1 On this subject, see the discussion of unfunded credit mitigation, at paras 6.46–6.48 above.
2 See Chitty, para 44-001. A similar definition is adopted in Paget, para 18.2. See also the language employed in Statute of Frauds 1677, s 4 (discussed at para 26.20 below).
3 Halsbury’s Laws of England, Guarantee and Indemnity, para 101.
4 Lakeman v Mounstephen (1874) LR 7 HL 17, although see the particular situation which arose in Heisler v Anglo-Dal Ltd  2 All ER 770.
5 Re Hoyle  1 Ch 84.
6 See the discussion of Statute of Frauds 1677, s 4 at para 26.20 below.
8 Indeed, terminology can be positively misleading. For example, in the context of the sale of goods, the expression ‘guarantee’ is frequently used but, in law, a warranty is intended: see Halsbury, Guarantee and Indemnity, para 101.
9 This point is very clearly illustrated by the decision of the House of Lords in Actionstrength Ltd v International Glass Engineering Ltd  2 All ER 615, where the parties may not even have regarded their arrangement as a guarantee, or even turned their minds to the legal nature or characterization of their arrangement. This case is considered further at para 26.27 below.
10 See Moschi v Lep Air Services Ltd  AC 331 (HL); Paget, para 18.2.
11 Or, alternatively, where the obligation to pay is limited recourse in terms of the assets concerned. On this subject, see Deutsche Bank v Ibrahim  1 Bank LR 267 and other cases noted by Paget, para 18.23.
12 On this point, see Chitty at para 44-001, citing Moschi v Lep Air Services Ltd  AC 331 (HL); Trafalgar House Construction (Regions) Ltd v General Surety & Guarantee Co Ltd  1 AC 199 (CA) and Sunbird Plaza Pty Ltd v Maloney (1998) 166 CLR 245 (High Court of Australia). An undertaking to procure payment by the primary debtor constitutes a ‘guarantee’: see Technology Partnership plc v Afro-Asian Satellite Communications (UK) Ltd  EWCA Civ 1520, a case on the Statute of Frauds 1677 (below).
13 ie the interest will represent damages for the guarantor’s failure to procure performance by the primary debtor. The point will usually be theoretical since standard forms of bank guarantees will invariably extend specifically to interest and any other sums owing by the debtor.
14 For full discussion of that subject, see Chitty, chs 2–4.
15 The exact point of time at which acceptance occurs would depend upon the precise factual background. The issue could be of some importance in practice, because the offer can be withdrawn at any time prior to its acceptance.
16 Whilst it is necessary that consideration should exist, it is not necessary that it should be explicitly stated in the guarantee itself: Mercantile Law Amendment Act 1856, s 3.
17 Note that the consideration must move from the bank, but it need not move to the guarantor: see Chitty, para 3-039.
18 If a guarantee is given at the request of the bank in this type of situation, then it may be inferred that the guarantee is given in order to avert an immediate demand: Greenham Ready Mixed Concrete Ltd v CAS (Industrial Developments) Ltd (1965) 109 Sol Jo 209.
19 In such a case, a guarantee given by an individual must comply with the requirements of s 1(3)(a) of the Law of Property (Miscellaneous Provisions) Act 1989. The provision requires the execution of the document by the guarantor, the signature of a witness and delivery as a deed. In the case of a company, the document must be duly executed under the common seal of the company, or it may be executed by two directors, or one director and the secretary. For details of the execution formalities, see Companies Act 2006, ss 43–47. Some care is, however, needed in procuring the execution of a guarantee by way of deed, since it has been stated that the signature and witness attestation must all form a part of the same physical document: R (on the application of Mercury Tax Group and another) v Her Majesty’s Revenue and Customs  EWHC 2721, para 40. This may appear uncontroversial for this requirement will invariably be met in the case of standard form bank guarantees. However, where—as is common practice in the context of international transactions—the guarantor sends a signing page to be attached to the final text, the decision in Mercury suggests that the guarantor should specifically acknowledge the content of the final text. If the execution version is subsequently altered, the guarantee will remain binding if it can be shown that this was to correct an error or the guarantor intended the signing page to be applied to the revised text: Koeningsblatt v Sweet  2 Ch 314 (CA); New Hart Builders Ltd v Brindley  2 Ch 342.
20 Thus, for example, if the parties refer in desultory fashion to the giving of a guarantee in the preliminary heads of terms for their transaction but the fully negotiated agreement contains no reference to it, then the court is likely to hold that no guarantee was intended to be given solely as a result of the passing reference to such an arrangement in the heads of terms: see Carlton Communications plc v Granada Media plc  EWHC 1650 (Comm).
