In shipbuilding contracts there will inevitably be
variations to the specification, plans, drawings, delivery date, and the
contract price. Whether such
variations can discharge the guarantor’s obligation under related payment or
refund guarantees will
depend on whether such guarantees are a traditional
or a demand guarantee. With regard to traditional guarantee, it was held in Holme v Brunskill [1],
that any material variation of the underlying contract without the surety’s
consent will discharge the surety from liability under the guarantee, except
where it is self-evident that the alteration is insubstantial or beneficial to
the surety. This is also because the liability of the debtor and surety under a
traditional guarantee are co-extensive. In contrast, the rule will not apply to
a demand guarantee, which is payable without proof or condition, independent of
the underlying contract and can simply be activated by a demand made on the
bank. To circumvent the rule in Holme v Brunskill, some guarantees may comprise
anti-discharge provisions to the effect that any indulgence, variation,
revision or amendment of the shipbuilding contract, or any extension to the
delivery date of the vessel shall not discharge the guarantor’s obligations
under the guarantee. However, the effectiveness of such anti-discharge
provisions will depend on the scope of the guarantee, and whether the purported
variation is within the purview of the original guarantee. In Trade Indemnity Co. Ltd v Workington Harbour and Dock
Board [2] the
terms of the guarantee states that the guarantor shall not be “released or discharged…by any agreement…for any
alteration in or to the said works or the contract”. A loan which was provided by the employer to
the contractor was included in the employer’s engineer’s final certificate. The
House of Lords held that the guarantee did not cover the loan. Lord Atkin said
that the
words: “…any arrangement…for any alteration in or to the said works or the
contract” are very wide. Probably they would have to be cut down so as not to
include such changes as have been suggested as substituting a cathedral for a
dock, or the construction of a dock elsewhere, or possibly such an enlargement
of the works as would double the financial liability.’ This
was cited in CIMC Raffles Offshore (Singapore) Limited and Yantai
CIMC Raffles Offshore Limited v Schahin Holding [3],
where Sir Bernard Rix said that: “The effect was that the claim
against the guarantor failed, but I rather think that this was not because the
guarantee was discharged, but rather because the loan was an entirely
extraneous matter.”
In Triodos Bank NV v. Dobbs [4], Mr. Dobbs gave a personal guarantee for
loans which was provided by the financing bank for a company’s construction
project. The original amount under two 1996 loan agreements with the bank were £900,000. This was replaced by two further loan agreements in 1998 and the loan amount increased
to £1,980,000. The 1998 loan agreements were subsequently replaced by a 1999
facility agreement which increased the loan to £2.6 million. Clause 2.4.1 of
the guarantee contained an “anti-discharge” clause that the bank could: “… at any time as it thinks fit and without reference to the
Guarantor…grant time for payment or grant any other indulgence or agree to any. amendment, variation, waiver or release in respect of an obligation of the
Company under the Loan Agreement.”
The
judge at first instance granted summary judgment in the bank’s favour and held
that the guarantee extended to the borrowing under the facility agreement of
1999. Also, Mr. Dobbs was estopped from denying that the guarantee so extended.
The court of appeal set aside the summary judgement
against Mr. Dobbs, leaving the Bank with the option to proceed to trial on the
question of estoppel by convention if they are so minded. Longmore LJ stated that (a) a replacement on terms so different from the original
agreement…cannot be an “amendment or variation” of the initial contract; (b) any variation (even if there is advance agreement to a
variation of the underlying loan agreement) must be within the “purview” of the
agreement, and this requirement is still law’ and (c) the
1999 facility was not within the purview of the original agreements. Chadwick
LJ, on the other hand, considered the issue as one of pure construction, and
that: “…the guarantor is not to be taken to have agreed
that his liability under the guarantee would be increased or made more onerous
by a subsequent agreement made between the lender and the borrower (to which he
is not a party) unless there are clear words in the guarantee which show that
he did agree to be bound to a more onerous obligation in the future imposed
without further reference to him.”
In CIMC Raffles
Offshore (Singapore) Limited and Yantai CIMC Raffles Offshore Limited v Schahin
Holding [5], Sir Bernard Rix left open the question whether the purview
doctrine is one of pure construction of particular application to contracts of
guarantee, or a doctrine of law, reflecting the equitable concern of Holme v. Brunskill, however much it
may be influenced by matters of interpretation. After reviewing various cases,
he considers that the purview doctrine applied in two situations. First, it
is simply as to its scope and either apply or do not apply to the new
arrangement. Second, the issue is whether the anti-discharge provision operates
to exclude the Holme v Brunskill
doctrine.
[1] (1877) 3 Q.B.D. 495.
[2] [1937] AC 1.
[3] [2013] EWCA Civ 644.
[4] [2005] EWCA Civ 630, [2005]
2 CLC 95.
[5] [2013] EWCA Civ 644.
Excerpt from the book entitled: SHIPBUILDING CONTRACT: WHEN THINGS GO SOUTH ISBN:9798223793175
*The book is now available on Amazon, Barnes and Noble, Foyles, Walmart, and major online bookstores in Australia, Europe, South Africa, UK, and the USA.
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