11 October 2018

Is a guarantor discharged from liability when the principal contract is varied?

In certain circumstances, such as by reference to the Ankar principle, a guarantor can be discharged from liability.
Australia Corporate/Commercial Law
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Guarantees are included in almost every loan, lease and commercial contract. A guarantee is where a person or entity, referred to as the guarantor, agrees to ensure payment of a sum of money or the performance of some other contractual obligation by a party to a contract.

In certain circumstances a guarantor can be discharged from their liability under a guarantee. One of those circumstances is identified by reference to the Ankar principle.

The Ankar principle

The Ankar principle comes from the High Court's decision in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 (Ankar). In short, it provides that a guarantor will be discharged from their entire liability under a guarantee if:

  • the guarantor's rights under the contract are altered without the consent of the guarantor; and
  • the alteration is substantial or prejudicial to the guarantor.

Examples of substantial or prejudicial alterations to a guarantor's rights include:

  • increasing the sum for which the guarantor is liable;
  • extending the time period for which the guarantor is liable; and
  • waiving the guarantor's right to claim against other parties.

Exclusion of the Ankar principle

Importantly, contracts can be drafted so as to avoid the operation of the Ankar principle. Contracts can (and often do) include clauses which:

  • provide an express power to vary the terms of the contract, including increasing the sum which is guaranteed, without the consent of the guarantor; or
  • expressly stipulate that the guarantor's liability will not be discharged if the guarantor's rights are altered.

If you are a guarantor under a contract such as a lease, or are considering entering into a contract as guarantor, ensure you read through your obligations carefully, including whether any party can alter those obligations without your knowledge or consent. If in doubt, you should seek legal advice, as the failure to fully understand your obligations may mean that you could be liable for much more than you originally agreed to.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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