21 In Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad  1 WLR 379 (CA), the comfort letter stated that it was the policy of the Malaysian parent company ‘…to ensure that the business of MMC Metals Limited is at all times in a position to meet its liabilities to you under the above arrangements…’. It was held that this did not create a legally binding obligation, in part because a full guarantee would have required the approval of the central bank under the Malaysian Exchange Control Act. The absence of such consent suggested that no legally binding commitment was intended, since it could not be presumed that the parent intended to act unlawfully with respect to its own, national monetary laws. In Australia, however, very similar wording (‘…we take this opportunity to confirm that it is our practice to ensure that our affiliate will at all times be in a position to meet its financial obligations as they fall due…’) was held to constitute a guarantee: see Banque Bruxelles Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502. It is suggested that the absence of exchange control considerations was a key consideration in the latter case, leaving the court free to take a broader view of the parties’ commercial intentions. For an English case in which the court appeared willing to enforce the terms of a comfort letter, see Chemco Leasing SpA v Rediffusion plc  1 FTLR 201. In the event, however, the court declined enforcement on the basis that the lender had not complied with some of the conditions set out in the comfort letter.
22 See Re Simon Carves Ltd  EWHC 685 (Ch), where the letter in question had been provided to the directors of a subsidiary company to facilitate the preparation of audited financial statements on a ‘going concern’ basis. This negated any intention to create a legally binding obligation.
23 There may even be occasions when the lending institution itself may wish to argue that the arrangement is not a full guarantee but is a more diluted—albeit legally effective—undertaking. This might occur where the arrangement has not been reduced to writing or has not been executed by or on behalf of the party concerned. Such an arrangement would not be legally enforceable as a guarantee in view of its lack of compliance with s 4 of the Statute of Frauds 1677 (on which see para 26.20 below).
24 Although it arose in a non-banking context, it may be noted that an argument that a particular undertaking amounted merely to a letter of comfort (or moral obligation) was rejected in Associated British Ports v Ferryways NV  All ER (D) 198.
25 On risk-weighted assets and credit risk mitigation and associated capital adequacy requirements, see Chapter 6 above.
26 See Byblos Bank SAL v Al-Khudairy  BCLC 232 (CA); National Westminster Bank plc v Alfano  All ER (D) 252 (Dec);  EWCA Civ 1703.
27 The section applies not only to the guarantee itself but also to an agreement under which a party undertakes to provide such a guarantee: Compagnie Générale d’Industrie et de Participation v Myson Group Ltd (1984) 134 NLJ 788.
28 See Maddison v Alderson (1883) 8 App Cas 467. In a development which cannot possibly have been within the contemplation of the 1677 legislature, it has been held that an individual’s name automatically reproduced in his email address is not a ‘signature’ for the purposes of s 4, although a manually typed name is more likely to be sufficient: see Mehta v J Pereira Fernandes SA  EWCA 813 (Ch). An automatically generated name of a bank on a SWIFT message may also be a sufficient signature for these purposes: see WS Tankship II BV v The Kwangju Bank Ltd  All ER (D) 234 (Nov);  EWCA 3103 (Comm). It may be added, somewhat obviously, that s 4 of the 1677 Act only requires signature of the document by or on behalf of the guarantor. The signature of the bank is not required: United Trust Bank v Dohill  2 All ER (Comm) 765;  EWHC 3302 (QB), para 13.
29 Provisions to the effect that a contract shall be ‘void’ suggest a rule of substantive law which should in principle be applied wherever the contract is governed by English law. Expressions such as ‘unenforceable’ or ‘no action shall be brought’ suggest a rule of procedure, to be applied by the English courts regardless of the law applicable to the contract in issue. However, it is impossible to lay down firm rules in this area, since much will depend on the circumstances, the detailed statutory language and the policy objectives of the legislation concerned.
30 See Leroux v Brown (1852) 12 CB 801 and other cases discussed in Dicey, Morris, and Collins, para 7-018. Notwithstanding the discussion in the text, it should be said that the characterization of s 4 as a procedural provision is by no means certain, and the decision in Leroux v Brown has been doubted.
31 See Art 11 of Rome I and the materials mentioned in the previous footnote. Of course, Rome I only applies if a conflict of law issue arises for the purposes of Art (1) of the regulation. It cannot assist where the guarantee is of a purely domestic nature. If an attempt is made to enforce a foreign law guarantee in an English court under circumstances where the guarantee is valid under its applicable law but would be unenforceable on the basis of s 4, the court would have to decide whether s 4 is intended to be an overriding mandatory provision of the forum which must be given effect in any event in accordance with Art 9(1) of Rome I. It may also be argued that, as a rule of procedure, s 4 is applicable to all court proceedings in England, regardless of the law applicable to the contract. It is not proposed to pre-empt these complex issues.
32 See The Anemone  1 Lloyds Rep 546 and other authorities cited by Paget, para 18.5.
33 Mercantile Law Amendment Act 1856, s 3; Perrylease Ltd v Imecar AG  1 WLR 463. For further cases on this principle, see Beckett v Nurse  1 KB 535 (CA); Elias v George Sakely & Co (Barbados) Ltd  1 AC 646 (PC).
