Joint venturers borrowed money guaranteed by four individuals. The guarantors agreed to a loan variation which included an additional guarantor. The lender sued the guarantors for the debt when the borrower failed to pay. One of the guarantors argued that his liability was discharged because when he signed the variation it had not been disclosed to him that the liability of the additional guarantor had been capped.
The court set aside the guarantee under the variation and discharged liability on the basis that that guarantor would not have agreed to the variation if he had been made aware that the liability of the additional guarantor was capped. The court said the rule is as follows:
A significant departure by the creditor from the contract will operate to preclude the existence or continued existence of the circumstances in which the surety has agreed to be bound. There is no need for the surety to rescind the contract for repudiation or breach of an essential or fundamental term. The situation is simply that the circumstances of his liability as surety do not exist.
The court noted that whilst the lender had the right under the original guarantee to deal separately with a new guarantor without releasing the existing guarantors, this right expired upon execution of the variation. The court also found the lender guilty of misleading and deceptive conduct because the deed conveyed that the new guarantor would be jointly and severally liable with each of the existing guarantors for the whole of the debt and refused to enforce the guarantee.
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