When referring to a guarantee, it is common law that a change to the debt that is being guaranteed, i.e. the ‘underlying obligations’ of the guarantee, can result in a discharge of the guarantor’s obligations. Amending the underlying obligations (for example by a change to the loan agreement) can even result in existing obligations being released, and at the very least is likely to discharge the guarantor’s obligations going forward.
Historically, the courts have been strict with banks when it comes to guarantees. The rule has even been applied when the guarantor is aware of amendments being made without its consent, or where there is a clause in the guarantee to the effect that amendments may be made without the guarantor’s explicit consent. Such clauses are known as ‘guarantor intent’ clauses and are often used to try to avoid the risk of amendments resulting in the guarantee being discharged. However, these are really only effective if the variation is insubstantial or would not adversely affect the guarantor.
There is no conclusive position on what constitutes a variation. Behaviour (such as waiving an obligation under the underlying loan agreement) can even be deemed a variation in some circumstances…
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