Porter Capital Corporation (the “Claimant”) advanced various sums of money to a company known as Cura under a Commercial Financing Agreement (the “CFA”).  Mr Masters (the “Defendant”), Mr and Mrs Lanzieri and Mr Young were all guarantors of debt owed by Cura to the Claimant.

The guarantee given by the Defendant and his co-guarantors was embodied in an agreement called the Performance Covenant and Waiver (the “PCW”). Under the PCW, Mr and Mrs Lanzieri’s liability was limited to the value of the interest in their home, which was subject to a prior mortgage.

Both the CFA and PCW were governed by the laws of Connecticut, both of which were standard agreements subject to modification. The PCW was drafted, albeit the Court held erroneously, such that the guarantors had to receive notice and give assent to any security being exchanged, surrendered or released. A Settlement Agreement was reached between the Claimant and Mr Young, in which Mr Young paid the Claimant a sum of money and the Claimant covenanted not to pursue proceedings against Mr and Mrs Lanzieri, hence releasing the property. Instead, the Claimant brought proceedings against the Defendant seeking the balance due under the CFA.

Some of the more general issues to be decided were:

What was the scope of the guarantee?
Had the Claimant provided prima facie proof of its case?
Was the Defendant prevented from disputing the amount of the guaranteed debt by Cura’s acceptance of or failure to dispute it?
Was the Defendant prevented from disputing the amount of the guaranteed debt by his acceptance of or failure to dispute it?
Was the Defendant precluded by the terms of the guarantee from taking the points he wished to take?
Was the Defendant released entirely or pro-tanto by the Settlement Agreement which released Mr Young and Mrs and Mrs Lanzieri’s property?

Although this case concerned issues of Connecticut law, it was common ground between the experts that the principles of construction of contracts in Connecticut law and English law are fairly similar. In particular, a contract of guarantee will be construed to give effect to the intention of the parties. The intention of the parties is ascertained by a fair and reasonable construction of the written word and a contract should not be construed in a way that renders it illogical.

The Court held that, applying principles of Connecticut law, the guarantee covered all of Curas’ business as constituted at the time of the guarantee and not just the obligations under the CFA.  The Court then held that the Claimant had provided prima facie proof of its case. It had shown on the balance of probabilities that Cura owed the sums claimed. In particular, it did this by providing schedules of loss; showing confirmation of outstanding balances; showing that there was no dispute about the sums owed and providing evidence of Curas’ voluntary bankruptcy petition which confirmed the amount due.  Having done this, the Court held that the evidential burden then passed to the Defendant to show that the amounts claimed were not due by Cura.

Notwithstanding various arguments made by the Claimant, it was held that the Defendant could challenge the amount of the debt owed. Despite having some evidential value, previous statements and audits do not necessarily constitute a binding contract in respect of a debt due. It was also argued that because the Defendant was a director of Cura, he should have had knowledge of Cura’s obligations. The Court held this not to be the case as the Defendant’s position within Cura was not such that required him to take legal advice on the interpretation of the CFA.

It was argued that the PCW, by way of a waiver of defence clause, precluded the Defendant from taking the points he wished to argue. The experts agreed that although such clauses can be given effect, where they are ambiguous they will be construed against the creditor. This said, it was held that such clauses are not a waiver of the rule of Connecticut law that a Claimant must prove certain facts before it can recover the contracted sum.  The Court held that a Claimant must affirmatively prove that he has performed his obligations under the contract before seeking to enforce it.

Despite the Settlement Agreement entered into with Mr Young, which contained provisions not to pursue Mr and Mrs Lanzierie, it was held that the Defendant was still liable for the balance due. Further, it was held that requiring the consent of the guarantor to release any security was clearly a mistake and the words “with notice or assent” should in fact have read “without notice or assent”. Accordingly, the Defendant was still liable under the guarantee.

Conclusion

Although a decision largely confined to its facts and principles of Connecticut law, this judgment provides a useful reminder to lenders that even if a settlement is reached between one or more guarantors under a Settlement Agreement, a lender may still pursue any balance from a guarantor not party to a settlement.

It is also apparent that guarantees can be drafted such that they cover all obligations of a debtor and not just obligations under a specific loan agreement. Finally, this case shows that a claimant only needs to provide prima facie proof of its case. It will then be for any defendant to dispute the amount claimed.

For further information, please contact Georgina Squire or the Partner with whom you usually deal.