Porter Capital Corporation v Masters

Debt – Guarantee – Enforcement – Claimant seeking to enforce guarantee in respect of debts owed by company — Whether defendant guarantor liable for all company’s debts to claimant – Whether settlement agreement with co-director guarantors discharging guarantee absolutely – Claim allowed in part The claimant was a factoring company incorporated in Alabama and operating in Connecticut. It entered into a commercial financing agreement with a company (C) to advance certain sums to C.  The defendant was the guarantor of debts owed by C to the claimant under an agreement (the PCW) entered into on the same day as the CFA. Under the PCW, the defendant, his co-directors and another individual (Y) all guaranteed C’s liability to the claimant but the co-directors’ liability was limited to the value of their interest in their home, which was subject to a prior mortgage. The PCW provided that the “undersigned hereby consent that from time to time, before or after any default by [C], with notice to or assent from the undersigned, any security at any time held by or available to [the claimant] for any obligation of [C] … may be exchanged, surrendered, or released …”. A settlement reached between the claimant and Y, in which Y agreed to pay the claimant a sum of money and the claimant covenanted not to pursue proceedings against the co-directors, which had the effect of releasing their property. The claimant brought an action against the defendant for the balance allegedly due and unpaid under the CFA in the sum of $2,698,198.86, plus interest. There was an issue between the parties as to the scope of the guarantee. The principal issue was whether the defendant was liable under the guarantee for all C’s liabilities to the claimant or whether the settlement agreement, which had released the co-defendants’ property, discharged the guarantee, absolutely or pro tanto, to the prejudice of the defendant. Questions arose whether the property was security for any obligation of the company under the PCW or security only for the guarantor’s obligation; and whether the PCW required notice or assent for any release of security or whether the word: “with” in the relevant clause was an obvious mistake and should be read as “without”, so that the settlement agreement involved no infringement of the defendant’s rights as regards PCW. Held: The claim was allowed in part.(1) The PCW explicitly provided that the guarantee covered liabilities outside of the CFA. It followed that the CFA had to have been intended to cover, at least, any liability of C to the defendant connected with C’s business as constituted at the time of the guarantee. Since the defendant had guaranteed all C’s liabilities to the claimant, all the claimant had to do was to establish a prima facie case, on the balance of probabilities, that C owed the sums claimed. On the facts, the claimant had done so. That did not mean that there was conclusive evidence of the debt but the case was amply proved in the sense that the evidential burden was transferred to the defendant to show that all or some of the amount claimed was not due from C, or that he had been released: Robins v National Trust Co [1927] AC 515 applied. Jackson v Irvin [1809] 2 Camp 48 distinguished.(2) The co-directors’ property was “security for any obligation of [C]” within the meaning of the PWC. The guarantees were security for C’s obligations, and it followed that any security for the guarantees was also security for C’s obligations, to which the claimant might have resort if neither C nor the guarantors discharged all C’s obligations. (3) A court might alter the literal language of a contract without resort to the equitable doctrine of reformation to correct errors or omissions which were plain on the face of the document and where only one reasonable interpretation was possible. It was obvious in the present case that the word “with” in the PCW, was a mistake for “without”, partly because otherwise there was an inconsistency with other terms. The words “with notice or assent” made no sense, since if it was enough that notice was given, the alternative of assent, which necessarily required prior notice already having been given, was meaningless. It therefore ought to be corrected without the need for an action for reformation. A requirement that the claimant should have to give notice or obtain consent from the guarantors for a wide variety of normal commercial actions was highly unlikely to have been intended as between a factoring company and a customer. On the facts, it was impossible for the defendant to show that a breach of the PWC had caused him any loss. In all the circumstances, the settlement agreement did not extinguish the defendant’s liability or any part of it. Lawrence Jacobson (instructed by Bermans LLP) appeared for the claimant; Iain Pester (instructed by Charles Russell & Co) appeared for the defendant Eileen O’Grady, barrister