Guarantees can be discharged, and the guarantor released from liability, where the obligation guaranteed is varied (without the guarantor’s consent) so that its terms are materially different.
To avoid this occurring, anti-discharge provisions may be included in the guarantee. Such provisions state that the guarantor will continue to be bound even if the terms of the underlying contract are varied, thereby extending the guaranteed obligations.
In CIMC Raffles Offshore (Singapore) Ltd and another v Schahin Holdings SA, a parent company guarantee was entered into guaranteeing payments by the buyer (as work was performed) under a contract to manufacture and sell two drilling rigs. After the guarantee had been entered into, and following delays by the builder, the sums due on delivery were substantially increased by a variation to the building contract.
The times when milestone payments were to be made were also altered, to include payment being made after delivery. As a consequence, the liability of the guarantor was increased if the buyer did not make the post-delivery payments.
The guarantor had not given consent to the amendments. Following delivery of the rigs, the buyer failed to pay the instalments due and the guarantee was called upon. The guarantor refused to pay.
It argued that the variations to the delivery date and payments were material and had discharged the guarantee as they were outside the purview of what the guarantee originally contemplated. Although the general nature of the obligations remained the same, the liability of the guarantor and the risk of the guarantee being called on were substantially increased. As a result, the anti-discharge provisions were inapplicable.
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Proceedings were commenced. Relying on the anti-discharge provisions the vendor sought summary judgment of the sums due.
Although successful at first instance, the Court of Appeal refused to grant summary judgment. The issue of the extent of the guarantee’s operation was not so clear cut that a decision could be made summarily as to the effectiveness of the anti-discharge provision. The fact that the subject matter of the guarantee remained the same did not conclusively mean that the variations to the underlying contract came within the purview of the guarantee.
If guarantees supporting leasing agreements have such anti-discharge provisions, but the variations to the underlying contract are such as could not have been in reasonable contemplation at the time the guarantee was provided, their effectiveness may well be questionable. Each case will of course be dependent upon its own factual matrix.
The safest course to ensure a guarantee remains enforceable is to obtain the guarantor’s consent to any amendments to the underlying contract which materially increases the guarantor’s liability. This is so even if those amendments or variations appear to fall within the anti-discharge provisions. Although this may require further commercial negotiation, it may avoid subsequent costly disputes.
Greg Standing is a partner in Wragge & Co’s finance litigation team