National Merchant Buying Society Ltd v Bellamy & Anor

The scope of a guarantee depends upon its objective construction in its commercial context. A guarantor’s knowledge of an existing contract between creditor and principal debtor does not, by itself, convert an unlimited guarantee into one confined to that contract.

A material and potentially prejudicial variation discharges a surety where the guarantee secures performance of a specific contract. By contrast, a freestanding guarantee of all present and future indebtedness ordinarily extends to liabilities arising from a contemplated course of dealing. Variations within that course, including increased credit, do not discharge the guarantor unless the guarantee, properly construed, imposes a relevant limit.

The Society supplied goods through a buying arrangement to CTF Supplies Ltd. Andrew Bellamy and Stephen Mallett, then CTF’s shareholders and directors, jointly and severally guaranteed all sums then or later owing by CTF. Mallett subsequently left CTF but did not revoke the continuing guarantee.

CTF’s credit limit was later increased and repeatedly exceeded. It also incurred liabilities for goods delivered to an associated company, CTF Midlands Ltd. After CTF became insolvent, the Society obtained judgment in the High Court against both guarantors for £331,627.26 plus interest.

Mallett appealed. He contended that the increases in CTF’s credit limit and the transactions involving Midlands materially varied the underlying arrangements without his consent and therefore discharged the guarantee. The central issue was whether the guarantee secured a specific contractual arrangement or all indebtedness arising from a contemplated course of dealing.

1. Appeal dismissed unanimously. The guarantee was a conventional freestanding guarantee of all money then or subsequently owing by CTF. Its language did not link Mallett’s liability to CTF’s credit limit or impose a monetary ceiling.

2. The nature and extent of a guarantor’s obligation depend upon the true interpretation of the guarantee. Ordinary principles of contractual construction apply. The relevant meaning is that which the document would convey to a reasonable person possessing the background knowledge reasonably available to the parties, consistently with Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896.

3. A guarantee of obligations under a specific contract incorporates the relevant contractual limits, whether expressly or by necessary implication. A variation which is neither manifestly insubstantial nor incapable of prejudicing the surety may then discharge the surety under Holme v Brunskill (1877) 3 QBD 495. Where, however, the guarantee covers obligations arising from a contemplated course of dealing, changes within the scope of that dealing do not discharge the guarantor.

4. A guarantor’s knowledge of the existing arrangements between creditor and principal debtor does not conclusively determine the guarantee’s scope. The rejected argument would have converted every guarantee, however expressed, into a guarantee confined to an existing contract known to the guarantor. That approach was inconsistent with settled principles governing the construction of written instruments.

5. The increases in CTF’s credit limit therefore did not discharge Mallett. Had the parties intended liability to be limited to £200,000, or to later limits individually approved by him, the guarantee could have said so. Its express continuing and revocation provisions instead enabled a guarantor to prevent further exposure by giving notice.

6. The Midlands transactions also fell within the guarantee. CTF itself arranged for the purchases and became liable to the Society, while the goods were merely delivered to Midlands. No impropriety or departure from CTF’s ordinary business was established. The resulting sums were accordingly debts owing by CTF and secured by the guarantee.

• Court of Appeal (Civil Division): The court unanimously dismissed Mallett’s appeal and upheld his liability under the guarantee.
• High Court, Chancery Division: Mr Nicholas Strauss QC, sitting as a Deputy High Court Judge, upheld the Society’s claims and entered judgment against each guarantor for £331,627.26 plus interest and costs. He permitted Mallett to appeal the guarantee issue.