UK Caselaw on the effect of variation of an agreement

UK Caselaw on the effect of variation of an agreement on the enforceability of a guarantee

National Merchant Buying Society Limited and (1) Andrew Bellamy and (2) Steven Mallett [2012] EWHC 2563

In this English High Court of Justice case, Mr N. Strauss Q.C. ("the Judge") held that an all sums due, continuing guarantee given when there was a (subsequently varied) existing obligation between the creditor and the underlying obligor, would not be discharged by that subsequent variation.

The first and second named defendants were the shareholders of a partnership company, CTF Supplies Limited ("CTF") that held an account with the National Merchant Buying Society Limited ("the Society"). Credit Insurance was provided by Euler Hermes UK plc. As CTF's account fell into arrears in 2001, the Society requested that the defendants give guarantees. The defendants jointly and severally guaranteed the due payment of all sums due to the Society by CTF. The guarantee stated "This guarantee shall be a continuing guarantee, subject to the right of any or either of us to give notice of revocation thereof... but no revocation shall in any way diminish or affect our liability to you in respect of any indebtedness of [CTF] incurred under any contract or obligation entered into between you and [CTF] prior to your receipt of such notice..."

In this case, the second named defendant contended that he should be discharged from liability under the guarantee as there had been a material variation to the contract between the Society and CTF to which he did not assent. Mr Mallett had left the CTF in 2006 and stated that he was unaware that (a) the credit limit was formally varied from £400,000 to £700,000, (b) that the credit limit was repeatedly breached (or informally and repeatedly varied) and (c) the Society accepted liability to pay suppliers for orders placed by CTF Midlands Limited, a new company formed by Andrew Bellamy.

The second named defendant cited the Court of Appeal decision, Triodosbank NV v Dobbs [2005] Llyod's Reports 588. In this case, the court held that variation was not permitted and the guarantee would be discharged where:

• The new agreement provided finance for a different purpose to the original loan.
• The new agreement was for a much larger sum that the original loan. 
• The rescheduled agreement was substantially different from the original loans and was not within the scope of the variation anticipated by the original loan agreements.

The Judge distinguished the Triodosbank case as it concerned a guarantee covering liabilities under two specific loan agreements which were then varied. The Judge said there is no doubt that if Mr Mallett's guarantee had been limited to CTF's liabilities under specific contractual arrangements with the Society at the time of the guarantee, he would have been discharged as a result of the significant increases in the facilities offered to CTF to which he did not assent. However, the Judge distinguished this particular case as it did not relate to any specific contractual arrangements. 

The Judge said that the question for the Court in all cases is what is the guaranteed obligation: is it the existing obligation, or does it extend to other obligations, present or future? The Judge relied on the approach of the Vice Chancellor in English case of Burgess v Eve L.R. 13 Eq. 450 that the court must ascertain the obligations that are covered by the guarantee from the words of the guarantee and the surrounding circumstances. It was held that the wording of the guarantee could not be clearer. The guarantee covers anything due or to become due, without limit.

It was argued that since the occasion for seeking the guarantee was the obtaining of credit insurance in the sum of £200,000, justifying a credit limit of £200,000 for CTF, this should be treated as a guarantee for a facility of £200,000 with the result that any increased facility not assented to by the guarantors would lead to a discharge. The Judge said that if the parties had intended the guarantee to be limited in that way, they would have said so. As such the Judge found that the defendants were liable for the total outstanding amount claimed by the Society.

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