The recent case of Triodos Bank NV v Dobbs highlights the risk of an inadvertent discharge of an existing guarantee where a lender and borrower agree to amend their original facility agreement. The Triodos decision means that unless the lender gets the express consent of the guarantor to the variation, then in order for the guarantee to remain in place any changes that the lender and borrower make must be either minor or, if more significant, have been expressly provided for in the original agreement.

The basic rule is that a guarantor is released from liability under the relevant guarantee where the lender and the borrower have varied the contractual position between them to the disadvantage of the guarantor without their prior consent. A caveat to that rule is where it is self-evident that the variation is beneficial to the guarantor or that it does not substantially affect the risk borne by the guarantor.

In the Triodos Case, when Triodos Bank demanded repayment of a series of guaranteed loans, the company was unable to pay in full and went into receivership. Attention turned to the guarantor. Despite the standard creditor protection language in the guarantee, the guarantor successfully defended Triodos Bank's claim on the basis that the new loan agreements were more than a variation of the old loan agreement. The sums due under the new loan agreements could not be considered 'due under or pursuant' to the original agreement.

It is interesting to note that the guarantor was aware of the new loan agreements as a director of the borrowing company. However, it was not sufficient to presume that he understood the effect that the new agreement would have on the existing guarantee.

The difficulty in practice now is the question of the degree to which a contract can be varied without releasing the guarantor and without having to seek their consent to an intended variation. The court held in the Triodos decision that variations can be made without the additional consent of the guarantor where:

• the change made can be properly termed a 'variation' rather than a new agreement heightening the borrower's obligations
• the amended facility agreement remains a contract within the 'general scope of the original guarantee'. In other words, the obligations under the varied contract must be of the same kind or nature as under the original facility agreement.

It is therefore crucial to distinguish between a permitted variation of an existing obligation and entering into what is in fact a different obligation. Consequently, creditors would be well advised to ensure that the variation provision in their standard guarantee explicitly contemplates significant (and commonplace) variations - for example, the amount of the indebtedness to be advanced, changes in the purpose for existing or future indebtedness, changes to margin and so on.

In light of the Triodos decision, it is suggested that the best approach now is to obtain written consent from a guarantor for anything other than the most minor variation to the original facility agreement.

For further information please contact Neil O'Keeffe.


Summer 2007.