Cologne cathedral at night

This is not a phrase which immediately springs to mind when considering the law on guarantees but was one of the analogies used in a leading case [1] on the circumstances in which a guarantor can be released from its guarantee obligations where there has been a change in the terms of the agreement guaranteed.

Any change = release 

It is a long-standing rule of law that, where obligations under an agreement between A and B are guaranteed by C, and A and B subsequently change the agreement’s terms such that C may be adversely affected by the change, then C is released from liability under the guarantee unless he has agreed to the change.

This rule gave rise to the common practice of including in guarantee documents so-called “indulgence clauses” – these usually provide that the guarantor continues to be liable if the agreement guaranteed is amended or varied, even if the guarantor has not agreed to (or even been made aware of) the amendment or variation. In effect, the guarantor is agreeing in advance to future (and unknown) changes.  Such clauses are often worded in extremely wide terms, but are they necessarily effective?

“We ordered a dock…” 

In the case referred to above, there was a guarantee in respect of a contract to build a dock at Workington. There was indulgence wording, allowing any agreement to be made between A and B for “any alteration in or to the works or the contract”. The company guaranteed subsequently entered into two loan agreements to finance the dock works – was the guarantor liable for the loans?

The House of Lords said no, but emphasised that indulgence wording could only be taken so far – for the guarantor to continue to be liable, the changes made had to be “within the general purview” of the original guarantee. They could not include changes such as “substituting a cathedral for a dock or the construction of a dock elsewhere” (quite why such a substitution would ever be contemplated was, perhaps sensibly, not pursued). More practically, the House of Lords thought that extending the scope of the works so as to double the financial liability would also release the guarantor.

More usual scenarios 

The more usual encounter with guarantees is in the context of loan agreements. In one case [2] where there was indulgence wording in the guarantee, the original loan agreement was replaced with one on different terms, for a bigger loan and for different purposes – the Court of Appeal held that the replacement agreement could not be treated merely as an amendment or variation and released the guarantor.

Get consent to the change 

The safest course is usually to get a guarantor’s consent to any proposed change to the obligations which have been guaranteed. This may not always be feasible or practical, in which case it will be necessary to look at the particular circumstances to see if the indulgence clause will keep the guarantor on the hook. Just don’t build that cathedral…

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[1] Trade Indemnity Co. Ltd v. Workington Harbour and Dock Board [1937] AC1

[2] Triodos Bank NV v. Dobbs [2005] EWCA 630

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.