Discharge of Guarantee

Table of Contents

General

Payment of the guaranteed debt will discharge the guarantor. It must be a valid payment. Accordingly, a fraudulent preference, which may be set aside, does not discharge the guarantee.

An express release by the creditor will operate as a discharge. However voluntary declarations giving an intention to release is not sufficient unless there is consideration on some equitable ground that makes it inequitable to go back on the stated intention.

A guarantee may be waived and abandoned before breach by a subsequent agreement not in writing. An alteration in terms prior to breach must be in writing in order to be effective.

Appropriation

The existence of a guarantee does not by itself take away the powers of the creditor to appropriate payment he would otherwise have. The same applies to the debtor’s powers of appropriation. The debtor may choose to pay an unguaranteed liability to the detriment of a guarantor. However, if there is any evidence of an intention that the payment is to be made in reduction of the guarantor’s liability, it may be deemed to be so applied.

Where neither creditor not debtor appropriates payments, they are generally appropriated to the earlier debt or debit unless there is contrary intention. If the debtor makes no appropriation, the creditor may generally, where there are separate accounts, appropriate the payment as he sees fit.

A guarantor of a debt which is repaid by instalments is not entitled on the bankruptcy of the debtor to have the dividend received in respect of the debt applied in discharge of one instalment; it must be applied proportionately for each instalment as it becomes due.

The guarantor may rely on set-off between creditor and debtor where it applies. The debtor may appropriate payment if this is his intention to the discharge of the guaranteed liability. However, the mere fact that the debtor is entitled to a set-off from the creditor at a given point in time, is not of itself sufficient to discharge the guarantee where it is in respect of other transactions outside the scope of the guarantee.

Fraud & Concealment

Prior fraud may invalidate a guarantee. This may consist of concealment of the truth or a false misrepresentation. It must be shown that the creditor or his agent was aware of fraud on the part of the principal debtor. Fraud on the part of the principal debtor is not sufficient.

Although a guarantee is not subject to principles of utmost good faith (as in the case of insurance) the guarantee must be voluntarily and freely entered. There is authority to the effect that a guarantee may be invalidated where there has been fraudulent concealment of material facts which should have been disclosed. It is not necessary that the fraudulent concealment would or did benefit the person who perpetrated it.

Fraudulent concealment may involve omission to disclose facts which are such as should be mentioned in answer to the guarantor’s questions. It also implies certain non-disclosure of facts which the creditor might naturally be expected to disclose. This is subject to whatever contract may be in place between them if any. It depends on the nature of the contract in each case whether the facts not disclosed are such that it is impliedly represented not to exist.

Disclosures

There is no general obligation on the creditor to make disclosure of facts to the guarantor. The contract or other sufficient circumstances may exclude any liability for nondisclosure or implied representation. The creditor has no obligation per se to advise the guarantor.

There may be circumstances where things ought to be said. Where a creditor makes a statement which he believes to be true but discovers to be false, he should correct it. It may be necessary to inform the guarantor of any private agreement. There may be an obligation in some cases to disclose a third-party agreement.

The creditor is obliged to inquire as to the circumstances where there is any question of fraud or fiduciary duty between the debtor and guarantor. Where that party is a spouse or there was some other cause to investigate, appropriate inquiry should be made. If he does not do so, he may be affected by any undue influence or other negating factor that operates between the debtor and the guarantor.

Alterations

The guarantor may apply to the court to have a guarantee delivered up and cancelled, where it is capable of being avoided on the grounds of misrepresentation or fraudulent concealment. The guarantor is entitled to have the guarantee delivered up to him.

A guarantee is invalidated at common law and the guarantor is released if a material alteration is made in it without its consent after execution. There is authority that this includes conversion into a deed by affixing seals by striking out of names of persons who are co-sureties or by amendment reducing the amount of one of the joint and several guarantors.

Any material change in the terms of the principal agreement between the creditor and debtor discharges the guarantor. This is based on the principle that what is guaranteed is the obligations between debtor and creditor. The alteration also discharges any mortgage by the guarantor in support of the guarantee. The guarantee does not apply to an alteration of the agreement unless this is specifically provided for in the guarantee.

Unauthorised alterations made by a stranger will invalidate a guarantee if they are made while it is in the custody of the creditor. This follows from the creditor’s obligation to take care and preserve the guarantee in its original state.

Discharge

Where a guarantee is entered subject to conditions precedent, which have not been completed then the guarantee will not become effective. Similarly, this is the case, where it is subject to other unfulfilled conditions which are preconditions to the liability of the guarantor. Where there are other post-guarantee obligations on the part of the debtor or guarantor which are not fulfilled, then the guarantee may be discharged, depending on the terms concerned.

Where the principal contract has been discharged by the conduct of the party who has been guaranteed, the guarantor is not discharged, if is due to the fraudulent act of the person who has been guaranteed.

The contract of guarantee must be strictly complied with. An agreement by the creditor to give time to the principal debtor will discharge the guarantor. However, mere passive inactivity and non-enforcement will not do so.

If it is self-evident that the variation will prove beneficial or at least not prejudicial, the guarantor may not be discharged. Whether the guarantor has been materially adversely affected is a question of fact.

