High Court ruling that All Monies Guarantee is not discharged by a variation of a pre-existing underlying contract

As a general rule, any amendment to guaranteed obligations, which are made after the giving of a guarantee, will discharge the guarantor’s liability under the guarantee, unless the guarantor consents or the variation is patently insubstantial or incapable of adversely affecting the guarantor.

However, in the recent High Court case of National Merchant Buying Society Ltd v Bellamy and Another [2012] EWHC 2563, the guarantee in question was an ‘all monies’ guarantee,  concerning whether the variation of the pre-existing specific obligation constituted a variation of the guaranteed obligations.  In this case, the court held that when the guarantor entered into the guarantee, it agreed to pay whatever was due now or in the future from the underlying obligor, therefore, making itself liable for the result of future dealings between the underlying obligor and the creditor.  The variation of the existing obligation did not discharge the guarantor.

The court distinguished its decision from the ruling in Bank of Baroda v Patel [1996] 1 Lloyd’s Reports 391 where the Defendant’s counsel conceded that, although his client’s guarantee appeared to be a freestanding all monies guarantee, it should in fact be read in conjunction with the (subsequently varied) facility letter that was the reason for granting the guarantee.

The distinction between this case and that of Baroda is significant for practitioners as the trigger for giving an all monies guarantee is often the entering into of a specific obligation.  It is therefore vitally important to be clear in those circumstances that an all monies guarantee is intended to be just that.