34 In Yeoman Credit Ltd v Latter  2 All ER 294, at p 299, the issue was rightly described as ‘…a most barren controversy. It dates back, of course, to the Statute of Frauds 1677, and has raised many hair-splitting distinctions of exactly that kind which brings the law into hatred, ridicule and contempt by the public…’.
35 Yeoman Credit Ltd v Latter  2 All ER 294, at p 296. In Stadium Finance Co Ltd v Helm (1965) 109 Sol Jo 471 (CA), the distinction was said not to be a pure matter of construction but depended on the ‘whole burden’ of the agreement—was there a primary obligation and a secondary obligation, or were there two primary obligations?
36 The relevant wording of s 4 has been reproduced in para 26.20 above.
37 It should be noted that, since the indemnity is designed to hold the beneficiary harmless against losses flowing from a particular source, it is incumbent on the beneficiary to prove his loss: see The Fanti  AC 1 (HL). To this extent, an indemnity is similar to a guarantee in the sense that the beneficiary’s claim is in damages, rather than debt: compare the discussion of Moschi v Lep Air Services Ltd at para 26.07 above.
38 See Coutts & Co v Browne-Lecky  2 All ER 207; Yeoman Credit Ltd v Latter  2 All ER 294 (CA). Both of these cases involved primary debtors who were under the age of majority, and whose obligations under the primary contract were unenforceable. The guarantee in Browne-Lecky was unenforceable because, under s 1 of the Infants Relief Act 1874, a loan made to a minor was void. The position of the guarantor in such a case may now be different, because s 1 of the 1874 Act has been repealed and s 1 of the Minors Contracts Act 1987 now provides that a guarantee is not to be unenforceable solely on the ground that the principal debtor is a minor. On this subject, see Chitty, para 8-045.
39 The Court of Appeal found it necessary to decide this apparently obvious point in Western Credit Ltd v Alberry  2 All ER 938.
40 See the discussion at para 26.81 below and the decision in Associated British Ports v Ferryways NV  EWCA Civ 189 (CA).
41 It has been held that ‘primary obligor’ wording of this kind is sufficient to render the guarantor liable as principle debtor, so that he cannot raise defences which may be available to the borrower himself: see ILG Capital LLC v Van der Merwe  All ER (D) 297 (May).
42 Moschi v Lep Air Services Ltd  AC 331 (HL); Associated British Ports v Ferryways NV  EWCA Civ 189 (CA).
43 The ‘email signature’ decision in Mehta v J Pereira Fernandes AS  EWHC 813 (Ch) (n 28 above) provides a salutary lesson in this respect.
44 For an illustration of this approach, see State Bank of India v Kaur  NPC 43 (CA).
45 For a recent case that emphasizes this point, see ABN AMRO Commercial Finance plc v McGinn  EWHC 1674 (Comm).
46 Actionstrength Ltd v International Glass Engineering SpA  2 All ER 615. If the guarantor could be estopped from pleading s 4, then the purpose of the provision would be defeated since a guarantee could be enforced even though it did not comply with the requirements or policy of the section.
47 See, for example, Zabihi v Janzemini  EWHC 2910, para 64 and Masood v Zahoor  EWHC 1034 (Ch), para 251. See also Pitts v Jones  1 All ER 941 (CA), which includes a discussion of the approach which the court should adopt in seeking to distinguish between a guarantee and an indemnity. In the event, the arrangement at issue in that case was found to constitute a guarantee which could not be enforced for want of compliance with s 4 of the 1677 Act.
48 Section 4 appears to contemplate that it should apply only where the proceedings are instituted by the creditor. It does not appear to prevent the use of the guarantee obligation by way of defence, set-off, or counterclaim.
49 On the consequences of such a material variation for the guarantor, see the discussion at para 26.81 below.
50  All ER (D) 60 (Sep);  EWHC 2685 (QB).
51 In this context, see the discussion of s 61 of the 1974 Act at para 4.31 above.
52 See Prenn v Simmonds  1 WLR 1381; Perrylease Ltd v Imecar AG  1 WLR 463; Bank of Scotland v Wright  BCLC 244; Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896; and other cases cited by Paget at para 18.20. On the rules of contractual interpretation generally, see Chitty, paras 12-041–12-094.
53 In the case of a personal customer, however, banks will now stipulate for a specific financial limit. This practice was originally adopted to comply with para 11 of the Banking Code, on which see Chapter 4 above.
54 See the situation which arose in Bank of Scotland v Wright  BCLC 244.
55 The expression was also held to extend to foreign exchange facilities in Bank of India v Transcontinental Commodity Merchants Ltd  1 Lloyds Rep 506 (CA).
