The underlying question for any guarantor is a basic one – what is the extent of my liabilities? The principal question for any lender on the other hand is – how can I ensure the guarantor’s liabilities are sufficient for me to get my money back if the borrower fails to make repayments?
Matters of liability and enforcement can quickly become complicated when variations are made to the original terms of the contract. This is especially the case when the terms can no longer be said to resemble the original agreement which the guarantor agreed to guarantee. Would the guarantor still be liable to step in to make repayments if the borrower defaults in these circumstances?
The reasonable contemplation argument
It is a matter of interpretation and fact as to whether amended terms:
- constitute a genuine variation of the underlying loan agreement, falling within the scope of the original agreement; or
- whether they are so radically different in substance that they can only be said to form new terms entirely.
The “doctrine of purview” considers the latter category. The doctrine has been used in the courts to argue that the guarantor’s liabilities should be discharged in circumstances where the effect of a varied term was outside the “purview”, or reasonable contemplation, of the guarantor. Put another way, where the changes are so significant that they cannot be viewed as a variation to the originally guaranteed agreement but are instead completely outside the scope (or purview) of the guarantee.
Matters that can impact on this include whether or not the guarantee relates to a specific contract or just an arrangement (the latter being more commonly seen with “all monies” guarantees). It is an issue that can present considerable difficulties for lenders when enforcing their guarantees (and any security backing up those guarantees).
Can the “doctrine of purview” be excluded?
The simple (and logical) answer to avoid lenders being caught out by the “doctrine of purview” is to expressly exclude it from applying in the agreement via an “anti-discharge” or “indulgence” clause.
An anti-discharge clause can work where amendments are made to the underlying agreement but there has been considerable debate in the courts as to whether they will work if the amendments are so significant they fall outside the purview of the guarantee. The generally accepted position is that where amendments are so significant, we cannot rely on anti-discharge clauses. Guarantors could still be released from their liabilities if the changes to the terms couldn’t have been reasonably anticipated at the time the guarantee was provided.
So, what is the solution?
Essentially, the guarantor needs to appreciate the nature and effect of their obligations and the lender needs to ensure that it has adequate protection in the event of a default. This could be resolved by the guarantor issuing new consents or guarantees each time there is a significant change to the borrowing and, if the guarantor is an individual, obtaining independent legal advice on such changes. However, whilst this may be the sensible legal answer, a balance must be struck between the guarantee being legally watertight and what is commercially and practically viable.
Lenders should ultimately consider this; if the borrower was to default on their payments, would the key terms of the agreement in their current format come as a shock to the guarantor or would they materially alter the risk that the guarantor is taking on? If the answer is yes, then it would be wise to obtain a new guarantee to prevent any disputes or uncertainties from arising in the future i.e. new terms should equal a new guarantee.
This blog post was written by Parmjit Lal. For further information, please contact:
Parmjit Lal, trainee solicitor, Banking & Finance
T: 0121 212 7894
Joanna Belmonte, senior associate and PSL, Banking & Finance
T: 0161 836 7809