To discharge a guarantee, the variation to the principal contract has to be material.
In Bank of Scotland PLC V Makris and O'Sullivan, the bank agreed an overdraft facility for a company owned by the defendants and another (S). The facility was to be secured by a fixed and floating charge, a legal charge over the company's premises, a guarantee from S secured over his property and unsecured guarantees from the defendants. The first defendant and S signed the initial facility letter on behalf of the company. S was not the sole owner of his home. The bank therefore decided to reduce the amount to be extended to the company to take the reduced security into account. Again, the first defendant and S signed the new facility documentation on behalf of the company. The company later went into liquidation and the bank sought to recover under the guarantees. The first defendant argued that the revision of the facility constituted a material variation of the contract between the bank and the company, sufficient to discharge the guarantee he had entered into.
The judge held that the principle that a material variation of the principal contract between the debtor and creditor may discharge a guarantee did not apply in this case. The second facility offered to the company was not a variation of the first offer but a fresh offer of a lesser amount on different conditions. The wording of the guarantee covered the monies advanced under the second facility letter. Further, the first defendant co-signed the second facility letter and thereby showed his consent to the new level of the facility. The guarantee against the first defendant had not therefore been discharged.
Things to consider
When faced with this situation, it is critical to determine the legal standing of the relevant documentation and whether what is on offer is indeed a variation of an existing facility or a new offer. The capacity in which the guarantor acts in relation to the documentation is also relevant in determining knowledge and therefore acceptance of any "variation".