Typical Situation
As a company director you may have given a guarantee to the Company’s suppliers. Typically supply agreements have a credit limit at any given time. Questions arise as to the effect of in increase in the underlying credit limit upon the personal guarantee. Have you been asked to pay far more under the guarantee than you ever thought you were liable for? Does an increase in the credit limit discharge your liability or not ?General Principle
Variations to the contract between the supplier or lender made without the consent of the guarantor after the guarantee has been given can operate to discharge the guarantee. Holme v Brunskill (1878) 3 QBD 495). For this reason nearly all bank guarantees will have carefully drafted clauses designed to avoid this happening. However personal guarantees in supplier contracts are frequently drafted less carefully and leave the door open to arguments about discharge of liability where the underlying contract has been changed.
Variation that can discharge guarantee liability
The Court of Appeal decision in the case of Triodos Bank NV v. Dobbs [2005] EWCA Civ 630 is authority for the proposition that a variation to the original contract such as the granting of increased credit, will discharge the guarantor from liability if the variation on its true construction in fact amounts to a contract that was different to that contemplated by the parties, including the guarantor, at the time the original guarantee was given. In this case the guarantor can be discharged even if, as a director of the company, he consented to the variation.
Variations that will not discharge liability
In National Merchant Buying Society Ltd v Bellamy and Mallett [2013] EWCA Civ 452 the Claimant was an industrial and provident society which negotiated bulk purchasing agreements with suppliers for the benefit of its members. Its members were companies in the construction industry. Mr. Mallett was a shareholder and joint director of his company which was a member. The company had a credit limit with the Claimant of £200,000 but appeared to be in financial difficulties. In 2002 the Claimant therefore asked Mr. Mallett to provide a written personal guarantee under which guaranteed payment of "all sums which are now or may hereafter become owing" to the Claimant by the company. In 2006 Mr. Mallett resigned as a director but his guarantee remained in place. The company’s credit limit was increased to £400,000 and then to £700,000. The company became insolvent in 2008 owing the Cliamant £330,000. The Claimant obtained part of that sum from its credit insurers and sought payment Mr. Mallet under the terms of the guarantee.
Mr. Mallett argued that the guarantee had been given on the basis of a contract with a credit limit of £200,000, which therefore limited liability on the guarantee to £200,000. As he had not consented to the increase in the credit limit his liability under the guarantee was therefore discharged.
The Court of Appeal decided that the guarantee was not linked to a specific contract but was a guarantee of all monies that would become due between the Claimant and the company. As the course of dealing between the claimant and the company was in the contemplation of the parties when the guarantee was given the liability on the personal guarantee was not discharged and Mr. Mallett had to pay.
The Court said :
“ The relevant question – in this as in every case – is ‘what is the nature of the guarantee obligation that the guarantor has assumed?’ The answer to the question turns on the interpretation of the guarantee, as to which there are no special rules”
Conclusion
1. If you are resigning your position as director of a company it is always best to remember that you need to make provision to deal with your potential guarantee liability at the point of resignation.
2. If however you are being pursued under the terms of an earlier personal guarantee then you will need to :
a. Check the terms of the guarantee itself
b. Check the terms of the underlying contract
c. Find out what happened since you resigned and
d. Take advice.
Patrick Selley
17th June 2014
www.patrickselley.com
email: patrick.selley@keystonelaw.co.uk
