Guarantees – Discussing anti-discharge clauses

Most guarantees have an “anti-discharge” clause, these clauses are designed to prevent a guarantor from being discharged from liability and allows the creditor to vary the underlying contract without the guarantor being discharged from their obligations. One of the most referred to authorities is the case of Holme v Brunskill.

In Holme v Brunskill, the case involved the renting of a farm. The farm had sheep on it and a bond was given in relation to the number and condition of the sheep on the farm. A dispute eventuated between the farm owner and the tenant. The dispute was resolved by the tenant giving up half of the leased land and a reduction of the rent payable, this was done without the knowledge of Mr Brunskill who was the guarantor. Mr Brunskill argued that the reduction of the land and rent was a variation of the underlying contract that discharged him.

The guarantee in this case was given for a certain number of sheep in a certain condition from the farm as it was then rented to the tenant. The actions of the owner and the tenant altered that commitment without the consent of the guarantor and the outcome of the case shows that it does not take a major alteration to discharge a guarantor but that it just has to be more than substantial.

An example of an anti-discharge clause is from the case of Dunlop New Zealand Limited v Dumbleton, it reads:

“In order to give full effect to the provision of this guarantee we hereby declare that you shall be at liberty to act as though we were the principal debtors and we hereby waive all and any of our rights as sureties (legal equitable statutory or otherwise) which may at any time be inconsistent with any of the above provisions.”

This provision ultimately waived the rights of the guarantor to be discharged. However, the ruling of Brunskill was applied and it was held that a variation of the underlying contract automatically discharged the guarantors and therefore the anti-discharge clause did not apply. The Courts have since confirmed in further case law that the general principles of contractual construction apply to guarantees and that a variation of the underlying contract has the effect of discharging a guarantee unless it is patently obvious that the guarantor has not been prejudiced.

What solutions are available and how might anti-discharge clauses work? There are suggestions that notifying guarantors and obtaining written consent to proposed amendments that are to be made might help avoid disputes arising, even where the amendments appear to fall within the ambit of the anti-discharge clause. It is evident through case law that the drafting of principal debtor clauses has given the Court some latitude to construe them in favor of the guarantor. Therefore, in order to make an anti-discharge clause work, the drafting of these clauses is likely to become more sophisticated and comprehensive over time.