56 See, for example, Amalgamated Investment and Property Co Ltd v Texas Commerce International Bank Ltd  QB 84; Eastern Counties Building Society v Russell  2 All ER 734 (CA). In spite of this principle, the court will view a guarantee as a whole with a view to ascertaining its intended scope and extent: Bank of Scotland v Wright  BCLC 244. In attempting to protect the guarantor, the court should not strain to avoid the clear meaning of the guarantee: see Tam Wing Chuan v Bank of Credit and Commerce International Ltd  2 BCLC 693.
57 See Coghlan v SH Lock (Australia) Ltd  3 BCC 183; Perrylease Ltd v Imecar AG  1 WLR 463; Associated Japanese Bank (International) Ltd v Crédit du Nord SA  3 All ER 902, and other cases cited in the Encyclopaedia of Banking Law, para 2054.
58 See, for example, OJSC Alfa Bank v Trefilov  All ER (D) 117 (Jun);  EWHC 1806 (Comm).
59 ie in accordance with the broader approach endorsed by the House of Lords in Investors Compensation Board Ltd v West Bromwich Building Society  1 All ER 98.
60 See Static Control Components (Europe) Ltd v Egan  EWHC Civ 392. See also the construction issues which arose in the context of the guarantee in Dumford Trading AG v OAO Alantrybflot  EWHC Civ 24.
61 It should be made clear that the guarantee does extend to ‘all monies’. If the guarantee is issued for a specific purpose, then it may be possible to construe the guarantee as limited to that purpose: see and contrast National Merchant Buying Society Ltd v Mallett  EWCA Civ 452 and Bank of Baroda v Patel  1 Lloyds Rep 391.
62  EWCA Civ 630 (CA). For a case in which a bank lost the benefit of a director’s personal guarantee of his company’s borrowings because of apparent confusion between the parties, see Lloyds TSB Bank plc v Hayward  EWCA Civ 466.
63 Triodos Bank, n 62 above, para 9.
64 To avoid this problem and also to minimize confusion which may be caused by later changes of corporate names, it is good practice to include the registered numbers of the various entities involved.
66 The relevant entities were incorporated in Russia. According to the judgment, ‘OAO’ denotes a public company, whilst ‘ZAO’ refers to a private company.
67 For a recent example, see ABN Amro Commercial Finance PLC v McGinn  2 Lloyds Rep 333;  EWHC 1674 (Comm).
68 See, for example, IIG Capital LLC v van der Merwe  2 All ER (Comm) 1173;  EWCA Civ 542; North Shore Ventures Ltd v Anstead Holdings Inc  2 Lloyds Rep 45;  EWCA 230.
69 On the 1977 Act, see the discussion at para 26.48 below.
70 See AXA Sun Life Services PLC v Campbell Martin Ltd  Ch 31;  EWCA Civ 133.
71 See the discussion of the decision in Etridge and companion cases at paras 26.53–26.56 below.
72 Although the provision about to be discussed is drawn from the Statute of Frauds Amendment Act 1826, it appears that the provision would apply to any form of representation made by the bank, whether innocent, negligent, or fraudulent.
73 For a decision relating to this section, see UBAF Ltd v European American Banking Corp  2 All ER 226 (CA).
75 See Harvey v Dunbar Assets plc  All ER (D) 400 (Jun);  EWCA Civ 952. It is, however, necessary to prove that it was the common intention of all parties that the effect of the guarantee should be conditional on signature by all of the intended guarantors: for a contrasting situation, see Capital Bank Cashflow Finance Ltd v Southall  2 All ER (Comm) 675;  EWCA Civ 817.
76 For example because, as in the Harvey case, one of the signatures was alleged to be a forgery.
77 See, for example, Bank Leumi (UK) plc v Akrill  All ER (D) 192 (Jul);  EWCA Civ 907.
78 See Moschi v Lep Air Services Ltd  AC 331 (HL). It is submitted that this analysis suffers from an air of unreality. Where the guarantor is a subsidiary of the principal debtor, or is a bank providing a guarantee for a fee, it will not be in a position to ‘ensure’ that the primary debtor does anything. The reality is that the guarantor is accepting liability for the debt of a third party. There is no reason why this should not be treated as a debt of the guarantor, albeit subject to the contingency of a default by the main borrower.
79 See, for example, Sabah Shipyard (Pakistan) Ltd v Islamic Republic of Pakistan  EWHC 2602 (Comm).
80 See Van der Merwe v IIG Capital LLC  EWCA Civ 542.
81 For a case in which this point was disputed, but in which the court ultimately arrived at the view stated in the text, see AIB Group (UK) Ltd v Martin  1 All ER 353;  UKHL 64.
86 On matters of this kind, see the discussion at para 26.81 below. Note that the 1977 Act applies where (i) one party deals as a consumer or (ii) the parties deal on the bank’s standard terms. The 1977 Act may therefore apply to a bank even in the context of its dealings with corporate customers. This should be contrasted with the1999 Regulations discussed below, which apply only to consumers.
