Lender vs. Guarantor: playing the claim game

Claim under a guarantee

Deburo guaranteed loans that RS granted to Deburo’s subsidiaries for property acquisition and development. The guarantees contained a condition precedent that the loan to value percentage (i.e. all outstanding indebtedness as a percentage of the aggregate market value of all the property) must exceed 60% before a claim under the guarantee could be made. When Deburo’s subsidiaries defaulted on the loan, RS sought payment under the guarantee. When payment was not forthcoming, RS issued proceedings. 

After proceedings were commenced, RS obtained valuations that it did not have when it had issued its claim. It sought to amend its original claim to incorporate these.  

The relevant provisions stated “[RS] shall only be entitled to make a claim…at any time that the Loan to Value exceeds 60 per cent”.

Issues with the issuing 

Deburo argued that:

1. the loan to value condition precedent had not been met when the claim was issued, since RS had not met the contractual requirements for a “Valuation”
2. RS could not correct this by amending the claim now, since the condition needed to be met when the proceedings were issued

In relation to 1., the court agreed that the condition had not been met. It based this finding on the established line of cases, stretching back at least a century, that emphasise the need for strict compliance with any condition precedents to a guarantee. Valuations were required for each property, and this had not been done.

In relation to 2., Deburo had to argue that the wording “make a claim” in the loan to value condition precedent referred only to the step of initiating legal proceedings. The court was not prepared to accept this. “Making a claim” had a broader meaning encompassing a demand or request for payment (as, for example, under an insurance policy). “Making a claim” also extended to bringing a new claim by amendment within an existing claim form. It held that RS’ second demand and the amended claim based on this demand constituted a valid “claim” for the purposes of this condition. Deburo’s interpretation did not give effect to the words “at any time”. Additionally, RS could always have issued a fresh claim form, but requiring it to do so merely increased costs and delay.

Judgment: RS Luxembourg II v Deburo Real Estate