Guarantor Or Security Provider Consent To Changes, Consents Or Waivers

With the market volatility across Europe following the Brexit vote and recent drops in share prices triggering margin call events in margin facilities, we consider it timely to consider whether guarantors and/or third party security providers under a margin facility should be asked to consent to any concessions, waivers or other indulgences granted to borrowers.

Background

As a general rule, it is clear under English law that where the liabilities of a borrower are varied without the consent of the guarantor, the guarantor is no longer liable under the guarantee unless the variation is "beneficial" to the guarantor or "unsubstantial"1. The same rule generally applies to third party security providers.

In addition to the exceptions of "beneficial" or "unsubstantial", over time and in response to the rigid nature of this rule, guarantees and third party security have evolved to include "indulgence clauses", being clauses contained in a guarantee or third party security under which the guarantor or security provider (as applicable) agrees up front to its liabilities continuing notwithstanding any changes to the underlying arrangements between the debtor and creditor. In the modern business world where arrangements between borrowers and lenders (as well as other arrangements where guarantees apply, such as leases or construction contracts) are constantly changing and being restructured broad indulgence clauses are considered a "must-have".

However, notwithstanding this, the case law is not clear as to the requirements for a successful indulgence clause and the "beneficial" or "unsubstantial" have been judicially interpreted to have little practical benefit for a lender (we consider these in more detail below). Accordingly, we would always recommend that the express consent of the guarantor or third party security provider be obtained to any change, consent or waiver granted under an underlying contract between a lender and borrower.

Unsubstantial or beneficial exceptions

It is the responsibility of the lender seeking to rely on the guarantee to prove that the variation, consent or waiver in question is "unsubstantial" or "beneficial" in order that the lender may obtain the benefit of the exceptions. In terms of proving that a change is "unsubstantial" or "beneficial" to a guarantor or security provider, such a change must be self-evidently unsubstantial or beneficial, without the court having to engage with the particular circumstances of the...