Guarantees

The Court of Appeal has recently decided a case concerning guarantees, a notoriously complex area of law. In the case CIMC Raffles Offshore (Singapore) Ltd and another v Schahin Holding SA the court considered at what point a guarantor of a contract was still liable despite amendments to the contract.

The contract related to the manufacture and later sale of two drilling rigs. The builder fell behind schedule and agreed with the buyer to vary the payment dates and amounts to reflect 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 an increase in liability of the guarantor if the buyer failed to make the post-delivery payments.

Eventually the rigs were delivered but the buyer did not make the post-delivery payments. The builder then called on the guarantee.

However, at this point the guarantor refused to pay, arguing that the further amendments after its guarantee had been given discharged their liability. The guarantor argued that it was no longer liable despite the fact that the guarantee specifically contained an anti-discharge provision which stated that the guarantor’s liability would not be altered if the guaranteed obligations were extended or if any of the terms of the guaranteed obligations were amended. Even without notice to the guarantor.

Is this stance tenable?

Where a variation 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 what is known as the ‘purview’ of the original contract.

In this case it was the original rig building contract that was varied. The nature of the guaranteed obligations remained the same despite the fact that the variations and the liabilities were ones which the buyer would have been responsible for in any event.

Arguably then, the variations fell completely within the purview of the guarantee. Problem solved?

Not quite. Owing to the changes the liability of the guarantor, and the risk of the guarantee being called in, were significantly increased. The facts of the case play a key role: it was the builder that put the project in jeopardy; the guarantee was provided mainly as security for the builder and the delay of substantial milestone payments until after delivery of the rig increased equity in the rig after delivery, which was an entirely unexpected event.

Conclusion

Unfortunately, it was 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.

This case highlights however how carefully guarantees need to be drafted. To be on the safe side the guarantors consent should always be obtained when any variations to a contract are being made.