Lloyds TSB Bank Plc v Hayward

The rule in Holme v Brunskill releases a guarantor where, after the guarantee, the creditor and principal debtor agree a contractual alteration causing disadvantage or potential disadvantage without the guarantor’s consent. A written facility letter may be varied by a binding oral agreement even though it appears complete and has been signed, because extrinsic evidence is not automatically excluded. A later side agreement requiring replacement security and creating a new event of default may be materially detrimental even if other defaults were available. Contractual protection given to a guarantor may disapply an exclusion clause in the guarantee and require consent before such a variation. Entering the variation without consent can therefore discharge the guarantor.

The bank claimed approximately £400,000 plus interest under three guarantees given by Mr Hayward for the club’s indebtedness. At the first trial, Rimer J gave judgment for the bank. An earlier appeal succeeded and a new trial was ordered. Following the retrial, Evans-Lombe J gave judgment for Mr Hayward and dismissed the bank’s claims: [2004] EWHC 1798 (Ch).

The bank appealed on whether an oral agreement had varied the facility letter and whether a later side letter concerning Mr Hayward’s consent had been correctly construed. The central issue was whether the later arrangements altered the contractual position between the bank and the club to Mr Hayward’s potential disadvantage, despite the terms of his guarantees.

Clarke LJ delivered the leading judgment. Jonathan Parker LJ and Kennedy LJ agreed. The appeal was dismissed and the decision of Evans-Lombe J was upheld.

1. Oral variation. The assessment of oral evidence, particularly where credibility is in issue, is primarily for the trial judge. Appellate interference is exceptional: Assicurazioni Generali SpA v Arab Insurance Group BSC [2003] 1 WLR 577. The judge had carefully assessed the witnesses, documents and probabilities, and was entitled to accept that the bank and the club had reached a binding oral agreement before the meeting ended.
2. The fact that the facility letter appeared complete and was signed during the meeting did not exclude proof of an additional oral term. The principle in Goss v Lord Nugent (1833) 5 B&Ad 58 and the presumption discussed in Gillespie Bros & Co v Cheney Eggar & Co [1896] 2 QB 59 did not make extrinsic evidence inadmissible in all circumstances. The agreement varied the facility arrangements so that payment under Mr Gardiner’s guarantee in respect of the 1996 instalment would not, by itself, trigger default and the bank’s right to call in the loan.
3. Construction. The Hayward side letter had to be construed in its contractual and commercial context. The reference to the loan arrangements in the facility letter included those arrangements as varied orally. The reference to the guarantee repayment schedule was broad enough to include the arrangements governing the timing and reduction of Mr Hayward’s guarantee liability, not merely the written repayment provisions.
4. Potential detriment and discharge. The Gardiner side letter varied the arrangements by requiring replacement security if Mr Gardiner’s guarantee was called and by creating a new event of default if replacement security was not provided. That exposed Mr Hayward to a real risk of earlier liability and was potentially detrimental, even though other events of default might also have been available. The Hayward side letter varied the exclusion clause in his guarantees and reinstated the rule in Holme v Brunskill (1877) 3 QBD 494. The bank entered the Gardiner side letter without Mr Hayward’s consent. He was therefore released from liability under the guarantees.

• Court of Appeal (Civil Division): The appeal was dismissed and the judgment following retrial was upheld: [2005] EWCA Civ 466.
• High Court (Chancery Division): Evans-Lombe J gave judgment for Mr Hayward and dismissed the bank’s claims following the retrial: [2004] EWHC 1798 (Ch).
• Court of Appeal: On the earlier appeal, the court allowed the appeal and ordered a new trial on the issue of the agreement between the bank and the club and any subsequent variation affecting the guarantees.
• High Court: At the first trial, Rimer J gave judgment for the bank on 22 March 2002.