Pritchard v DJZ Constructions [2012] NSWCA 196

In this Court of Appeal decision several parties executed guarantees. Later one of the guarantors was released. The remaining guarantors claimed to be discharged by the release of the earlier one.

The law
A guarantee is discharged when conduct on the part of the creditor has the effect of altering the guarantor’s rights, unless the alteration is unsubstantial and not prejudicial to the guarantor. A creditor must show that the nature of the alteration can be beneficial to the guarantor only or that by its nature it cannot in any circumstances increase the guarantor’s risk, e.g. a reduction in the debtor’s debt or in the interest payable. The mere possibility of detriment is enough to bring about the discharge of the guarantee.

The court found that the later agreement not to enforce the security meant that such security was not available to the guarantors in terms of being subrogated to the right of the investors under the mortgage. In these circumstances the effect of the agreement was to discharge the guarantee.

The court also found that the solicitors negligent in failing to advise of the risk that entry into the later agreement posed to the guarantees.

Sadly the lender (and his solicitor) had not read Matthew Bransgrove’s article in the Law Society Journal  Guarantees: draft carefully to survive unauthorised variations or the article on our website How to variation proof a guarantee.

Click here to read the full judgment

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