When referring to a guarantee, it is common law that a change to the debt which is being guaranteed, i.e. the ‘underlying obligations’ of the guarantee, can result in a discharge of the guarantor’s obligations. Amending the underlying obligations (for example, by a change to the loan agreement) can even result in existing obligations being released, and at the very least is likely to discharge the guarantor’s obligations going forward.
Historically, the courts have been strict with banks when it comes to guarantees. The rule has even been applied when the guarantor is aware of amendments being made without its consent, or where there is a clause in the guarantee to the effect that amendments may be made without the guarantor’s explicit consent. Such clauses are known as ‘guarantor intent’ clauses and are often used to try to avoid the risk of amendments resulting in the guarantee being discharged. However, these are really only effective if the variation is insubstantial or would not adversely affect the guarantor.
There is no conclusive position on what constitutes a variation. Behaviour (such as waiving an obligation under the underlying loan agreement) can even be deemed a variation in some circumstances.
There is also the possibility that what appears to be a variation can actually be considered to be an entirely new obligation. For example: the High Court has held that where the conditions precedent to a loan were not met and the lender subsequently agreed to make the loan on marginally different conditions, the loan made on the second set of conditions was deemed to be an entirely separate obligation, and not a variation of the original loan. The new obligation is not considered a variation capable of discharging the guarantee but may instead mean that the guarantee does not extend to the new obligation at all (if it is a specific guarantee as opposed to all encompassing).
It is therefore considered to be good practice to obtain the consent of guarantors whenever amendments are made to the underlying loan or if there are any further advances made.
All monies, no problem?
Last year, however, case law relating to ‘all monies’ guarantees offered some comfort for banks. Where the guarantee is a genuine all monies guarantee (meaning it guarantees everything owed to the lender by the borrower and not just sums under a specific agreement or agreements), the variation of an individual contract setting out an obligation from the borrower to the bank was held not to discharge the guarantee. This is because an all monies guarantor agrees to pay whatever is due now and in the future from the underlying obligor to the indemnified party.
Nonetheless, this cannot necessarily be relied upon in absolutely all circumstances. As all monies guarantees are often entered into because the bank and borrower are entering into a specific obligation, it must be made clear to the parties that the guarantee in question is a stand-alone all monies guarantee and is not only relevant in conjunction with the specific loan agreement entered into at the time (i.e. that it will guarantee further advances and facilities). It is certainly sensible for the bank to maintain a record that it was made clear to the guarantor at the time that the guarantee was ‘all monies’, and it is here that authorisations such as board minutes and confirmation of independent legal advice letters can be particularly useful.
For this reason, if the evidence demonstrating the guarantor’s understanding of the all-encompassing nature of the guarantee is lacking and there is to be a new loan agreement, restatement or a significant amendment (and there are no hard and fast rules as to what ‘significant’ would amount to as these things are often not tested until they get to court), it is prudent to obtain the consent of the guarantor.