The recent case of National Merchant Buying Society Ltd -v- Bellamy and another (“Bellamy”) has further clarified a lender’s rights to pursue a guarantor. Specifically, the Court considered the ability of a lender to rely on a broadly worded guarantee to recover indeterminate sums from a guarantor.
Guarantees – All Monies v Specific Contract
Central to the Court’s decision was the distinction between an “all monies guarantee”, which guarantees payment of money owed at the time or which might become owed thereafter, and a “specific contract guarantee”, which is tied to the performance of a specific contract. In the former case, an alteration to the terms of the contract does not release a guarantor from his or her obligations whereas, in the latter case, it would.
The Bellamy case involved a supply business, CTF, which was a member of the Buying Society, a provident society which negotiated with suppliers on behalf of its members, thereby securing substantial rebates which were passed on to its members. CTF’s directors, Mr Bellamy and Mr Mallett, provided guarantees to the Buying Society when its indebtedness became a concern.
Mr. Bellamy and Mr. Mallett guaranteed payment to the Society of “all sums which are now or may hereafter become owing to [the Society] by [CTF]”. At the time the guarantees were given, CTF’s credit limit with the Society was £200,000. CTF progressively increased its credit limits, although Mr Mallett had left CTF when some of the increases were agreed.
As a starting point, the Court considered the two types of guarantees set out above. Mr Mallett argued that the all monies guarantee he had provided should be discharged as the contract, i.e. the credit facility, was increased without his consent.
In relation to distinguishing between the two types of guarantees, the Court held that the guarantee must be clear on its face as to whether it extends to future obligations. If it does, it cannot be affected by later agreements which alter the liability of the debtor. The Court rejected the idea that a guarantor should be held responsible for no more than a ‘seeing to’ of a contract between a creditor and debtor which the guarantor was aware of, where this was not clearly provided for in the guarantee. So, a guarantee was not to be turned into a specific contract guarantee in every case simply because there was a contract in existence at the time the guarantee was given, which the guarantor knew the terms of. Therefore, the primacy of the terms of the guarantee was made clear. The question to be asked is: “what do the terms of the guarantee provide for?”
In Bellamy, the Court decided that the terms of the guarantee, as set out above, made it an all monies guarantee.
This case demonstrates the importance of framing guarantees in the widest possible language so as not to tie the guarantee to any term of a contract. That will reduce the danger that the guarantee is later construed to be a specific contract guarantee which has been extinguished by a subsequent variation of a contract. Even if the debtor’s liability has arisen out of a specific contract or business relationship, when it comes to the guarantee, it would be prudent not to refer to that particular contact or business relationship. This may be of particular importance for lenders offering credit facilities to borrowers.
It may also be beneficial to make the intended application of the guarantee the subject of an express term, so that there is little room left for argument in the event that a guarantor later seeks to argue that the guarantee has been discharged by a variation, particularly if previous guarantees have been specific contract guarantees.
For further information, please contact Georgina Squire or the Partner with whom you usually deal.