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Discharge of Guarantees. The Doctrine of “Purview of the Guarantee”.

CIMC Raffles (Singapore Ltd & Anr v Schahin Holdings SA [2013] EWCA Civ 644 

Well–drawn guarantees contain comprehensive “anti-discharge” provisions, designed to prevent a guarantor being discharged from liability by any post-guarantee amendments to the prinicipal transaction or extensions of time to pay or other indulgence given to the principal debtor without the guarantor’s knowledge or consent. This right to be discharged is generally known as the rule in Holme v Brunskill (1878) 3 QBD 495) after the leading case that set out the mature principle. Banks and others have continuously refined these “anti-discharge” provisions to try to make sure that the rule in Holme v Brunskill is stripped of its effect.  

Tucked away in an obscure corner of the arcane and complex law of principal and surety is the doctrine of “purview of the guarantee”. This doctrine originates in academic commentary, but was taken up by the House of Lords in Trade Indemnity Company Limited v. Workington Harbour and Dock Board [1937] AC 1 where the dispute concerned the effect of alterations to a dock building contract on the guarantor’s liability and the guarantee included an “anti-discharge” cause. Lord Atkin said (at 21):

 “The words “any arrangement…for any alteration in or to the said works or the contract” are very wide. Probably they would have to be cut down so as not to include such changes as have been suggested as substituting a cathedral for a dock, or the construction of a dock elsewhere, or possibly such an enlargement of the works as would double the financial liability. An author of great authority [Rowlatt on Principal and Surety, 2^nd ed. (1926), p. 118], happily still with us, suggests that such words only relate to alterations “within the general purview of the original guarantee”.” 

It was not until 2006 in Triodos Bank NV v. Dobbs [2005] EWCA Civ 630 that the doctrine got the full blessing of the Court of Appeal after detailed analysis that had hitherto been lacking. However, the case has been criticised because it was the subject of different reasoning by different judges and is difficult to apply in practice. There are no clear guidelines to help determine whether or not a variation or alteration goes beyond the general purview of the original guarantee.

In the CIMC case the Court of Appeal conducted a further review in an appeal against summary judgment that indicates that if there is a good arguable case that amendments to the principal contract after the giving of the guarantee have altered the nature of the obligation guaranteed to such an extent as to have changed the nature of the obligation beyond the reasonable contemplation of the parties at the time the guarantee was given the matter will need to go to trial. As Sir Bernard Rix said at [65]:

“Ultimately, the various questions of construction which arise on both appeal and cross-appeal, or the closely allied question of the purview of the guarantee, will have to be considered as a whole, in the light of the evidence which will be forthcoming at trial. Moreover, this is not a case where the issues of law which arise on the appeal are straightforward: each of them presents difficulties of analysis, and the jurisprudence is somewhat opaque.”

Sadly, however, the jurisprudence does, indeed, remain opaque. Sir Bernard identified three possibilities for the purview doctrine:

1. Is it a doctrine of pure construction, albeit of particular application to contracts of guarantee?
2. Is it a doctrine of law, reflecting the equitable concerns of Holme v. Brunskill, however much it may be influenced by matters of interpretation?
3. In a case like CIMC an “anti-discharge” provision may have both a protective and an aggressive aspect. It may seek protectively to defend the creditor from the danger of future events discharging his guarantor in the absence of the guarantor’s subsequent consent; and it may seek additionally and aggressively to bind the guarantor to an enhanced liability without taking a further guarantee. The former may (subject to construction) be within the “anti-discharge” provision; the latter outside it. This may depend on the nature of the guarantee itself. A typical banking “all monies” guarantee “is of the latter kind: subject to the possibility of a cap, it covers not only current but also future liabilities and at the same time obviates discharge by strenuous anti-avoidance provisions”. [53]

In addition Sir Bernard considered the effect of a term making the guarantor a “primary  obligor”. His conclusion hardly assists [59]-[61]:

“In sum, the role of primary obligor language in a guarantee is complex and ultimately dependent, as it would seem, on the language and nature of the particular guarantee concerned. None of the cases deal with the purview doctrine.

I would nevertheless accept, for the sake of argument, that section 1(b) of the guarantee (rather than section 1(c)) appears on the face of it to be a powerful clause for the purpose of excluding the Holme v. Brunskill doctrine. The question remains, however, whether it also excludes the purview doctrine, in any of its manifestations. There is no authority which provides any guidance in that respect. In principle, it is at least reasonably arguable that it does not.” 

Conclusions

1. Whether or not  the “purview of the guarantee” principle is engaged at all is highly fact specific;
2. Where it is engaged, because the nature of the alterations or amendments to the principal contract make the guarantee different from what the parties to the guarantee contemplated when it was given, it will be necessary to construe the entire contract not merely the words of the “anti-avoidance provision;
3. Even a conclusion that the events are covered by the wording of the guarantee may not be enough. It remains to be finally determined if, as some judges have considered (notably Longmore LJ in Triodos Bank NV v. Dobbs with whom Neuberger LJ, as he then was , agreed), the purview doctrine is an independent rule of law which can still be applied to circumvent the “anti-discharge” provisions;
4. If the facts justify it, the purview doctrine does provide a fall-back position which will, at least, scotch a summary judgment application.
5. From the creditor’s point of view the best starting point is a widely drawn  “anti-discharge” provision though whether an express agreement that any enlargement to the contract (however substantial) shall fall within the purview of the guarantee would defeat the purview doctrine  would avail if it is a principle of law designed to prevent circumvention of such provisions is doubtful;
6. Obviously, obtaining the guarantor’s consent to any alterations of enlargements is the best course, but it is often not taken for fear of refusal.  Giving the guarantor notice may suffice, at any event, if it can be said that the guarantor has allowed the creditor to think that he has consented (Hollyer v Eyre (1840) 9 C & F 52). Further the effect of Triodos Bank NV v. Dobbs  is that assent, whether previous or subsequent to a variation, only renders the guarantor liable for the contract as varied where it remained a contract within the general purview of the original guarantee and if a new contract was to be secured there had to be a new guarantee.

Relevant link:  profile of Richard Perkoff