87 See s 13 of the Act, which extends the meaning of ‘exclude or restrict’ a liability to embrace provisions which (i) exclude or restrict any right or remedy in respect of a liability, (ii) render the enforcement of a liability subject to onerous conditions, or (iii) exclude or restrict rules of procedure.
88 On provisions of this type, see the discussion in relation to loan or facility agreements at para 20.50 above.
89 For a decision specifically in relation to a ‘no set-off’ clause in a guarantee, see Barclays Bank plc v Kufner  EWHC 2319 (Comm). In Stuart Gill Ltd v Horatio Myer & Co Ltd  QB 600 (CA), it was held that a clause was unreasonable insofar as it prevented set-off in respect of a claim arising with respect to the goods and services for which the relevant payment was claimed. It would be more difficult to apply this reasoning to a purely financial contract and, in any event, a bank undertakes no obligations to the guarantor under a standard form guarantee. As a result, it is suggested that the decision in Stuart Gill could not be applied in this particular context. This view derives some support from the decision in Bank of Scotland v Reuben Singh (unreported, 17 June 2005).
90  2 BCLC 398. In theory, the clause prohibited set-off even in respect of fraud by the bank, but this was held to be immaterial since fraud would have been outside the contemplation of the parties in any event. A ‘no set-off’ clause was similarly found to pass the ‘reasonableness’ test in United Trust Bank v Dohill  2 All ER (Comm) 765;  EWHC 3302 (QB). For a further case discussing (but not deciding) the extent of a guarantor’s right of set-off under these circumstances, see National Westminster Bank plc v Bowles  All ER (D) 447 (Jul).
91  2 Lloyds Rep 441 (CA).
93 ie a person acting outside the scope of his trade, business or profession: art 3(1) of the 1999 Regulations.
94 Article 8 of the 1999 Regulations. Schedule 2 to the regulations sets out a list of factors which must be taken into account in determining whether a term is ‘unfair’ for these purposes. Many of these factors will be inapplicable to guarantees in view of their essentially unilateral nature. Provisions which may potentially be applicable to consumer financial contracts have already been noted at para 15.41 above.
95 Regulation 9 of the 1999 Regulations.
96 As noted at para 26.14 above, the bank provides consideration for the guarantee in the technical sense, but this consideration is not received by the guarantor.
98 This view was adopted in Bank of Scotland v Reuben Singh (unreported, 17 June 2005), followed in Williamson v Bank of Scotland  EWHC 1289 (Ch) and Manches v Freer  All ER (D) 428.
99 Kufner, n 89 above, relying on a decision of the European Court of Justice in case C-45/96, Bayerische Hypotheken- und Wechselbank AG v Dietzinger  1 WLR 1035, albeit decided in a slightly different context.
100  EWHC 3302 (Ch). See para 66 of the judgment.
101 This alternative line of reasoning was explored in Kufner, n 89 above.
102 Cf Standard Bank Ltd v Apostolakis  IL Pr 766.
103 See Family Law Reform Act 1969, s 1(1). In formal terms, capacity can thereafter only be called into question if the guarantor was of unsound mind, or was insufficiently sober to understand the implications of the transaction at hand; on these aspects of contractual capacity, see Chitty, ch 8.
104 This delicate turn of phrase was employed by Lord Nicholls in Royal Bank of Scotland plc v Etridge (No 2)  UKHL 44 (para 87). The case is considered in more detail, below.
106 Imperial Loan Co v Stone  1 QB 599; Josife v Summertrot Holdings Ltd  EWHC 996 (Ch).
107 Companies Act 2006, s 31.
108 Companies Act 2006, s 18.
109 The memorandum and articles of association constitute a contract as between the company itself and its members: see Companies Act 2006, s 33.
110 As a matter of detail, it should be noted that some of the provisions about to be discussed will not apply where the company concerned is a charity: see Companies Act 2006, s 42.
111 See Companies Act 2006, s 31, to which reference has already been made.
112 For example whether because it has in fact examined the memorandum or because the directors have advised it of the position.
113 Companies Act 2006, s 40(1). References to limitations deriving from the company’s constitution include any such restrictions as may be found in any resolution of the company or any shareholders’ agreement: s 40(3) of the 2006 Act.
114 Section 40(2)(b)(i) of the 2006 Act. Once again, it is submitted that the bank can hold the company to the transaction even though it knew that the guarantee fell within the scope of some limitation applicable to the exercise of the directors’ power to give guarantees. If the bank is not under a duty to make enquiries in the first place, it should not be disadvantaged by the fact that it had chosen to make such enquiries or had otherwise discovered the relevant limitation.
