The English High Court recently considered whether variations to arrangements under a facility letter created entirely new obligations outside the remit of the existing guarantee under the facility letter or whether such variations constituted amendments to existing guaranteed obligations.

The common law position is that if the variations were considered to amount to a new agreement rather than an amendment to the existing facility agreement, the guarantor would not be liable under the guarantee.

The court found that the variations did not constitute a new agreement. Accordingly, the guarantors’ liability was still in existence. Due to the fact that the judgment was based on the particular circumstances of this case, it does not clearly set out the parameters of what might constitute a variation of an existing agreement or the creation of a new agreement. Of note in this case, was the court ruling that although it was required to review the substance of the variations, in order to determine whether they amounted to a new agreement, it could also consider how the variations were expressed. The court found that both the expression and the nature of the variations did not constitute a new agreement. While this decision is not binding in this jurisdiction, it may be persuasive

The Irish High Court in another recent case stated that it was a “well accepted principle that a material variation of the terms between the lender and the borrower will discharge a surety from liability on foot of the guarantee”. In this case the court decided that the inclusion of a clause in the guarantee specifically allowing for the variation of credit without guarantor consent was sufficient to ensure that the guarantor was not discharged from his liability. Many guarantees contain such a clause specifying that variation of the original facility agreement does not discharge the liability of the guarantor and this may, depending on the facts of the case, provide lender protection. However, in light of the recent English High Court judgment wherein the substance of the variations was reviewed, prudent lenders should consider seeking guarantor consent to changes to the original contract. This will help alleviate the risk that variations are held to be new obligations and to ensure the continuity of the benefit of guarantees to lenders.

Contributed by Fiona O’Donovan.

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