Earlier this year, the Court of Appeal, in National Merchant Buying Society Limited v Bellamy and Another, held that an all monies, continuing guarantee, given when there was an existing specific obligation, was not discharged by a subsequent variation.
A guarantor's liability under a guarantee is a secondary obligation and is contingent on the underlying primary obligation. If the parties wish to amend the underlying primary obligation, care must be taken to avoid inadvertently discharging the guarantor from its liability under the guarantee.
There is a difference in how 'all monies' guarantees and guarantees in respect of a specific obligation are treated.
The general rule set out in Holme v Brunskill is that where a guarantee is given in respect of a specific obligation, any amendments to the guaranteed obligations will discharge the guarantor's liability under the guarantee unless the guarantor consents to the variation or the variation is patently insubstantial or incapable of adversely affecting the guarantor.
In respect of all monies guarantees and following the decision in National Merchant Buying Society, a variation of an individual contract may not discharge the guarantee unless there is something in the circumstances surrounding the guarantee that imply it was intended to be limited.
From 2000 until December 2008, National Merchant Buying Society had a business relationship with CTF Supplies Limited and the society provided credit to CTF. The shares in CTF were owned 50/50 by Mr Bellamy and Mr Mallett who were both CTF directors. Mr Mallett left CTF in December 2006 and his shares were bought by Mr Bellamy, who continued to run CTF.
A joint and several personal guarantee was provided by Mr Bellamy and Mr Mallett on 17 May 2002 and at this time the credit limit available to CTF was £200,000. The credit limit was formally varied to £400,000, then to £450,000, and finally to £700,000. Following the numerous breaches of the credit limit, the society demanded repayment from the guarantors of the outstanding balance of £772,213 due to it.
At trial, Mr Mallett argued that his guarantee had been given at a time when CTF's agreed credit limit with the society was £200,000 and the subsequent increase from £400,000 to £450,000 in October 2007, and the further increase to £700,000 in July 2008, were without his consent and automatically released him from the guarantee.
The court held that guarantee was not limited to obligations under a specific contract and the guaranteed obligations were all sums now or hereafter due by CTF as the guarantee was worded as follows ".we hereby jointly and severally guarantee the due payment to you of all sums which are now or may hereafter become owing to you by [CTF]."
The decision and interpretation of 'all monies' guarantees
In Bank of Baroda v Patel it was held that the free-standing all monies guarantee should be read in conjunction with the (subsequently varied) facility letter as that was the reason for the giving of the guarantee. Therefore, the guarantee was in respect of a specific contract and it was not an 'all monies' guarantee.
By contrast, in National Merchant Buying Society, the wording of the guarantee was clear and it covered anything due or to become due to the society, without limit. There was nothing in the surrounding circumstances to support any implied limitation, therefore the guarantors were liable for the future dealings between CTF and the society.
The Bank of Baroda case is a useful contrast to the ruling in National Merchant Buying Society because it appears that the courts are now considering the reason for the giving of a guarantee as well as the wording used in the guarantee and the surrounding circumstances.
Whilst the ruling in National Merchant Buying Society seems to be a step in the direction of upholding all monies guarantees, in respect of future loans it will still be advisable to:
- insert clauses in the guarantee which provide that the guarantor consents in advance to amendments being made to the underlying contract (although these clauses do not provide absolute protection for guarantors)
- make it clear that the guarantee is intended to cover all present and future obligations, liabilities and sums due from the underlying obligor
- obtain the written consent of a guarantor prior to any material variations being made to an underlying contract in order to avoid inadvertently discharging the guarantee and to ensure any new obligations are covered by the guarantee
- make sure the guarantee includes an indemnity