115 A limit on borrowings will usually include a limit on the level of guarantees which may be given for the benefit of subsidiaries and others. For companies which adopted articles of association in the form of Table A to the Companies Act 1948, a borrowing limit equal to the company’s capital and reserves applied—see art 79 of Table A.
116 Smith v Henniker-Major  BCC 544 (CA). A failure to give adequate notice to all of the directors of the company as a result of a mistaken interpretation of the relevant provisions of the articles of association will thus not affect an outside party dealing with the company in good faith, since the provision constitutes a ‘…limitation on the powers of the directors…’ for these purposes: see Ford v Polymer Vision Ltd  2 BCLC 160;  EWHC 945 (Ch).
117 Companies Act 2006, s 40(b)(ii) and (iii).
118 For reasons which will become apparent, it is necessary to emphasize that the directors must exercise their powers for the benefit of their particular company, and not for the benefit of the wider group of which the company forms a part. It should be noted that the duties of directors are now to some extent codified by ss 170–181 of the Companies Act 2006.
119 Although the case did not arise in a banking context and the statutory provisions were only briefly noted, the point made in the text is well illustrated by the House of Lords decision in Criterion Properties plc v Stratford Properties LLC  UKHL 28.
120 In this type of situation, it would be necessary to have recourse to more traditional procedures. The bank would have to ensure that company has power to provide the guarantee under the terms of its memorandum, and that all internal procedures required to sanction the transaction under the articles of association had been duly carried out. It would then have to obtain from the holding company a waiver of any breach of fiduciary duty involved in the execution of the guarantee, although it should be noted that any such waiver may only be effective if the subsidiary remains solvent notwithstanding the obligations assumed pursuant to the guarantee: on this subject, see Rolled Steel Products (Holdings) Ltd v British Steel Corporation  Ch 246. In other words, if the statutory protections are not available for some reason, then the bank must take steps to satisfy itself that the directors are not in fact acting in breach of their fiduciary duties.
121 In other words, the guarantee can only be impugned if (i) the directors did in fact provide the guarantee in breach of their duties and (ii) the bank was aware of the facts which gave rise to such breach: see, for example, Charterbridge Corporation Ltd v Lloyds Bank Ltd  Ch 62, where a guarantee and security given to cover the liabilities of a fellow group member was upheld.
122 Rolled Steel Products (Holdings) Limited v British Steel Corporation  Ch 246.
123 Re Introductions Ltd  Ch 199.
124 Ford v Polymer Vision Ltd  2 BCLC 160;  EWHC 945 (Ch), para 92.
125 For example by making such inquiries as may be necessary to satisfy itself that no breach of fiduciary duty is involved.
126 Criterion Properties plc v Stratford Properties LLC  UKHL 28, discussed and applied in Ford v Polymer Vision Ltd  2 BCLC 160;  EWHC 945.
127 On apparent authority and the position of the third party dealing with the company, see Chitty, paras 31-054–31-081. On the application of the principle in the present context, see Paget, para 6.4. For a recent case in which a claimant sought to rely on the ostensible authority of the chief executive of a Korean company to execute guarantees in respect of a shipbuilding contract, see Rimpacific Navigation Inc v Daehan Shipbuilding Co Ltd  2 All ER (Comm) 814;  EWHC 2941 (Comm).
128 See Companies Act 2006, s 42.
129 See Alliance Bank Ltd v Kearsley (1871) LR 6 CP 433.
130 Crédit Suisse v Allerdale Borough Council  2 Lloyds Rep 241 (CA); Crédit Suisse v Waltham Forest London Borough Council  4 All ER 176 (CA). The guarantees given in each of these cases were held to be void on the basis that they fell beyond the authority’s powers. Note also the vires issues which arose in relation to swap contracts entered into by local authorities: see the discussion at paras 23.29–23.34 above.
132 Barclays Bank plc v Khaira  1 WLR 623; Union Bank of Finland v Lelakis  CLC 27; and other cases noted by Paget, para 13.20.
133 National Commercial Bank (Jamaica) Ltd v Hew  UKPC 51 (PC).
134 Grant Estates Ltd v Royal Bank of Scotland plc  CSOH 133; Barclays Bank plc v Svizera  All ER (D) 65 (Apr);  EWHC 1020 (Comm).
135 The point has most recently been re-affirmed by the House of Lords in Royal Bank of Scotland plc v Etridge (No 2)  UKHL 44, para 185.
136 See, for example, Union Bank of Australia Ltd v Puddy  VLR 242; Goodwin v National Bank of Australasia (1968) 117 CLR 173; Westpac Banking Corporation v Robinson (1993) 30 NSWLR 668; and other cases cited in Paget, para 18.18.
137 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. It may be said that such reservations will often be implicit in the request for the guarantee.
138 Levett v Barclays Bank plc  1 WLR 1260.
139 See Paget, para 18.17, citing Goad v Canadian Imperial Bank of Commerce (1968) 67 DLR (2d) 189 and Crédit Lyonnais Bank Nederland v Export Credits Guarantee Department  1 Lloyds Rep 200 (CA). In similar vein, see National Westminster Bank plc v Kotonou  All ER (D) 325 (May).
