Parent Company Guarantees

11 October 2007

Carolyn Greene

Parent Company Guarantees: Making clear what they apply to...

The Court of Appeal has held that a parent company guarantee contained in a joint venture agreement extended to payment obligations set out in a Facility Letter, which was annexed to the agreement. Whether or not the two documents constituted a single or separate agreements was found to be immaterial on the basis that as the Facility Letter was referred to in the joint venture agreement, each document had to be interpreted in light of the other. The case is an object lesson on the need to scope out the 'reach' of a parent company guarantee clearly.

Case Name and Citation
Wolsey Securities Ltd v Abbeygate Management Services Ltd [2007] EWCA Civ 423

Carolyn Greene, Senior Assistant, Dispute Resolution

On 22 November 2000, Wolsey Securities Ltd ("Wolsey") entered into a joint venture agreement with Abbeygate Securities Ltd ("AG Securities") and its parent company Abbeygate Management Services ("AG Management") for the construction of a block of flats (the "JV Agreement").

AG Securities had been incorporated for the purposes of the development and had no assets of its own. Funds for the development were to come in part from a loan granted to AG Securities by Wolsey under a Facility Letter, which was annexed to the JV Agreement. The Facility Letter was signed by both AG Securities and AG Management.

For present purposes, the key terms of the JV Agreement were as follows:

  1. Clause 2.12 which obliged AG Securities to repay to Wolsey all monies advanced under the facility;

  2. Clause 4.3 which entitled Wolsey to debit to AG Securities’ loan account any outstanding "Management Charges".

  3. Clause 8.3 which provided for the payment to Wolsey by AG Securities of Management Charges, which were defined as payments set out on a Cash Flow Appraisal document, also annexed to the JV Agreement;

  4. Clause 10.3 which stated that the AG Management would act as guarantor in the event that AG Securities failed "to perform any of its said obligations herein contained; and

  5. Clause 13, which set out an entire agreement provision in standard terms.

The development was not profitable and AG Securities went into liquidation. Wolsey issued proceedings against AG Management seeking the sum of £88,845.16, plus interest. The sum claimed included a small element of loan repayment but related principally to Management Charges.

AG Management denied liability for Management Charges of any kind on the basis that the JV Agreement and the Facility Letter constituted two separate agreements. AG Management argued that it had agreed to act as guarantor only in relation to AG Securities’ obligations under the JV Agreement. As the Management Charges were due under the Facility Letter, and not the JV Agreement, AG Management argued that it had no liability in respect of the Management Charges. Both Wolsey and AG Management accepted the principle that if the JV Agreement and the Facility Letter constituted one agreement, then AG Management would be liable for the Management Charges. The agreed issue before the Court was, therefore, whether the JV Agreement and the Facility Letter constituted a single agreement or two separate agreements.

At first instance, Park J agreed with AG Management that the two documents constituted separate agreements and that, as such, AG Management was not liable for the payment of the Management Charges. The judge expressed an opinion that as a "joint venturer", Wolsey should share the risk of the development and should not be able to recoup its Management Charges.

Wolsey appealed this decision, and succeeded in getting the decision reversed.

The Court of Appeal considered the proper construction of the phrase "all monies" as referred to at Clause 2.12 of the JV Agreement. It had regard to clause 4.3 and formed the view that if Wolsey did debit the loan account with unpaid management charges, the amount in the loan account (including the charges), fell to be repaid in accordance with Clause 2.12. To the extent repayment of the full amount was not made, AG Management, as guarantors, became liable.

The Court of Appeal did not in the end express a definitive view as to whether or not the JV Agreement and the Facility Letter constituted a single or separate agreements, but rather focused on their combined effect, taking into account the construction of Clauses 2.12 and 4.3.

It held that the combined effect of the documents, when interpreted in light of each other, was that Management Charges as set out in Clause 4.3 included any and all management charges due to Wolsey, whether under the JV Agreement or under the Facility Letter. AG Management was, therefore, liable to Wolsey under the agreement for payment of the sums claimed.

Commentary and Practical Implications.
This decision highlights the importance of ensuring that when drafting a parent company guarantee, care is taken to understand fully the obligations of the guaranteed party and to be fully aware of all potential payments to which the guarantee could extend.

Where there are two or more related agreements in place between the parties, quite possibly with differing obligations, it should be clearly established which obligations the guarantee relates to.