is significant to the guarantor.
Here, the guarantors sought to avoid the guarantee on the grounds that they had not been informed of certain substantial risks regarding the principal contract. On the facts, it was determined that the guarantee would not be set aside as the guarantors were actually aware of the alleged risks. In addition, there were certain clauses within the guarantee that were found to exclude liability for non-disclosure by the creditor.
This case raises the question of whether a guarantor is adequately protected by the law of disclosure. While it is logical to require only the disclosure of information which would have made a difference to the guarantor, the degree of ‘difference’ needed is questionable. Further, the acceptance of contractual clauses excluding liability for non-disclosure creates the possibility of potentially onerous situations for guarantors.
- North Shore Ventures Ltd (“North Shore”) entered into an agreement (“the Loan”) to give Anstead Holdings Inc (“Anstead”) a loan facility of US$50 million. Anstead’s owners, Formichev and Peganov, entered into a further agreement to pay Anstead’s debt upon default (“the Guarantee”).
- A portion of the loan facility was drawn down and placed in a Swiss bank account as agreed in the Loan. However, in August 2003, US$18 million of this sum was frozen, and a sequestrian order was made on the application of Swiss authorities. The sum remained frozen for more than 4 years.
- The sequestration was due to the fact that North Shore was associated with a certain Berezovsky, who was the subject of a criminal investigation for alleged money laundering.
- In 2008, North Shore was still owed almost US$35 million. North Shore issued proceedings against Anstead under the Loan and against Formichev and Peganov under the Guarantee.
The guarantors alleged that North Shore had failed to disclose the facts that:
- Berezovsky and the companies associated with him were the subject of investigations by the Swiss authorities, which had frozen a number of their bank accounts; and
- There was a very substantial risk that the proposed advances, which were associated with Berezovsky, might be frozen if they were paid to Switzerland.
The Court thus had to determine whether Formichev and Peganov were entitled to avoid the guarantee by reason of such non-disclosure.
Holdings Of The High Court
It was held that the Guarantee could not be avoided. The non-disclosures were insufficient to render the Guarantee unenforceable as the guarantors were found to be aware of the alleged undisclosed facts regarding Berezovsky. Further, the terms of the Guarantee prevented the guarantors from relying on non-disclosure.
It was accepted that there is a duty on the part of the creditor to disclose unusual facts to a prospective guarantor. After examining the available authorities, the Court laid out its findings as to the scope of this duty.
- The obligation of disclosure is not limited to features of the principal agreement behind the guarantee. Therefore, in the case of a guarantee for a loan, the creditor is obliged to disclose unusual features other than of the contract with the principal debtor.
- A creditor need not disclose anything which the prospective guarantor could reasonably be expected to know. Therefore, a loan creditor is not normally obliged to disclose matters regarding the debtor’s creditworthiness; the guarantor can be expected to know that the guarantee is required because of concerns over the debtor’s creditworthiness.
- It is immaterial that a prospective guarantor could be expected to be ignorant of a particular matter if he could be expected to know of the risk in general terms.
- A creditor need only disclose material risks.
- A guarantee can only be avoided if the non-disclosure was significant to a guarantor, and was capable of making a difference to him. Therefore, a guarantor cannot avoid a guarantee by relying on the non-disclosure of information which he already knows.
Even though the alleged non-disclosures here are not features of the Loan, they are, in principle, matters which North Shore was obliged to disclose. The risk that the proposed advances might be frozen if paid to Switzerland was an unusual and highly relevant feature, particularly where the drawdowns were prima facie to be deposited with a Swiss bank.
However, the Court found that the non-disclosure was not significant to Formichev and Peganov because they had knowledge of the Swiss investigations on Berezovsky and the associated companies, as well as the risks arising from them.
- Formichev had previously worked for Berezovsky, and remained abreast of Berezovsky’s business and financial affairs when the Loan was concluded.
- Formichev would have known of the investigations against Berezovsky, and also that Swiss accounts linked to Berezovsky had been frozen. Even though he may not have known the details, they were immaterial, as he knew enough to be able to evaluate the risks.
- Peganov was unlikely to have known of the Swiss investigations. However, he could reasonably be expected to have been told of the risks by Formichev, his friend and co-venturer, whom he had left to pursue the negotiations relating to the Loan and the Guarantee.
Therefore, Formichev and Peganov were not entitled to avoid the Guarantee on the ground of non-disclosure.
The Guarantee provided that the guarantors’ liability would not be affected by:
“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…
[or] 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.”
The Court found that these clauses were wide enough on their ordinary meanings to cover pre-contractual non-disclosure. Further, it was not inherently improbable that the parties should have intended to exclude liability for non-disclosure as it was the guarantors – as owners of Anstead – who stood to benefit from its activities.
Therefore, even if there had been material non-disclosure on the part of North Shore, the above exclusion clauses prevented Formichev and Peganov from relying on the non-disclosure to avoid the Guarantee.
The law is correct to ensure that a guarantor is fully apprised of all relevant and material information by requiring the creditor to disclose any significant facts which the guarantor would not be reasonably expected to know. However, it is unclear just how ‘significant’ and ‘material’ non-disclosure must be before it releases a guarantor from liability.
The judgment here compared the materiality of non-disclosure to the requirement of inducement in misrepresentations. Still, it is questionable whether the information must be important enough to have been capable of changing the guarantor’s mind about entering the guarantee. Such a standard would be relatively high, and would allow a creditor to get away with withholding a significant amount of information.
Further, the Court acknowledged that parties could contractually exclude liability for non-disclosure. Although it was specified that the exclusion clauses here were successful in part due to the fact that the guarantors were the ultimate beneficiaries of the loan, it raises the possibility that an innocent guarantor may find himself in an onerous position where he is unable to avoid a guarantee even where crucial information was withheld from him.