Lloyds TSB Bank Plc v Shorney & Anor

A creditor may increase a principal debtor’s liabilities only where the surety has consented or the surety contract clearly permits the variation. A clause allowing variation of advances or banking facilities does not necessarily authorise the creditor to take materially increased guarantees where those guarantees prejudice the surety’s equitable remedies. A clause postponing the surety’s rights of reimbursement and subrogation until the creditor is paid in full limits the exercise of those remedies; it does not itself authorise alterations to the underlying transaction which the surety could not reasonably have contemplated. Where such an alteration causes prejudice, equity may prevent reliance on the postponement clause without discharging the surety entirely.

Mr and Mrs Shorney mortgaged their home to secure Mr Shorney’s liabilities to the Bank, subject to a maximum recovery of £150,000. The mortgage contained provisions permitting certain variations of banking facilities and postponing the mortgagor’s rights against the customer until the Bank had been paid in full.

After the mortgage was granted, Mr Shorney entered into further guarantees which materially increased his liabilities. Mrs Shorney was not informed. She later paid £150,000 towards the mortgage debt. The county court held that the Bank could not rely on the postponement clause and refused to order sale of the property. The Bank appealed, raising issues concerning construction of the mortgage, equitable protection of sureties, disclosure, subrogation and estoppel.

1. Appeal dismissed. The Bank was precluded from relying on clause 21 because it had obtained further guarantees which materially prejudiced Mrs Shorney’s position without her consent.
2. Equity protects a surety’s ability, after payment, to recover from the principal debtor and to obtain the benefit of securities held by the creditor. A creditor cannot increase the surety’s liability or vary the underlying transaction so as to prejudice the surety without consent, unless the contract clearly authorises that conduct.
3. Clause 16 authorised variations of advances, accommodation or facilities in circumstances falling within its wording. It did not cover the taking of further guarantees for the company’s liabilities in this case. The concluding general words did not extend the clause to that transaction.
4. Clause 21 operated to postpone Mrs Shorney’s equitable remedies until the Bank had been paid in full. It did not authorise the Bank to alter her position by increasing Mr Shorney’s liabilities beyond what she could reasonably have contemplated. The Bank could have relied on the clause if it had obtained her consent to the prejudice.
5. The case was not, in substance, one of non-disclosure which avoided the mortgage. The appropriate equitable relief was tailored to the prejudice: the Bank was prevented from relying on clause 21, rather than being deprived of the mortgage altogether. Mrs Shorney was not a volunteer when she paid under threat of enforcement, and she was not barred by the rule in Henderson v Henderson (1843) Hare 100.
6. The Bank was ordered to pay the respondents’ costs.

• Court of Appeal (Civil Division): dismissed the Bank’s appeal from the decision of His Honour Judge Weeks QC dated 18 December 2000.
• Taunton County Court: reversed the Deputy District Judge’s order enforcing the charging order by ordering sale of the property.