Close Brothers v Ridsdale [2012] EWHC 3090 (QB)
Enforcement of guarantees
The facts of this case are all too familiar. Mr Ridsdale had been a successful property developer. He was the first defendant and his wife was the second defendant. Mr Ridsdale carried out his property development through a company, the third defendant. Close Brothers lent money to the company under a facility letter for a development in the charmingly named Puddletown, a small rural village in Dorset. Mr and Mrs Ridsdale personally guaranteed £350,000.
The first 12 month facility letter was dated 9 June 2008. The Ridsdales signed their guarantee on 1 July 2008, in Mrs Ridsdale’s case against the advice of her solicitor. The development was behind schedule by March 2009. Mr Ridsdale therefore needed to extend the facility, but between June 2008 and March 2009, the economic climate had changed dramatically. Mr Ridsdale’s other developments were facing problems too. As a result, the negotiations over the extended facility were more difficult than either party had expected or experienced in the previous 5 years of the relationship. Crucially, Mr Ridsdale was looking for, but did not get, an assurance from the bank that it would not call in the loan until the project was complete.
The facility was extended three times: on 10 July, 28 October 2009 and 4 February 2010. It is important to note that the alternative to an extension was to allow the facility to expire in a market where it was improbable that that the same facility would be available elsewhere. If a facility was available, it would almost certainly have been on less favourable terms. There were a number of issues for determination:
Issue 1
Whether a fundamental change was made to the original facility letter by the extended facility letters, and, if so, had Mr and Mrs Ridsdale consented to that change? The principle was clear and of long authority that a guarantor would be released from liability under a guarantee if there was a material or ‘not unsubstantial’ change to the underlying agreement in respect of which the guarantee has been given. The Judge accepted that there had been such a material change principally because, under the extended facility, the bank only committed itself to funding the first phase of the project, whereas originally the bank had committed itself to funding the whole project. However, the Judge found that the Ridsdales had consented to that change by signing the new facility letters.
The judge also noted (at paragraph 106) that the authorities made clear that a guarantor would not be discharged from liability if the change, whilst material, cannot be otherwise than beneficial to the guarantor. This point had not been argued before him, but the judge felt that the extension may well have been better than any other deal in the market. On that basis, it must have benefited the Ridsdales.
Issue 2
Whether clause 3 of the guarantee was ineffective to preserve the validity of the guarantees in the face of the change represented by the first extended facility agreement?
Clause 3 was a standard, bank friendly provision to avoid a guarantee being rendered ineffective by a change in the agreement between the parties to the underlying transaction being guaranteed.
Where a change was not in substance a variation or amendment to the original underlying transaction but was on the contrary a new agreement outside the general purview of the original guarantee, then the guarantors would not be liable in respect of that new agreement. The Judge found that in this case, the extended facility was not outside the purview of the original guarantees given by the Ridsdales. The extension of the facility was precisely the sorts of change to the facility which clause 3 was intended to anticipate.
Therefore, while the Ridsdales could persuade the Judge that there had been a fundamental change to the original facility, they could not persuade him that there was a new agreement outside the general purview of the original guarantee.
The bank had a back up argument if it lost on either of the above issues: there was fresh consideration flowing to the Ridsdales for each extension so they would remain liable under each of them. On this analysis, the bank only has to establish the validity of the last in time. The Judge said that this was a novel argument not addressed in any authority, and although he did not have to decide it, it had much to commend it. It is a development of the point that the Ridsdales had an interest in continuing the development to see if the project could be rescued; the alternative was an insolvency. That commercial reality was a key theme of the decision.
Gibson & Co.
November 2012