140 North Shore Ventures Ltd v Anstead Holdings Inc  1 All ER (Comm) 85. The judgment includes a detailed discussion of earlier case law on the bank’s duty of disclosure to a guarantor.
141 See generally the provisions of the Misrepresentation Act 1967; Barton v County NatWest Bank Ltd  Lloyds Rep Bank 408.
142 Paget, para 18.16, and cases there cited.
144 See Kufner, n 89 above.
147  1 All ER (Comm) 519.
148 The point was made in the Kingston case, n 147 above. For earlier cases confirming the existence of this equitable duty, see Standard Chartered Bank v Walker  3 All ER 938; American Express International Bank Corp v Hurley  3 All ER 564; and Skipton Building Society v Stott  1 All ER (Comm) 257 (CA). In other cases—for example Barclays Bank Ltd v Thienel (1978) 247 EG 385 and Burgess v Auger  2 BCLC 478—it had been decided that no such duty was owed to a guarantor who had made no payment. But these decisions cannot stand in the face of the authorities just mentioned.
149 See the situation that arose in Butterfield Bank (UK) Ltd v Philip  EWCA Civ 1770.
150 At any rate, this is the case if the guarantee is given on an ‘all monies’ basis, and is not capped at a particular financial limit.
151 The guarantor’s rights of subrogation and contribution are briefly discussed at paras 26.93–26.94 below.
153 For a decision which illustrates this point, see Western Credit Ltd v Alberry  2 All ER 938 (CA). In discussions with the guarantor, the bank must take care not to give assurances that it will not vary the underlying facility agreement, since this may override the protective contractual clause noted in the text: see Lloyds TSB Bank plc v Haywood  All ER (D) 384 (Apr).
154 Hyundai Shipbuilding and Heavy Industries Ltd v Pournaras  2 Lloyds Rep 502; The Maistros  1 Lloyds Rep 646.
155 National Westminster Bank plc v Skelton  1 All ER 242 and Ashley Guarantee PLC v Zacaria  1 WLR 62. These cases are noted by McKnight, para 16.10.3.
156 Mahant Singh v U Ba Yi  AC 601; Associated British Ports v Ferryways NV  EWCA Civ 189 (CA).
157 See China and South Sea Bank Ltd v Tan  1 AC 536.
158 The leading English authority is Holme v Brunskill (1878) 3 QBD 495. For an assessment of the ‘materiality’ of changes to the underlying agreement, see Aviva Insurance Ltd v Hackney Empire Ltd  EWCA Civ 1716. Courts in Australia have formulated this test rather more strictly, holding that ‘…any departure by the creditor from the suretyship contract which is not obviously and without enquiry insubstantial, will discharge the surety from liability, whether it injures him or not…’: Anker Ltd v National Westminster Finance Australia Ltd  162 CLR 549, at p 588. It is open to a guarantor to agree otherwise, but the wording must be clear and must cover the circumstances which have arisen. Thus, where a clause stated that the guarantor ‘…will not be released from any obligations by reason only of any extension of time granted or any other act or omission by the [lender] favouring the [borrower]…’ this language was not broad enough to cover the lender’s agreement to increase the overall amount of the facilities and the guarantor was discharged accordingly: see Valstar v Silversmith  NSWCA 80 (New South Wales Court of Appeal).
159 Bank of Scotland plc v Makris and O’Sullivan (Ch D, 15 May 2009).
160 The difficulties experienced by the bank in Triodos Bank v Dobbs  EWCA Civ 630 (CA) (see para 26.30 above) provide a salutary reminder of the need to secure the guarantor’s consent for these purposes. See also Silverburn Finance (UK) Ltd v Salt  2 All ER (Comm) 438 (CA), where the guarantee in question applied to a factoring agreement. It was found to have terminated when the factoring agreement came to an end, and thus could not be invoked in relation to a subsequent factoring agreement between the same parties. Whether or not the guarantors have agreed to a variation in a particular case may be a difficult factual question. Company directors may be taken to have agreed to an extension of their personal guarantees if, in their capacity as directors, they sign a letter agreeing to an increase in the facility and that letter stipulates that the personal guarantees should apply: see Moat Financial Services Ltd v Wilkinson  EWCA Civ 1253. However, a restructuring of the underlying indebtedness will not always discharge the guarantor: see Wittman (UK) Ltd v Willdav Engineering SA  EWCA Civ 824 (CA). Cases of this kind will inevitably tend to be highly fact-sensitive.
161 For a case in which the guarantors unsuccessfully argued that their consent had been obtained in this way, see Close Bros Ltd v Ridsdale  All ER (D) 156 (Nov);  EWHC 3090 (QB).
