The claimant was a well-known merchant bank. The first and second defendant were husband and wife. The third defendant was a company set up by the husband for his personal development projects. The claimant advanced sums of money to a subsidiary of the third defendant guaranteed by the husband and wife under a facility letter. The facility letter was then varied by an extended facility letter. The company failed to repay the money. Clause 3 of the guarantee contained a standard provision, on behalf of the bank, to prevent the guarantee being rendered unenforceable by any future changes to the agreement. The claimant brought an action to recover on the guarantees.
The two issues in this case were whether:
- a fundamental change was made to the original facility letter by the extended facility letter, such that it materially affected the risk assumed by the wife and husband under the guarantee, and whether the husband and wife had consented to that change; and
- clause 3 of the guarantee was ineffective in preserving the validity of their guarantees in the face of issue 1, above.
The claim was allowed, as a surety is released from liability under a guarantee, if there is a material change to the primary agreement for which the guarantee was given, unless the surety had notice of the change and consented to it. In addition, the Court stated that, if the change had not been a variation or amendment to the original agreement, but was a substantially new agreement outside the general purview of the original agreement, then the surety would not be liable in respect of that new agreement.
In this case, there had been a material change in the facility and the husband and wife consented to the change. However, the extended facility was not outside the purview of the original guarantees given by the husband and wife. The court held that, although it was required to look at the substance of the variations, it could take account of the fact that, in form, they constituted an amendment of what had gone before (that is, the variations were expressed and documented as amendments to the original facility letter). The extension of the facility and the introduction of phasing were precisely the sort of changes to the facility which clause 3 was intended to anticipate.
The decision does not provide a clear-cut distinction between a variation of an existing obligation, and a new obligation. As a lender it is always best to get the guarantor’s agreement that its guarantee continues to extend to the obligations as varied, and to get such consent at the time of the variation.