April 29, 2022
Lending agreements, and in particular guarantees, which come with their own subset of rules, need to be carefully drafted. Even sophisticated parties may find themselves in expensive and risky lawsuits if the language is not precise.
Intercap Equity Inc. v. Bellman illustrates this risk and provides a degree of clarity. Because sophisticated agreements are often tailored to specific situations, this guidance may not resolve all uncertainty, but it is a big step in that direction.
The basic framework is not unusual – a lender sues guarantors who are the principals of the borrowing company. This starts to be more complex because there were a series of guarantees given, as the terms of the loan changed. The last renegotiation of the loan occurred after the last of the guarantees was signed.
The “Second Guarantee” in question was described in the document as a “continuing guarantee” of all existing liabilities of the Borrower to the Lender, and all past or future amounts incurred “in connection with” the existing Loan agreement.
The guarantors boldly argued that the Second Guarantee was NOT a continuing guarantee EVEN THOUGH it said it was.
How do you make that argument?
You point out that continuing guarantees have certain “hallmarks” required by earlier cases. The guarantors argued that these are:
- future advances are covered and the consent of the guarantors is not required;
- the time for the continuing guarantee is indefinite BUT the guarantors may give notice to freeze liability and not be responsible for future advances; and
- continuing guarantees do not refer to a specific loan, but cover future debts generally.
The guarantors suggest on the facts that:
- the Borrower agreed not to increase the amount of the Loan without prior written consent of the guarantors;
- the guarantee did not contain a “freeze” provision; and
- the guarantee refers specifically to the Second Loan Agreement.
The Court of Appeal sinks this adventuresome argument by clarifying that the so-called “hallmarks” are not hard and fast rules. Each case turns on its own facts. Guarantees are contracts, and contracts are interpreted in context.
In this case, the Second Guarantee applies to not only specific liabilities under the Second Loan Agreement, but all amounts “in connection with” that Agreement.
The Court of Appeal has held many times that “in connection with” has a very broad meaning. “Connection” requires only some degree of relationship.
Since the final Loan refinanced and paid out the Second Loan, even though it had a higher loan amount, it was connected.
The guarantors had to pay.
This contrasts with a 2018 Divisional Court decision which found that similar (but not identical) wording was ambiguous and the guarantors were not required to pay. The Court of Appeal in Intercap does not overrule the earlier decision – it emphasizes that subtle fact differences may lead to a different result.
If you are doing sophisticated lending or borrowing, you need lawyers who understand sophisticated loans, like those at Weilers LLP. However, that alone is not enough. Your lawyer can only make sure that your true intention is captured in an agreement, including a guarantee, if that lawyer understands your intention.
At Weilers LLP, we do everything we can do achieve that. However, the final stopgap has to be in your mind and your hands. You need to read your agreement carefully, word for word. You need to make sure that you understand it fully, and that it clearly reflects your true intention. If you have any doubt, you need to tell your lawyer before signing – perhaps some redrafting is required for clarity.
Far better to take a little extra time and effort to get the agreement right in the first place than to spend money on costly and risky law suits later.