Guarantees: a continuing need to be careful

It is established case law in the UK that a guarantor will be released from any liability under a guarantee if there is a material change to the underlying agreement in respect of which the guarantee has been given unless the guarantor has consented to the change or the change is in fact beneficial to the guarantor.

Guarantees habitually try to address this issue by providing that the guarantee will continue to have effect notwithstanding any change to the underlying agreement, so that the consent of the guarantor does not need to be sought each time.

The court of appeal has held in Tridos Bank NV v Dobbs that if the variation was not in truth a variation of the original agreement, but a new agreement outside the scope of the original documents, the guarantor would not be liable in respect of the new agreement even if the guarantor was a director of the borrower and was aware of the changes being made.  Therefore the nature of the amendments is critical.

In the more recent case of Close Brothers Limited v Ridsdale [2012] a guarantee of a development facility which had been provided by the company’s directors, Mr & Mrs Ridsdale, was challenged by the guarantors.  They alleged that the obligations under the facility agreement had materially changed (because it had been extended three time with the amount of funding being reduced from the amount required to fund the entire development to that required to complete the first phase of the development.

The judge considered the fact that the extension of the facility benefited the guarantors (funding was unlikely to have been obtained on better same terms at the time), and the form of the variations (which had been documented as an amendment to the original facility agreement) which the judge concluded were not new agreements.  His conclusion was therefore that the guarantors were not discharged.  In addition, while he did not rule upon the point, the judge noted that the terms of the guarantee contained the standard clause regarding variation of the underlying agreement and that such wording is relevant in considering such an issue.

In practice it will be better not to chance the issue especially where the guarantees are an integral and fundamental part of the bank’s security.  The advice must therefore always be to obtain the specific written agreement of the guarantor[s] to the amendments.

For further details on any of the issues covered in this update please contact Angela Stallard, Partner in Corporate and Commercial on 02075832222 or [email protected]