Michael Hoare & Mary Hoare v AIB PLC & James Luby [2014] IEHC 221

Guarantee – All sums – Conflicting oral evidence as to the nature and purpose of the guarantee

The case concerns Michael and Mary Hoare, a married couple from Galway who were involved in the purchasing and renovating of student accommodation. Michael Hoare also ran a construction company, Dangan Homes Limited. Among the issues that were considered by Charleton J, was the validity of a guarantee given by the plaintiffs to AIB in respect of the obligations of Dangan Homes Limited and whether or not oral evidence as to the understanding of the parties in relation to the granting of the guarantee is capable of overriding the written provisions of the guarantee.

Background

The plaintiffs entered into a guarantee in respect of the loan obligations of Dangan Homes Ltd of €1.844m. The terms of the guarantee expressed to cover not only the present transaction but also all future obligations entered into between the bank and the principal debtor, Dangan Homes Ltd. The Defendant sought to rely on the "all sums" nature of the guarantee to cover new loan obligations of Dangan Homes Ltd.

The plaintiffs argued that they had understood the guarantee to be in respect of a single project only. That project was successful and the loan of €1.844m was repaid.  The Plaintiffs argued that the guarantee therefore was released.

Judgment

The Judge expressed extreme reluctance to allowing any term of a written contract to be overridden orally and stated that "it will be rare indeed for any signed written document to be altered as to its terms by any representation as to its contents". However, based on the testimony of the plaintiffs, the facts presented and the fact that "all the evidence on the guarantee is one way", the Judge held that the guarantee was extinguished by the performance and repayment of the €1.844m loan.

The Judge distinguished arguments such as non est factum (in which stringent conditions must be met) and in relation to express misrepresentation, stated that the defence is not one where a person puts forward the argument that they understood "clear words differently to how they were expressed in a written contract" but more so that the effect of a particular clause was "set at naught" by a misrepresentation by a party who could be regarded as "having authority in terms of the contractual obligation". The Judge noted that in rare circumstances, such a defence could apply to a guarantee.

Factors which persuaded the Judge included:

  • Precedent of Bank of Ireland v McCabe & McCabe [1994] (Supreme Court) – in this case, the defendants admitted that they had executed a guarantee which was expressed to be in respect of a specific transaction but also in respect of all future guarantees. The defendants argued that they had understood the guarantee to be a unique transaction and the manager and assistant manager of BOI gave supporting evidence. The guarantee was held to have been discharged on repayment of the loan for which it was granted.
  • Specific events and oral representations in relation to the guarantee as follows:
    • The initial limit on the amount to be guaranteed which was inserted into the guarantee was amended and reduced by the bank to reflect the actual loan amount borrowed – evidenced an understanding that the guarantee was in relation to a specific loan; 
    • The bank later queried in correspondence in relation to new loan facilities (after the repayment of the €1.844m loan) as to whether new personal guarantees were to be provided by the plaintiffs or whether the plaintiffs would confirm that the existing guarantee for €1.844m could be relied upon; 
    • The repeated refusal of the plaintiffs to enter into any further guarantees after the repayment of the €1.844m loan which was acknowledged by the bank; and 
    • Company resolutions to accept new loan facilities did not reference, in any way, a new guarantee.

Comment

This case is unusual in that Judge Charleton allowed representations to be made in relation to a contract which contradicted the written terms of that contract but the decision is very much specific to the facts of the case and the evidence that both plaintiff and defendant clearly demonstrated a similar understanding as to the purpose and effect of the guarantee.

Another case in which a similar issue arose in relation to "all sums" guarantees was Bank of Scotland v Fergus [2012] in which the defendant claimed that an "all sums" guarantee that was put in place on 1 June 2006 in relation to loan facilities, on or after that date, did not extend to cover loan facilities granted after that date.

The defendant also sought to rely on Bank of Ireland v McCabe & McCabe.  In this case however, the Judge rejected that argument stating that where a guarantee, construed objectively, means that it is a continuing guarantee for all monies, then the onus of proof shifts to the defendant to "establish as a matter of probability that the guarantee, despite its express written terms, was given for a particular facility or transaction. Mr. Fergus has not adduced any evidence to that effect and in my judgment, the evidence given by the Bank officials, including that given on cross-examination, does not establish such facts on the balance of probabilities".

From a practice perspective, the case again highlights the need for caution when dealing with guarantees which are expressed to be "all sums" and the following steps should be adhered to:

  • If a guarantee is to be provided in relation to a specific transaction, the guarantee should be tailored accordingly;
  • If "all sums" security is to be taken by the bank, the borrower and guarantor should be clearly advised as to the meaning and effect of an "all sums" clause in relation to future borrowings and this advice should be clearly documented; and
  • If "all sums" security is to be relied upon at a later stage in relation to new monies by the borrower, it may be advisable to obtain a Deed of Confirmation in relation to the guarantee or, depending on the terms and quantum of the new monies, a new guarantee.