Will a variation of the underlying agreement invalidate a guarantee?
Guarantees unaffected by variation of agreements – Maxted and another v Investec Bank Plc  EWHC 1997 (Ch)
Investec entered into loan agreements with three companies. Two directors provided a capped guarantee for interest payable on the loans. The guarantee contained a standard “indulgence clause”, which provided the guarantee would not be discharged by “any variation or amendment of any agreement between the bank and the debtors”.
The loans were amended on various occasions to extend the terms and roll up accrued interest. Prior to these amendments, the guarantors had signed a confirmation of the guarantee and waived their right to seek legal advice.
When faced with a statutory demand for monies due under the guarantee, the guarantors argued that the guarantee had been discharged by serious amendments to the loan agreements, and that the confirmation of the guarantee had been obtained by Investec’s undue influence.
The guarantors failed on both grounds.
The Court held that guarantees should be construed like any other contractual instrument – in other words, according to the intention of the parties and the natural meaning of the language used. On the facts, the amendments fell within the indulgence clause and did not impose any new obligations on the guarantors. Further, the guarantors had confirmed the guarantee and consented explicitly to the variations in the independent legal advice waiver. It would be “unreal” to divide their personal knowledge and their capacity as individuals from their knowledge as directors.
The guarantors’ claim of undue influence (based on the argument that the indulgence clause gave rise to a relationship of trust and confidence with Investec) was also rejected. As men of business, the guarantors were capable of understanding the risks involved in the giving of guarantees. The relationship with the bank was purely commercial, and as such undue influence could not arise.
Why is this important?
This decision confirms that the commonly-used indulgence clauses are effective, so that the guarantee remains in place, notwithstanding amendments to underlying loan documents. But there are limits – particularly if an amendment imposes “a new and different obligation”, then the guarantee may no longer apply.
Any practical tips?
Always be careful when drafting a guarantee to provide additional security (eg from a parent company or director). In many cases, it is best to draft these as a “guarantee and indemnity” and you should always include the standard “indulgence clauses”. They will often be executed as a deed to provide consideration.
If there is a (substantial) change to the underlying primary obligation, consider revisiting/reexecuting the guarantee (and indemnity).