Finance brief - January 2013
- A Guide to Yacht Finance
- A Guide to Recovering Money from a Russian Personal Guarantor
- Marketforce and IEA 10th "The Future of Private Banking" Conference, October 2012
- General liens and financial collateral
- All monies guarantees: do they do what it says on the tin?
- Suing for book debts after assignment: who can bring proceedings?
- Potential lender liability when taking security over an asset
Guarantees frequently form a key part of finance transactions, and so lenders need to take great care to be sure that they can rely on them. Because the contractual relationship between a lender and a principal debtor is likely to be varied over time, the lender will want to ensure that any guarantees it relies on will survive such variations. This area of law is as complex as it is ancient, increasing the risk that lenders fall foul of the legal requirements relating to guarantees. Helpfully, the recent case of National Merchant Buying Society Ltd v Bellamy and another  EWHC 2563 (Ch) offers lenders some clarification on one of their key areas of concern.
Guarantees come in many shapes and sizes, but one of the key distinctions from a lender's perspective is whether a guarantee is "specific" (in that it guarantees only obligations arising under a specific agreement) or "all monies" (in that it guarantees any and all obligations from the principal debtor to the lender, whether existing at the time of the guarantee or arising in future). Clearly a lender's preferred solution is to obtain an all monies guarantee, though this may not always be possible.
In the case of a specific guarantee, best practice when varying the underlying agreement between the lender and the principal debtor is to alert the guarantor to the proposed variation, to engage them in the process, and to obtain from them a written confirmation of the guarantee (if not, in fact, requiring an entirely new guarantee).
In the case of an all monies guarantee, this requirement would seem not to arise, because the guarantee does not relate to a specific agreement (as the court put it in National Merchant: "there is nothing to vary"). In practice, however, all monies guarantees are often given in the context of a specific agreement. The 1996 case of Bank of Baroda v Patel raised the potential issue that, where a specific agreement can be identified as "the occasion for the granting of the guarantee", an all monies guarantee could be treated as a specific guarantee.
The fundamental question is: what is the guaranteed obligation? If it is merely limited to existing liabilities, then the issues in respect of variation arise. If, however, it extends to future liabilities, then they do not (because "there is nothing to vary"). In deciding which of these is the case, the court will look at both the wording from the guarantee and the surrounding circumstances. Where an all monies guarantee is to be given, best practice is therefore to make it absolutely crystal clear that it is intended to be a true all monies guarantee. As the court will look not only at the wording of a guarantee but also the circumstances, lenders need to take great care to avoid limiting the guarantee to specific obligations (e.g. by representations made in emails or over the telephone).
In National Merchant, the court confirmed the basic rule that when a guarantee is given at a time when there is an existing contract between the lender and the principal debtor (the terms of which are known to the guarantor), but the guarantee is not limited to the liability under that contract, the guarantor will not be discharged by any variation of it.
Notably, National Merchant is a High Court decision only, and the case law on guarantees has a habit of being distinguished by later courts on the basis of differing facts.
We conclude that whilst on a true all monies guarantee variations to the terms of the underlying agreement should not discharge the guarantee, as the National Merchant decision is at first instance and dependent on the particular facts of that case, best practice should for the time being remain to obtain a written confirmation from the guarantor that he / she agrees to any variation of the underlying agreement between the lender and principal debtor.
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