The recent decision in National Merchant Buying Society v. Bellamy [2012] EWHC 2563 (Ch) (27 July 2012) (National Merchant) is a welcome one for lenders. Unlike many judicial decisions on guarantees (which often serve to add ambiguity to an already complex and thorny area of law), this decision provides some welcome clarity. It suggests that where a lender has a true all monies guarantee it need no longer agonise over whether to get the consent of the guarantor when amending the obligations of the underlying principal debtor. Nonetheless, the circumstances surrounding the granting of the guarantee may still be relevant when deciding whether a lender has a “true” all monies guarantee.

Amendments of specific guaranteed obligations

Lenders have long known that amending specific guaranteed obligations without the consent of the guarantor can have devastating effects on the guarantee’s validity. Back in 1878 Holme v. Brunskill established a rule that if a guarantee of obligations under a specific contract does not specifically contemplate a variation of those obligations, any amendment to them without the guarantor’s consent will discharge the guarantee. The only exception to this is where the amendment is clearly trivial or obviously for the guarantor’s benefit.

What if the guarantee contemplates variations of the underlying contract? This can help ensure the guarantor remains bound. However, following the Court of Appeal case of Triodos Bank NV v. Dobbs in 2005 it is clear that the guarantor will still be discharged if the amendments to the underlying obligations are outside the “general purview” of the original guarantee, or are so radical that they create a new set of principal debtor’s obligations.

Therefore most lenders now actively involve guarantors when amending specific guaranteed obligations, and often insist on taking fresh guarantees of the amended obligations.

Amendments of obligations guaranteed by an all monies guarantee

Before National Merchant it was not clear how the rule in Holme v. Brunskill (as developed) affected an all monies guarantee. A true all monies guarantee, by its very nature, does not cover the principal debtor’s obligations under a specific contract, but all monies or liabilities now or in the future owing by the principal debtor. Therefore, there seems to be nothing to vary to engage the rule in Holme v. Brunskill.

However, what if the all monies guarantee is given when there is an existing contract between the creditor and the principal debtor, and the guarantor knows the terms of that existing contract? Could varying the underlying obligations then discharge the guarantor? As the judge in National Merchant noted, “surprisingly, there appears to be no conclusive answer to this in the authorities”.

The earlier case of Bank of Baroda v. Patel had suggested that reliance on the “all monies” nature of a guarantee is not always prudent. In that case the guarantee appeared to be a freestanding all monies guarantee. However, although the guarantee made no mention of a facility letter, the bank’s counsel conceded it should in fact be read with the (subsequently varied) facility letter that was the reason for granting the guarantee.

In National Merchant, one of the guarantors argued that the same analysis should apply to his all monies guarantee: he had given the guarantee in connection with a specific obligation of the principal debtor, and so the later amendment of that specific obligation without his consent should discharge the guarantee. The judge rejected this argument, concluding: “If the parties had intended the guarantee to be limited in that way, they would have said so.” The judge did not consider himself bound to follow Bank of Baroda v. Patel because it was not a point the judge had had to make a decision on in that earlier case.

A note of caution …

Although helpful to lenders, National Merchant is only a first instance decision. Even if it were not, it is common for decisions on guarantees to be distinguished according to their particular facts.

The judge in National Merchant made it clear that, when deciding what obligations a guarantee covers, the court must look at both the words of the guarantee and the surrounding circumstances. Therefore, the guarantee’s wording may not be the full story. In National Merchant there was nothing in the circumstances existing when the guarantee was given to support any implied limit on its scope. However, this may not always be the case.

A lender taking an all monies guarantee should be particularly careful not to make any representations to the guarantor that its scope will be limited in some way. If, in reality, a lender is seeking a guarantee of specific obligations only, it is better for all concerned to document it in this way. That way, everyone will remember to involve the guarantor in later amendments to the guaranteed obligations.

Law stated as at 27 November 2012