Lloyds TSB Bank Plc v Hayward

A variation of the contractual arrangements between a creditor and principal debtor may discharge a guarantor where it alters the guarantor’s position to his disadvantage and was made without his consent. The rule applies even where the guarantee contains wording intended to preserve liability despite variations, if the guarantor’s contractual protection has itself been varied. The guarantor need not establish the precise financial prejudice caused by the alteration. Unless it is self-evident that the alteration is unsubstantial or beneficial, the guarantor is entitled to decide whether to remain liable.

The Bank claimed £400,000 from a former director of a football club under three all-money guarantees. The claim followed a restructuring of the Club’s indebtedness agreed in September 1994. The Court of Appeal had ordered a retrial of what had been agreed at the meeting on 23 September 1994 and whether any subsequent variation discharged the guarantees.

The principal issues were whether the parties agreed that a replacement guarantee would be required if the initial guarantee was called, and whether the Bank agreed that the Club would not be in default until a later repayment date if the initial guarantee was realised.

1. The Bank failed to prove that the September 1994 meeting produced an agreement requiring the Club to provide a replacement guarantee if Mr Gardiner’s guarantee was called in respect of the first repayment. The Facility Letter contained no such provision, and the contemporaneous records did not establish a concluded oral agreement.

2. The court accepted that Mr Hayward and the Bank had agreed that the Club would have until 30 June 1997 to make the second £250,000 repayment if the first repayment was met by realising Mr Gardiner’s guarantee. That agreement was fundamental to the overall bargain.

3. After the meeting, the Gardiner Side Letter validly bound the Club to provide a replacement guarantee if Mr Gardiner’s guarantee was called before 30 June 1996. This was a variation of the facility arrangements agreed without Mr Hayward’s consent. It exposed him to a demand under his guarantees on 1 July 1996 rather than 30 June 1997.

4. The rule in Holme v Brunskill (1877) 3 Q.B.D. 495 remained good law. Where the contract guaranteed is altered by agreement between creditor and principal debtor, the surety must be consulted. If the surety has not consented, he is discharged unless the alteration is self-evidently unsubstantial or beneficial. The contractual provisions in the guarantees did not prevent application of the rule because the Hayward Side Letter had varied those provisions to require notice of an adverse renegotiation.

5. Mr Hayward’s guarantees were therefore discharged before the Bank demanded payment on 3 July 1996. The Bank’s action failed.

• Court of Appeal: ordered a retrial on the agreement reached at the 23 September 1994 meeting and any subsequent variation affecting the Defendant’s guaranteed liabilities.
• High Court (Chancery Division): on retrial, accepted the Defendant’s account of the relevant agreement, held that the later variation discharged his guarantees, and dismissed the Bank’s action.