Giving More Time

The agreement giving time must be binding and capable of being enforced. Giving such an extension contractually without the guarantor’s consent discharges the guarantee. Omission to press for payment is not sufficient.

Where the guarantee is a continuing guarantee, an agreement to give time may partly discharge the guarantor only. Where the guarantee covers a number of different supplies, giving time may relieve liability only in respect of those supplies under the contract.

An agreement by the creditor with the debtor to give more time discharges the guarantor, as it prejudicially alters his position by preventing the creditor taking payment from the guarantor and enabling him to sue the debtor. An agreement that the creditor will not enforce until a particular date does not discharge if the date is earlier than the date which the creditor would otherwise have enforced.

Securities

A creditor may agree with a guarantor to take security without discharging fellow guarantors or the principal debtor.

A failure by the creditor to do something he is bound to do for the protection of the guarantor discharges the guarantor. However, acquiesce in acts which are contrary to the conditions of the guarantee, which do not amount to connivance or gross negligence equivalent to shutting eyes to fraud or something equivalent to it, does not discharge the guarantee.

A guarantor or guarantor is entitled on payment of the guaranteed debt to have securities held by the creditor handed over to him in the same condition in which they were received. This is so regardless of whether they existed at the date of the guarantee or came into effect afterwards. It follows that any impairment by the creditor of that right will relieve the guarantor from liability. This will apply to the extent of any loss thereby caused and relieve the guarantor from the liability.

The liability of the guarantor for the debt is not affected by the sale by the debtor of the secured property in the manner contemplated by the mortgage deed. The creditor on the bankruptcy of the debtor may sell and realise the security without discharging the guarantor.

Securities given by a fellow guarantor must not be wasted. It seems that provided they are held by the creditor, a guarantor who has paid more than his share is entitled to have them assigned in order to enforce a right of contribution.

Whatever discharges the principal debtor usually discharges guarantor as his position is altered without consent. He may be discharged if he can establish that the alteration changes the nature of his liability but not necessarily otherwise. A discharge of the debtor by operation of law may but does not always discharge the guarantor.

Releasing Debtor & Others

Where there is an express or implied agreement that the creditor is to preserve rights against the debtor, and the creditor deprives himself of this right or releases it, the guarantor is discharged. Where however there is no such contract, the creditor only has a right to perfect that which he holds but if fails to do so this does not release the guarantor unless the guarantor is actually thereby damaged.

A guarantor is discharged where a release of the principal debtors is executed. The guarantor is not discharged where the release is procured by fraud on the part of the debtor, even though he is not party to the fraud. The third party cannot avail himself, of what has been obtained by the fraud of another.

The taking of a second security in discharge of the original one or in place of the personal liability of the debtor discharges the guarantor. However, the acceptance of additional security from the debtor does not discharge the guarantor unless there is an agreement to give time or intention that the original security is not to remain in force.

An agreement not to sue the debtor may not discharge the guarantor if the rights of the creditor are reserved against the debtor. A release of the debtor will not discharge the guarantor if the guarantor has ceased to be guarantor and becomes a principal debtor or if prior to the release, he has paid part of the debt or given a security or in return for extension of time by the creditor without the agreement of the debtor or has agreed to pay a sum for which he is originally guarantor only.

Joint Guarantors

Release of one of the joint or joint and several guarantors by settlement without are reserving remedies against them will bar the creditor’s rights against them on the guarantee. Where one co-guarantor is released, security given by others will be discharged. In each case, what matters is whether what has happened amounts to a release. Where no formal release is given, regard is had to the surrounding circumstances.

A guarantor will not be released where there is no actual release of his fellow guarantor, by giving of time or covenant not to sue or where the creditor acts with the guarantor’s consent. In the case of a release of one co-guarantor with a reservation of remedies against the others, the latter are not discharged.

New Contract

The substitution of a new contract for an old one between the parties discharges the guarantor from liability. Where a creditor takes further security in place of the original one so that they merge in the original security, the guarantee is revoked. Whether the security is merged is a question of law. It is a question of fact whether a particular security was taken in place of the original security.

There is no merger if the new security is expressed to be collateral. A new agreement between parties to a guaranteed contract substituting security for personal liability is presumed to revoke the original guarantee.

Revocation Clause

A guarantee may provide that it is revocable or terminable either by the guarantor or creditor by notice. A notice on the part of the guarantor generally prevents future liability accruing but does not relieve the guarantor from liability already incurred.

Where a guarantee does not provide for revocation by notice, whether it can be revoked is a matter of interpretation. The guarantor’s promise may be entire or divisible. If it is entire, no revocation can be given without good cause. If it is divisible notice of revocation may be available in respect of future liability.

Death

The death of the debtor prior to default will discharge the guarantee where the obligation of the principal ceases on death. The death of a guarantor does not determine the guarantee, if it has been acted upon it will become binding on the guarantor before his death.

The question arises as to whether the guarantee is divisible or whole. If the guarantee may be determined by notice expressly or impliedly, notice must be given and notice of the death is insufficient. The death of a co-guarantor does not terminate the liability of the other guarantors.