Walker Morris

Variations and indulgence clauses — avoiding inadvertent release of guarantees

The law of guarantees is complex and, in the heat of a commercial deal, it is all too easy to inadvertently release a surety to the detriment of yourself or your client. What are the key principles of which all transacting parties should be aware, and how can you get a current deal done without discharging an underlying liability?

It might seem trite to say, but a guarantor’s liability is contingent upon the underlying obligations it has guaranteed. If those underlying obligations are altered, the guarantor can be released. When primary contracting parties want to move forward with their commercial objectives, all too often contractual terms are tweaked, payments or loan facilities are changed, commercial concessions or practical arrangements are made, and guarantees are therefore inadvertently discharged. The law in this area is full of subtleties and it is difficult to draw a clear line as to the circumstances in which changing commercial deals can proceed safely, and those in which guarantors will be released. In the wake of a Court of Appeal decision on the topic, it is helpful to review the law and the potential pitfalls…

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