Is a guarantor released from the guarantee if the lender and borrower change the terms of the underlying loan agreement without the guarantor's consent?
The traditional answer is that a guarantor is released from liability if there has been a material variation of the underlying agreement. But can the lender protect itself through careful drafting of the underlying agreement or guarantee? The Court of Appeal recently considered this issue in
Cancian v Carters.1 We discuss the case and its implications below.
Carters supplied building products to Bella Vista Homes on credit, under a document titled a “credit account application and terms of agreement for supply" (the agreement). Mr Cancian, Bella Vista's sole director, personally guaranteed payment of all monies owing by Bella Vista under the agreement.
Bella Vista anticipated monthly purchases of $400,000, and requested a credit limit of $700,000. Carters initially set the credit limit under the agreement at $50,000. Afterwards, however, Carters increased the credit limit to $800,000. It did not notify Bell Vista or Mr Cancian of this decision.
Bella Vista eventually stopped paying its invoices and was put into liquidation. By that time, it owed Carters more than $1 million. Because Bella Vista was in liquidation, Carters sued Mr Cancian under his guarantee.
Mr Cancian argued that he was not responsible for Bella Vista's debt under the guarantee, because he was not aware of the increase in the credit limit, and did not consent to it.
The position at common law is that a material variation of a lending agreement may discharge a guarantor from liability. The rationale is that a lender should not be able to keep a guarantor bound to a guarantee where they have materially altered the guarantor's potential liability without their consent. Here, a change in credit limit from $50,000 to $800,000 would be material.
However, Bella Vista's agreement with Carters provided that Carters “may impose a credit limit on the Customer's account and alter the credit limit without notice." The Court of Appeal therefore ruled that the increase in credit limit by Carters was not a variation of the agreement. Rather, Carters simply changed the credit limit in accordance with the provisions of the agreement.
The guarantee also included an anti-discharge clause. This provided that the guarantor was not discharged from liability by any variation or alteration of the agreement.
The Court of Appeal held that a significant increase in credit limit, such as that here, fell within the scope of the anti-discharge clause. Accordingly, even if the change in credit limit had been a material variation of the agreement, the anti-discharge provision would have applied and Mr Cancian would still have been liable under the guarantee.
What does this mean for lenders and others who have the benefit of a guarantee?
This case highlights two key steps that lenders and others who have the benefit of a guarantee should take to reduce the risk of a guarantor successfully relying on a material variation of the underlying agreement to avoid liability:
To the extent possible, the underlying loan agreement should expressly state that the lender (and borrower) are allowed to make any future changes that may be anticipated (such as an increase to credit limits). An amendment by a lender that fits within the scope of a permissible variation will not engage the material variation rule.
Guarantees should include anti-discharge provisions. The Court of Appeal's decision shows that, even if there has been a material variation to an underlying agreement, the Court will give effect to the plain meaning of an anti-discharge provision in a guarantee and find the guarantor liable.
If you have any questions about the matters raised in this article please get in touch with the contacts listed or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.