REUTERS | Jose Miguel Gomez

Guarantees: the “purview doctrine” revisited

The Court of Appeal has recently been grappling with the issue of guarantees again. In CIMC Raffles Offshore (Singapore) Ltd and another v Schahin Holding SA it considered the extent to which an anti-discharge provision may operate to exclude the purview doctrine in the context of guarantees.

What was the issue?

The contract in question related to the manufacture and subsequent sale of two drilling rigs. The builder fell behind schedule and agreed with the buyer to vary the payment dates and amounts under the contract to take account of the delay. The buyer provided the builder with a parent company guarantee in respect of these payments.

After the guarantee was made, the sums due after delivery were substantially increased by a further variation of the contract. The delivery dates were also delayed. The consequence of these amendments was to increase the liability of the guarantor if the buyer failed to make the post-delivery payments.

The rigs were eventually delivered, the buyer did not make the post-delivery payments and the builder called on the guarantee. The guarantor refused to pay, arguing that the further variation discharged the guarantee because it was outside the “purview” of the original guarantee. This was notwithstanding that the guarantee contained an anti-discharge provision, which stated that the guarantor’s liability would not be altered or impaired if the guaranteed obligations (that is, the post-delivery payments) were extended or any of the terms of the guaranteed obligations were amended, without notice to the guarantor. This type of provision is commonly included in guarantees and is designed to avoid the consequences of the rule in Holme v Brunskill.

The issue was whether these anti-discharge provisions extended to cover a variation of a kind that was outside the “purview” of the guarantee.

So what is the purview doctrine?

Where a variation (or other amendment) to a guaranteed contract is in terms that are fundamentally different from the original contract, it is no longer regarded as being a variation to the original contract at all. Consequently it falls outside the “purview” of the original guarantee.

In this case it was the original rig building contract that was varied. The nature of the guaranteed obligations remained the same despite the variations (payment for the rigs) and the liabilities were those for which the buyer was in any event responsible at some time or other. Arguably therefore the variations fell squarely within the purview of the guarantee. However the liability of the guarantor, and perhaps also the risk of the guarantee being called, was substantially increased. The factual matrix played an important role: it was the builder’s faults that put the project in jeopardy; the guarantee was provided primarily as security for the builder and delaying substantial milestone payments until after delivery of the rig increased equity in the rig after delivery, which was an entirely unexpected event.

Can you exclude it?

Whether the purview doctrine is purely a rule of construction (albeit of particular application to contracts of guarantee) or a rule of law, reflecting the equitable concerns of Holme v Brunskill, and influenced by matters of interpretation, is a question to which the cases do not provide a definitive answer.

Why does this matter? It matters because, if it is purely a rule of construction, a widely drafted anti-discharge provision may operate to exclude the purview doctrine when construed together with the other provisions of the guarantee. However, if it is a rule of law, then while the form of guarantee and context will clearly be relevant, even very wide words in an anti-discharge provision may not cover something that goes beyond the parties’ reasonable contemplation. Once the event in question lies outside the purview of the guarantee, then it falls outside the guarantee as a whole, including its anti-discharge provision.

A further issue on which the cases give no guidance is where the line is likely to be drawn in future between those variations to a guaranteed contract that would be regarded as falling “within the purview” of the original agreement, and those that would fall outside it. The Court of Appeal clearly struggled with this.

Fortunately for the court, but perhaps unfortunately for us, it decided that this case was not one for summary disposal (it was an appeal against the summary enforcement of the guarantee). The purview issue will now be considered, along with a number of other issues, at trial.

Applying this in practice

  • Drafting anti-discharge provisions

Despite the concerns of some commentators, this judgment does not, in my view, mean that a properly drafted anti-discharge provision would be ineffective. The guarantor effectively accepted that the narrowly drafted anti-discharge provision in this case was effective to exclude the Holme v Brunskill doctrine. Widely drafted anti-discharge provisions, when construed together with other provisions of the guarantee and the factual matrix of any particular case, may also extend to exclude the purview doctrine.

However, it is important to remember why anti-discharge provisions are included in guarantees and perhaps this is the key. They are there specifically to protect the creditor from the danger of future events discharging the guarantor in the absence of the guarantor’s consent (Holme v Brunskill). They are not intended to be a mechanism by which the guarantor’s liability can be substantially increased without its consent such that it no longer resembles the original “deal” or risk profile. There are other ways of achieving this if that is the commercial deal, for example, an “all monies” guarantee. This covers not only present but future liabilities and a guarantor may be liable for substantially increased liabilities under it despite not having consented to them (National Merchant Buying Society Ltd v Bellamy and another).

  • Obtain consent for variations

The contracting parties should obtain the guarantor’s consent if the nature or scope of a variation to a guaranteed contract substantially increases the guarantor’s liability. This will avoid the need to rely on anti-avoidance provisions.

The guarantor may refuse to give its consent, in which case the creditor can make an informed decision whether to proceed with the variation in the knowledge that certain liabilities of the guaranteed party are not guaranteed. More likely, the guarantor may request an additional payment for giving consent to a substantial variation. This then becomes a commercial decision, weighing the increased cost of the guarantee against its extended scope.

Parties to a guaranteed contract may object to paying an additional amount for consent to a variation that they think is already covered by the original guarantee. However, as the time, effort and cost involved in this case demonstrates, sometimes it really is better to be safe than sorry.

Share this post on: