Court of Appeal: Farmer who acted as brother’s guarantor can argue that guarantee is void

About this case:

• Judgment:
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The bank had sought a summary judgment, but Mr Justice Michael Peart agreed with the High Court finding that the farmer’s lack of independent legal advice may have breached the terms of the guarantee, and may therefore be void. Accordingly, the matter should be given a full hearing.

In the Court of Appeal, ACC Loan Management Limited sought judgment against Gerard Sheehan for €166,746 and interest on foot of his personal guarantee and indemnity he executed in March 2008.

This guarantee was one of a number of conditions of a loan sanctioned by the bank to Newmarket Foods Limited which was a company owned and operated by Mr Sheehan’s brother, Vincent Sheehan.

Newmarket Foods defaulted on its loan repayments, and in June 2013 the bank sent a letter of demand to Mr Sheehan calling upon him to discharge the amount owing. He failed to do so, and in October 2013 the bank issued proceedings by way of summary summons.

Independent legal advice

Defending the claim, Mr Sheehan pleaded, inter alia, that in his contract with ACC, confirmation of independent legal advice was required as a prerequisite to the release of funds, but that ACC had in fact relied on an assurance from Mr Sheehan’s solicitor which was not independent, “and was in any event wholly deficient in that he was never advised that his entire farm and livelihood was potentially being put at risk under the guarantee”.

In a sworn affidavit on behalf of ACC, it was apparent that ACC accepted that Mr Sheehan did not receive advice in relation to the contents of the guarantee and indemnity document prior to signing it.

In December 2015, Ms Justice Murphy concluded that an arguable defence was raised by Mr Sheehan which required to be determined by way of plenary hearing. Having then adjourned the matter for mention to the 9th February 2016, she made an order of that date directing a plenary hearing, and also gave the usual directions as to further pleadings to be delivered.

Court of Appeal

ACC appealed to the Court of Appeal against the order made by Justice Murphy. According to Mr Justice Michael Peart, Justice Murphy was correct to conclude that Mr Sheehan had done enough to establish a prima facie defence in relation to legal advice to the required level.

ACC specified that it was a requirement for the release of funds that it receive a “letter from Guarantor Solicitor confirming Guarantor received independent legal advice prior to execution of Guarantee & Indemnity document”.

Justice Peart stated that the bank “need not have imposed such a precondition to a drawdown of the loan,” but that since it had, this was critical to Mr Sheehan’s case and “central to the finding that such a prima facie defence had been made out”.

“Had it not done so, the Court might very well have concluded that there was no obligation upon it to ensure that the guarantor received such advice prior to drawdown, even though on the guarantee document itself it urges the guarantor to get legal advice prior to executing same. That encouragement to seek legal advice may well be given out of an abundance of caution so as to avoid possible difficulties with enforcement down the road”.

Where the bank itself decided that it required that confirmation, and subsequently waived its own requirement unilaterally in the light of statements made by Mr Sheehan’s solicitor, “that is arguably at least something which may at trial be found to provide Mr Sheehan with a defence to the bank’s claim on foot of the guarantee”. Whether or not the bank had a right to waive its own requirement was also something which was necessary to decide upon in a full hearing.

Referring to Aer Rianta v. Ryanair, Justice Peart examined whether it was “very clear” that Mr Sheehan would have no case or arguable defence to the bank’s claim. In the circumstances, Justice Peart considered Mr Sheehan’s case “on this one issue to be at least an arguable issue on the evidence adduced on affidavit”.

Consequently, Justice Peart dismissed ACC’s appeal, but proposed to “vary the order made in the High Court, if necessary, so as to clarify that Mr Sheehan’s defence is confined to the defence found to be arguable by the trial judge” thus making it clear that any failed defence that had previously be argued on Mr Sheehan’s behalf would not be argued again.

Justice Peart added that it was important to emphasise that on a motion for summary judgment, where not all of the issues raised by way of defence on affidavit meet the required threshold, that the order adjourning the case to plenary hearing should clearly identify the issue(s) found to be arguable and limit the defence to be delivered to those issues which have been found to pass the threshold – as per Bussolino Ltd v. Kelly IEHC 220, and NAMA v. Kelleher IECA.