Are you an employer/developer using performance bonds? Are you comforted by the inclusion of anti-discharge (indulgence) clauses in the bond in order to protect you regarding post contract amendments? If so, this blog post will be of interest to you.

A recent Court of appeal case considered the extent to which an indulgence clause in a bond may exclude variations which were outside the ‘purview’ (i.e. range or scope) of the original guarantee.  This is an issue which has been considered in several cases and arises from the old case of Holme v Brunskill. The purview doctrine is where a variation to a contract is in terms that are fundamentally different from the original contract, therefore is no longer regarded as being a variation to the original contract at all. In this event, it can be argued that the variation falls outside the ‘purview’ of the original guarantee.

The Court of Appeal recently allowed an appeal against summary judgment for sums guaranteed under a construction contract. It held that the true interpretation of the guarantee, including whether it extended to cover greater payments, provided for by post-guarantee amendments, would have to be considered at trial based on all facts.

After the guarantee was entered into, the sums due on delivery were substantially increased and the delivery dates were delayed, by agreement between the builder and the buyers. This supposed to substantially increase the guarantor’s liability.

The builder commenced proceedings to enforce the guarantee, claiming sums originally guaranteed and substantially larger sums under the variation. The guarantor argued that;

1. The guarantee had been discharged as the buyers’ obligations were changed without its consent.

2. In the alternative, the guarantee did not cover the larger liability.

The judge at first instance held that the guarantee had not been discharged. The guarantor was liable at least for the lesser sums due under the originally guaranteed contracts. He said the question of any larger guaranteed liability would have to go to trial.

The key issue on appeal was whether the indulgence clause covered, not just any variation of the contracts, but a variation of such a kind as to lie outside ‘the purview’ of the guarantee.

It was decided that this case was not suitable for disposal at summary judgment. The key question of interpretation depended on evidence concerning the factual matrix of the guarantee. The Court held that there should be a single trial of the issues. It allowed the guarantor’s appeal and dismissed the builder’s cross-appeal.

See CIMC Raffles Offshore (Singapore) Limited and another v. Schahin SA (2013). The key point to note from this case, is that cases on this “purview” issue will be decided on their own facts. Indulgence (or anti-discharge) clauses are intended to protect the beneficiary from future events discharging the guarantor where the guarantor’s consent is not obtained. However, they are not intended to allow a guarantor’s liability to be substantially increased without its consent so that it no longer resembles the original facility agreed.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.