National Merchant Buying Society Ltd v Bellamy and Mallett  EWCA Civ 452
On 9 July I looked at a Court of Appeal decision which showed that it remained arguable that a change in the arrangements between a creditor and the principal debtor might so alter the subject matter of what was guaranteed as to discharge the guarantor. This week comes a timely reminder that the first and fundamental step is to construe the contract to see what obligations are covered by the guarantee.
In National Merchant Buying Society Ltd v Bellamy and Mallett  EWCA Civ 452 C was an industrial and provident society which negotiated bulk purchasing agreements with suppliers for the benefit of its members. Its members were companies in the construction industry. M was a shareholder and joint director of a company (X) which was a member. X had a credit limit with C of £200,000 but appeared to be in financial difficulties. In 2002 C therefore asked M, and the other company director (B), to provide a written personal guarantee under which they jointly and severally guaranteed payment of "all sums which are now or may hereafter become owing" to C by X. In 2006 M resigned as a director and his shares were bought by B, but his guarantee remained in place. C increased X's credit limit to £400,000 and then to £700,000. X continued to purchase supplies through C but became insolvent in 2008 owing C £330,000. C obtained part of that sum from its credit insurers and sought payment from B and M under the terms of the guarantee.
The Appellant’s Case
M submitted that the guarantee had been given on the basis of the contract between X and C under which X had a credit limit of £200,000, which impliedly confined his liability to that limit. He argued that he had not consented to the increase in the credit limit and his liability under the guarantee was therefore discharged.
The Court of Appeal rejected this contention. The guarantee was not of the performance of obligations under a specific contract. It was a guarantee of the performance of obligations arising out of a contemplated course of dealing. Provided that the course of dealing remained within the scope of that contemplated by the guarantee any variations to the manner of dealing between the creditor and the principal debtor would not affect the continuing nature of the guarantor’s liability. As a result, even the very substantial increase in C’s credit limit and the consequent increase in M’s exposure without his knowledge or consent did not discharge his guarantee.
It would have been different if there had been a specific contract. That would have limited the guarantee obligations. Any variation to that contract that was not insubstantial or incapable of affecting the guarantor’s liability would have discharged the guarantor under the rule in Holme v Brunskill (1878) 3 Q.B.D 495.
Giving the judgment of the Court, Rimer LJ said at -:
"38. The proposition is that a guarantee will be treated as in the ‘specific contract’ class if, at the time it is given, the relationship between principal and creditor is governed by a contract of which the guarantor knows the terms. In such a case, the guarantee will be regarded as given on the faith of that contract, and as being confined to ‘seeing to’ the principal’s due performance of it. So put, the proposition is dependent exclusively upon the guarantor alone having knowledge of the contractual terms; and, as I follow it, as having the mechanistic effect of turning every guarantee, however expressed, into a ‘specific contract’ guarantee.
39. The proposition is wrong. A guarantee is merely a particular type of contract. The relevant question – in this as in every case – is ‘what is the nature of the guarantee obligation that the guarantor has assumed?’ That is the question that Phillips J, in the Mystery of Mercers case, recognised as the critical one. It is the question that in St Microelectronics NV v. Condor Insurance Ltd  EWHC 977 (Comm);  Lloyd’s Law Reports Vol 2 525, at paragraph 36, Christopher Clarke J said underlies all cases such as this; and it is the question that the judge also asked himself in paragraph 92 of his judgment in this case. The answer to the question turns on the interpretation of the guarantee, as to which there are no special rules. A guarantor is likely in most cases to know the nature of the business relationship between the principal and the creditor. So is the creditor. But proof of such knowledge by either or both parties to the guarantee does not, by itself, tell you anything conclusive about the nature, terms or intended effect of the guarantee. That depends upon the true interpretation of its language, an inquiry involving ‘the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract’ (Investors Compensation Scheme Ltd v. West Bromwich Building Society  1 WLR 896, at 912, per Lord Hoffmann). In engaging in such an inquiry, it may well be appropriate to have regard to the commercial arrangements which were at the time in place between the principal and the creditor, which will form part of the background against which the guarantee is given. But the proposition that the interpretation of the guarantee is conclusively dictated by knowledge that the guarantor may alone have had is inconsistent with the now well-settled approach to the construction of written instruments, including guarantees, and is wrong.”
Related link: profile of Richard Perkoff