162 Mercantile Bank of Sydney v Taylor  AC 317 (PC); Liverpool Corn Trade Association Ltd v Hurst  2 All ER 309; Skipton Building Society v Scott  QB 261; Kufner, n 89 above.
163 See James Graham & Co (Timber) Ltd v Southgate Sands  QB 80 (CA). If the guarantor was not aware of the proposal to take other guarantees and security and had thus not placed any reliance on those arrangements when deciding to execute his own guarantee, then it seems that any subsequent release of those additional securities should not affect the guarantor’s liability—see Mount v Barker Austin  PNLR 493 (CA), noted by Paget, para 18.13.
164 Bank of India v Trans Continental Commodity Merchants Ltd  2 Lloyds Rep 298 (CA).
165 This seems to follow from the decision in Mount v Barker Austin (n 163 above).
166 For a recent example, see Kufner, n 89 above.
167 See generally Chapter 39 below.
168 The comments about to be made would apply equally to any security given for the obligations of a third party, whether or not supported by a guarantee.
170 For example, a shareholder could challenge a guarantee given by the company on the basis that it was, to the knowledge of the lender, given in breach of the directors’ fiduciary duties. A situation of this kind arose in Criterion Properties plc v Stratford Properties LLC  UKHL 28.
171 See Chapter 39 below. Whilst the present discussion is framed by reference to the rules applicable to corporate insolvency, it should be noted that similar provisions apply to individuals: see Insolvency Act 1986, ss 339–343.
172 This is the combined effect of the Insolvency Act 1986, ss 239 and 240. A longer time period applies where there is some group or other connection between the debtor and creditor, but this will not normally arise in the context of an ordinary banking relationship.
173 The following definition is derived from the Insolvency Act 1986, s 239(4).
174 For more detailed discussion of the ‘preference’ provision in a banking context, see Paget, para 20.56.
175 This is the combined effect of the Insolvency Act 1986, ss 238 and 240. See the materials referred to in n 174 above.
177 This follows from the definition of ‘relevant time’ in the Insolvency Act 1986, s 240.
178 Insolvency Act 1986, s 238(5).
179 See, for example, the situation which arose in First National Finance Corporation v Goodman  BCLC 203 (CA).
180 Silverburn Finance (UK) Ltd v Salt  2 All ER (Comm) 438 (CA). Note, however, that the decision applies to guarantees given on a continuing basis to cover transactions from time to time entered into by the borrower with the financier. The implied right of termination should not apply to a guarantee given in respect of a particular and ascertained facility, since the guarantor will have contracted to cover that facility in full.
181 Subrogation is an equitable right and will generally arise only if the transaction was entered into at the behest of the principal debtor: see Owen v Tate  QB 402.
182 These rights of subrogation and contribution are derived from equitable principles but see also Mercantile Law Amendment Act 1856, s 5.
183 See Re SSSL Realisations (2002) Ltd v AIG Europe (UK) Ltd  Ch 610. The court specifically held that an undertaking of this kind did not contravene s 107 of the Insolvency Act 1986 (dealing with the distribution of a company’s property) or r 4.181 of the Insolvency Rules 1986. There was therefore no basis on which such clauses could be disregarded on public policy grounds.
184 In Cattles plc v Welcome Financial Services Ltd  EWHC 3027, the court held that a clause of the type described in the text was effective to preclude the guarantor from competing with the lenders (see in particular para 55 of the judgment). However, at around the same time (and admittedly on the basis of different documentation) another court reached a different conclusion in Mills and others v HSBC Trustee (CI) Ltd  EWHC 3377 (Ch).
185 This apparently bizarre distinction follows from the decision in Re Sass  2 QB 12, on which see Goode on Legal Problems of Credit and Security (4th edn, Louise Gullifer, 2008) para 8-18.
186 It is assumed for present purposes that—as would usually be the case, the agreement between the French borrower and the English bank is governed by English law.
187 See Chapter 41 below.
189 On these points, see Art 12 of Rome I.
191 Article 4(2) of Rome I.
192 For an earlier case which adopted this approach under the pre-existing rules of private international law, see Broken Hill Pty Ltd v Xenakis  2 Lloyds Rep 304.
193 See Land Rover Exports Ltd v Samcrete Egypt Engineers and Contractors SAE  EWCA Civ 2019.
194 See the decision of the European Court of Justice in Case C-133/08, Intercontainer Interfrigio SC v Balkende Oosthuizen BV  ECR-I 9687.
195 British Arab Commercial Bank plc v Bank of Communications  1 Lloyds Rep 664;  EWHC 281 (Comm).
196 See Art 11, Rome I. For a recent case where a guarantee was found to be governed by Russian law, see VIS Trading Co Ltd v Nazarov  All ER (D) 245 (Mar);  EWCA Civ 313.
197  All ER (D) 48 (Sep).