A varied guarantee increasing the guarantors' liability could not be relied upon where it had not been executed.

In Investec Bank (UK) Ltd v Zulman & Zulman, the bank lent £2 million to the defendants' business, £1 million of which was secured by a cash deposit from the defendants. A further advance of £500,000 was agreed to be secured by a guarantee from the defendants. A limitation clause in the guarantee provided that the defendants would only be liable to the extent that their business's liability to the bank at the time of the making of a demand by the bank exceeded £2 million with the maximum amount of their liability being £500,000 plus interest. The loan was later reduced to £1.5 million plus interest by the use of the £1 million cash deposit. A variation letter was drafted providing for the defendants' liability not to exceed £500,000 plus interest and purporting to render the limitation in the earlier guarantee null and void. An intended revised guarantee was drafted by the bank but never executed by the defendants. The business went into administration and the bank sought to enforce the guarantee against the defendants.

The defendants argued that, as the business's debt to the bank was under £2 million, the claim against them should fail under the terms of the first guarantee. The bank argued that the parties had assumed that the reduction of the loan by the transfer of the £1 million cash deposit would not affect the defendants' personal liability in respect of the £500,000 and that the limitation clause would cease to have legal effect. It argued it had acted to its detriment by agreeing to reduce the level of the defendants' business's borrowings and in executing a deed of release and the defendants were therefore estopped from relying on the limitation clause.

The court held that the threshold to the guarantee continued to be £2 million and the reduction of the loan by the use of the deposit sums did not reduce that threshold. The bank had not made out the assumption alleged: the defendants had thought the original guarantee would remain in place and the execution of the variation letter did not have the effect of varying the guarantee by removing the limitation clause. The proposed revised guarantee's existence was not consistent with the allegation that the amendment to the guarantee would be brought about by the variation letter. The original guarantee remained valid and was a defence to the bank's claim.  

Things to consider  

Time and time again we report on cases where issues have arisen in relation to guarantees and their effectiveness. Where any step is being taken that has any effect at all upon a guarantor, or the underlying debtor (such as an agreement for extended time to pay), the effect upon the guarantee, and its continuing validity, needs to be taken into account. Failure to do so could result in a loss of the security intended by the guarantee.