Good Faith Or Tough Luck? Loan Guarantors Liable For Debt

In the absence of an express term, there is usually no general implied duty of good faith in commercial agreements which are not ‘relational’. The court recently gave valuable guidance on good faith and ‘absolute discretion’ in the performance of a contract, which businesses and their lawyers should note.

The award-winning commercial lawyers at ParrisWhittaker are experienced in advising businesses in Jamaica and the surrounding region on the nature and performance of their obligations under their commercial contracts.

In this case¹, the UK’s High Court considered a contract between a lender and two loan guarantors.  The ruling has important persuasive authority on the courts in The Bahamas and should be noted.

What’s the background?

Sibner Capital Ltd (the lender) had signed a joint venture (JV) agreement with its borrower, a property owner and the loan guarantors in relation to a property development. The JV agreement expressly required the parties to act in good faith, so long it would not restrict Sibner’s rights under the facility agreement.

Under the terms of the facility agreement, Sibner “may in its absolute discretion accept a sum less than the Tranche A commitment [minimum loan repayment of £300,000] plus interest on the Tranche A Repayment Date in satisfaction of the Borrower’s obligation to repay the Tranche A Facility on that Date…”

A dispute arose after the borrower failed to pay Sibner the balance of monies owing by the agreed time, subject to certain conditions. The lender had, weeks earlier, agreed to a repayment less than the Trance A loan followed by the balance. When the balance failed to materialise, Sibner served statutory demands on the guarantors.

In its claim against the guarantors, Sibner argued (among other issues) that its ‘absolute discretion’ was unrestricted by any implied term of good faith under the facility agreement.

What was the court’s approach?

The High Court did not agree that Sibner was under an implied duty of good faith when exercising its discretion under the facility agreement.

• The facility agreement expressly stated that Sibner’s discretion was ‘absolute’ as to how much was repayable to it
• The JV agreement, which did include an express duty to act in good faith, stated that this obligation would not restrict Sibner’s rights under the facility agreement.  Its absolute discretion was unqualified.

This meant that the guarantors could not claim there was a duty of good faith in order to dispute the outstanding debt.  An important factor for the court reaching its decision in the lender’s favour was the fact that the agreement was drawn up with the involvement of lawyers.  That – and the reality that the commercial parties were experienced and had equal bargaining power.

Key takeaways

Always instruct experienced commercial lawyers when negotiating the terms of any business contracts and related documentation to ensure they are robust and effectively protect your interests.

In the absence of express terms, the court will not willingly imply a term into a commercial contract without good commercial reasons. As mentioned relational contracts are one exception (a key hall-mark of a relational contract is the mutually agreed long-term relationship between the parties concerned).

So, if you require the other party to act in good faith in its performance of its obligations under a business agreement with you, insist on an express term to that effect. For robust advice, contact the commercial team at ParrisWhittaker at our Jamaica office on +1.242.352.6112 or info@parriswhittaker.com

¹Sibner Capital Limited v Neil David Martin Jarvis & Suzanne Jane Hughes [2022] EWHC 3273