4 October, 2015
Guarantees are frequently used in financing transactions as quasi-security to guarantee the payment obligation of the principal debtor to the creditor. Where variations are made to the underlying contract (e.g. a facility agreement), there is a real risk of inadvertently discharging the guarantor from the guarantee. This right to be discharged was established in Holme v Brunskill (1), which articulated the principle that a guarantor will be discharged from the guarantee if he has not consented to an alteration of the underlying contract, unless it is apparent that the alteration is not substantial or is not prejudicial to the guarantor.
In the recent case of ECICS Ltd v Capstone Construction Pte Ltd(2), the High Court had to consider the extent to which anti-discharge clauses found in standard form guarantees would displace the doctrine in Holme v Brunskill and had the opportunity to consider the effectiveness of anti-discharge clauses to circumvent the doctrine in Holme v Brunskill.
Facts
The plaintiff, ECICS Ltd (“ECICS”), is an insurance company. The first defendant, Capstone Construction Pte Ltd (“Capstone”), is a construction company. ECICS provided a credit facility to Capstone, under which ECICS agreed to issue performance bonds or guarantees for construction work done by Capstone. As security for the credit facility, the second defendant, Mr Chew Seng Nan, the third defendant, Mr Yew San Ho, and the fourth defendant, Ms Priscilla Kua, provided personal guarantees to ECICS. Mr Yew and Mr Chew were shareholders and directors of Capstone. Ms Kua is the wife of Mr Yew.
Pursuant to the terms of the credit facility (the “Facility Agreement”), ECICS issued, in 2011, a performance bond to another construction company, Expand Construction Pte Ltd (“Expand”), as security for the performance of Capstone’s
obligations as subcontractor of a construction project at Punggol West. Expand was the main contractor for the Punggol West project. It was a term of the FacilityAgreement that the performance bond must include a proviso to the effect that no demand was to be made under the performance bond unless the Housing and Development Board (“HDB”) also made a similar demand against Expand. As Expand was not agreeable to such a proviso, ECICS eventually issued the performance bond to Expand without that proviso at Capstone’s instruction.
In May 2012, Capstone was awarded another construction project at Bedok. As guarantee facilities were required for the Bedok project, ECICS increased the existing credit facility under the Facility Agreement to $4.6 million pursuant to an
additional agreement made between ECICS and Capstone in June 2012. The increase in credit facility was secured by an “all-monies” personal guarantee from Mr Yew, Mr Chew and Ms Kua. Under the increased guarantee facility, ECICS issued a performance bond to the HDB for work done at Bedok. Subsequently, Capstone was wound up in 2013.
ECICS commenced proceedings to enforce the guarantee. The trial only involved ECICS and Ms Kua, and the other defendants did not participate. At trial, Ms Kua relied on the occurrence of the following events as relevant grounds to discharge her from liability under the guarantee:
- no consent was obtained from her for the variations of the Facility Agreement and the consent letter issued by ECICS was not signed by her; and the removal of the proviso from the performance bond
- and the increase in credit facility without her consent constituted a material variation of the Facility Agreement under the doctrine of Holme v Brunskill , and she was prejudiced by such variations.
Decision
The High Court gave judgment in favour of ECICS. Ms Kua has since appealed against the decision to the Court of Appeal.
The Court rejected Ms Kua’s contentions as it was satisfied that the guarantee contained broadly worded clauses permitting the variations. In any case, Ms Kua had consented to such variations as evidence showed (on the balance of
probabilities) that she had signed the consent letter issued by ECICS.
Clause 7 of Ms Kua’s personal guarantee provided that her obligations as guarantor remained notwithstanding:
“… renewing determining varying or increasing any facilities to or the terms or conditions in respect of any transaction
with [Capstone] in any manner whatsoever whether under or in connection with the Agreement or
otherwise”. [emphasis added]"
In concluding that Ms Kua’s guarantee remained in full force and effect despite the variations to the Facility Agreement, the Court made the following points:
- the variation clause in the guarantee was broadly worded to capture any foreseeable events which may discharge the guarantor. The effect of such a clause “on a plain reading was to ensure that the obligations of the guarantor remained even if there were any changes to the contract between [ECICS] and Capstone”. Although the clause was broad, “there was nothing wrong with breadth if that was the bargain struck between the guarantors, including the 4th Defendant, and the plaintiff”. The purpose of Clause 7 was “clearly … to take the contract out of the rule in Holme v Brunskill.”
- the effectiveness of the variation clause may be limited by the doctrine established inTriodos Bank NV v Dobbs(3), namely, that a clause in a guarantee permitting variations of the underlying contract would only be effective to the extent that the variations fall within the purview of the underlying contract. In other words, if the variations amounted to an entirely new agreement entered into between the guarantor and the bank, they would not be covered by the anti-discharge clause and the guarantor would thereby be discharged from liability. In this case, the High Court however held that:
“[t]he variations in question…did not change the essential basis of the guarantee, which was to cover the exposure incurred by Capstone through the guarantee facility agreement. Neither were any of the variations concerned with guarantee facility agreements that were distinct from the original one, unlike the
situation in Triodos.”
Thus, Ms Kua’s liability for Capstone’s increased exposure was not of such a nature as to take it out of the initial contemplation of the original agreement, which was to require all the guarantors, including Ms Kua, to give an “all monies” guarantee to ECICS.
Likewise, the removal of the proviso did not render her guarantee obligation significantly different from the original agreement and was “not a change of such a degree that it should be interpreted as falling outside the ambit of the original contract”. Even after the removal of the proviso, the building contracts continued to exist and to be covered by the guarantee facility. Hence, no significant change had occurred to such an extent that the main contract supported by Ms Kua’s guarantee was no longer in existence.
In any case, Clause 7 was sufficiently wide to cover the removal of the proviso, given that the plain words of the clause, which referred to “terms or conditions in respect of any transaction with [Capstone] in any manner whatsoever whether under or in connection with the Agreement or otherwise”, were not limited in any way.
Comment
Guarantees are nothing more than commercial contracts and should not be construed any differently from commercial contracts. It is common to find comprehensive, broadly worded anti-discharge clauses in standard form guarantees
to circumvent the equitable doctrine in Holme v Brunskill.
Such clauses are designed to procure the guarantor’s consent in advance that certain events (such as those events contemplated in this case) which may provide the guarantor with a defence to a claim under the guarantee will not discharge the guarantor under the guarantee. So long as the language is clear and there are no good reasons to override the contractual rights of the parties, the approach of the court is to give effect to the principle of freedom of contract and anti-discharge clauses would be enforceable since they are simply part of a contract entered into freely by the parties.
However, as mentioned above, the effectiveness of anti-discharge clauses may be limited by the doctrine in Triodos Bank v NV Dobbs.
Where existing obligations under a facility agreement secured by a guarantee are varied to such an extent that
they amount to fresh obligations, anti-discharge clauses may not be effective to defeat a claim by the guarantor that these fresh obligations are not covered underthe existing guarantee.
The Triodos doctrine, when distilled into general contractual principles, is nothing more than the court respecting the bargain struck between the parties.
If there is doubt as to the enforceability of a guarantee arising from the occurrence of a certain event, a lender can either take a new guarantee or obtain the guarantor’s consent to variations of the underlying contract to avoid any attempt by the guarantor to get off the hook of giving a guarantee.
1 (1873) 3 QBD 495.
2 [2015] SGHC 214.
3 [2005] EWCA Civ 630
Gerard Ng, Partner, RHTLaw Taylor Wessing
