UK: Does A Variation To An Obligation Arising Under A Facility Agreement Discharge A Guarantee?

It is established case law that a guarantor will be released from liability under a guarantee if there was a material or 'not unsubstantial' change to the underlying agreement in respect of which the guarantee has been given, unless the guarantor has consented to that change, or if the change, whilst material, cannot be otherwise than beneficial to the guarantor.

Although guarantees typically contain a 'protection' clause under which the guarantor agrees that, notwithstanding any variation to the initial underlying contract, the guarantee will continue to have effect, without the need for the guarantor's consent at the time of each variation, the Court of Appeal in Triodos Bank NV v Dobbs the Court of Appeal held that if a variation was not, in substance, a variation or amendment to the original underlying transaction but was, in fact, a new agreement outside the general purview of the original guarantee then the guarantor would not be liable in respect of that new agreement, even if, as in Triodos, the guarantor was a director of the borrower and was aware of the revisions to the underlying agreement.

In a recent case in the High Court, Close Brothers v Ridsdale [2012], Mr and Mrs Ridsdale challenged the enforceability of a personal guarantee given to Close Brothers in relation to a development finance facility made to a company of which they were directors. As a result of delays to the development, the term of the facility was extended three times. 

During this period, as a result of the economic climate and the deterioration in the real estate market, other developments being carried out by other entities controlled by Mr and Mrs Ridsdale were also in difficulties, and it would have been difficult to have refinanced or if refinancing was available it would have been on more stringent terms.

Although there had been a material change to the facility agreement, as originally the bank had committed to funding the whole project, and under the extended facility, the bank only committed itself to funding the first phase, Mr and Mrs Ridsdale had consented to that change by signing the new facility letters. The judge noted that the extension must have benefited Mr and Mrs Ridsdale, given that it may well have been better than any other financing available to the company at that time.

In addition, the guarantee contained a standard bank friendly clause to avoid a guarantee being rendered ineffective by a change in the underlying agreement being guaranteed. The extended facility was the type of change envisaged by that clause and therefore there was not a new agreement outside the 'purview' of the original guarantee.

The fall-back position for the bank in the event that it lost on the points above was that there was fresh consideration flowing to Mr and Mrs Ridsdale for each extension so they would remain liable under each of them.  This was a new argument, and whilst it was not decided it, the Judge held that it had much to commend it.

As well as considering the substance of the variations, the judge also considered the form of the variations, which had been documented as amendments to the original facility agreement, and consistent with the finding that the extensions were not new agreements.

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