Amending guaranteed obligations without killing the guarantee is tricky. The notorious decision in Triodos v. Dobbs [2005] All ER 364 (and related cases) often makes it unwise just to rely on the excellent and meticulous drafting in the guarantee in the LMA leveraged finance facilities agreements (the LMA Guarantee) to prevent amendments to finance documents from discharging the guarantee. The main options for ensuring the facility remains guaranteed then become:

  • (unless the amendments are clearly trivial or pro-guarantor), the guarantor contemporaneously consenting to amendments to the guaranteed obligations and confirming its guarantee will extend to the amended obligations; or
  • (where amendments are very extensive or fundamental), taking a new guarantee.

These options tend to be equally advisable even if any cap on the guarantee is unchanged.

Why best practice?

Key problems with the cases on this issue are:

  • most of it threatens the guarantee with discharge;
  • where the cases are pro-guarantor, they tend to be solid precedents;
  • pro-finance party cases tend to be easier to treat as one-offs, or to have limited weight. For example, the recent ruling in Maxted v. Investec Bank [2017] EWHC 1997 is a decision of a Bankruptcy Master rather than a High Court judge; and
  • the cases are unclear on many issues. So it is often impossible to say whether amendments will discharge a guarantee, a guarantor confirmation will prevent discharge or (under Triodos) the finance parties must take a new guarantee, because amendments to the finance documents have, in substance, produced new obligations rather than amended obligations.

With so much at stake and the law unclear, best practice is the only realistic risk management option.

Key elements of best practice

The following is not a comprehensive list.

  • Use the LMA Guarantee and related drafting from the LMA's leveraged finance facilities agreements. This includes providing that any reference to a (guaranteed) finance document is to that document as "as amended, novated, supplemented, extended or restated". One could add the words "from to time" and "replaced" to that rule of construction.
  • Adapt the LMA Guarantee to your transaction. For example, the LMA guarantor intent clause aims to mitigate the problems this note discusses. But its leveraged finance origins mean it does not envisage all amendments finance parties might want covered in other markets.
  • Otherwise, as far as possible, do not allow the LMA Guarantee or the related LMA drafting mentioned above to be diluted or amended. Guarantees are fragile and technical instruments. It is unsafe to treat most of their clauses as a starting point for negotiation.
  • If the parties are not using the LMA Guarantee, ensure (among other things) that the waiver of defences language in your guarantee is not too brief, conceptual or generic. Best drafting practice here is to be so laboriously clear, repetitive, specific and emphatic that there can be no debate as to whether the guarantor has waived as a defence the specific events that happen on your financing.
  • Adopt as a default position that the guarantor must contemporaneously consent in writing to all amendments to the guaranteed obligations that are not obviously trivial or pro-guarantor and confirm its guarantee will extend to cover the amended obligations.
  • Where you are not confident that proposed amendments are clearly and expressly contemplated in the waiver of defences clause in your guarantee and would come as no surprise to the guarantor, consider whether Triodos necessitates taking a new guarantee. Especially consider this if the guarantor might plausibly argue under Triodos that, despite the amendments being worded as variations to an existing agreement, in substance and reality, they have produced new obligations or a new agreement. A new guarantee can be taken in a single sentence in an amendment and restatement agreement or guarantee confirmation.

Additional protections

Where parties have not agreed a financing must strictly follow LMA terms, further clauses can strengthen the guarantee. The main options are:

  • taking an outright indemnity from the guarantor against non-payment/performance of the guaranteed obligations. A cap on this indemnity may make it an easier sell;
  • including a free-standing principal debtor clause. Under this clause, the guarantor should unconditionally agree to pay or perform the guaranteed obligations when due. A key point is that the liability under this clause should not be expressed as conditional on anyone else's failure to pay or perform; and
  • adding a free-standing all moneys guarantee clause.

Note that these:

  • options will not necessarily work with every amendment to every financing;
  • principal debtor and all moneys clauses require careful drafting not summarised above; and
  • options are available in some markets, but not others.

Law stated as at 8 December 2017