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Discharge of a guarantee
Discharge of a guarantee
Discharge of a guarantee
Guarantees are complex instruments.
Lawyers go to great efforts to ensure that
the terms of a guarantee are watertight.
Despite this, there are a number of
circumstances which can result in the
discharge of a guarantee. One particular
minefield is dealings between the lender
and the borrower during the life of the
loan. There are a number of actions of the
lender which can inadvertently result in
the discharge of a guarantee.
Variation of the principal contract
A material variation of the principal
contract (e.g. the facilities agreement)
by the lender and the borrower may
discharge the guarantee. If it is clear that
the variation is insubstantial or that it
is beneficial to the guarantor, it will not
constitute a material variation. However,
the court will only reach this conclusion
if it is obviously so; the court will not
otherwise inquire as to the effect of an
alteration. This test is strict and works
in favour of the guarantor. The mere
possibility of detriment to the guarantor
is sufficient to result in the discharge of
the guarantee. For this reason, as a rule
of thumb, all variations to the principal
contract should be regarded as material.
Giving time
A guarantor may be discharged if the
lender and the borrower enter into a
binding agreement to extend the time
for performance by the borrower of its
obligations under the principal contract.
Release of the borrower
An absolute release of the borrower by
the lender will release the guarantor.
An absolute release may be by written
contract, but it may also be a result
of certain arrangements between the
lender and the borrower. For example,
the novation of the principal contract
(and acceptance of a new debtor in place
of the old) or the composition with the
debtor may result in the guarantee being
inadvertently released.
Solutions
There are means by which the lender
can ensure the guarantor remains on the
hook. The most effective, and the easiest,
is for the lender to obtain the consent of
the guarantor.
Most guarantees do in fact contain
a clause which aims to secure the
guarantor’s prior consent to such dealings
between the lender and the borrower.
So long as the wording of these clauses
covers the exact dealings which occur,
the guarantee will remain valid. But, in
practice, lenders err on the side of caution
and obtain the guarantor’s express
consent at the time of the particular
Norton Rose Fulbright – April 2014 11
In the know
arrangement. This is to avoid any
subsequent dispute over the validity of
the guarantee.
Case Study
Two years ago Bank A entered into a
facilities agreement with Borrower B.
Borrower B’s obligations under the
facilities agreement were guaranteed by
Guarantor C. The guarantee contains a
clause that states that the guarantee will
not be affected by any variation to the
facilities agreement or the granting of
time to Borrower B. Bank A and Borrower
B have agreed to amend the facilities
agreement. The amendments include an
increase to the margin and an extension
of the final maturity date.
The amendments appear to be covered by
the clause in the guarantee and as a result
Guarantor C will be deemed to have given
its prior consent to the amendments.
Nevertheless, Bank A would be advised to
obtain the express consent of Guarantor
C to these amendments to reduce the
risk of future litigation concerning the
effectiveness of the guarantee.
12 Norton Rose Fulbright – April 2014