Appeal dismissed; creditor's failure to sue principal debtor does not discharge surety without formal contract variation.

THE SUPREME COURT

Murphy J.

Hardiman J.

Geoghegan J.

67/02

BETWEEN/

ALLIED DISTRIBUTIVE MERCHANTS LIMITED

Plaintiff/Respondent

and

BRIAN KAVANAGH AND KAREN KAVANAGH

Defendants/Appellants

JUDGMENT of Mr. Justice Geoghegan delivered the 10th of May 2002

This appeal arises out of an application for summary judgment in proceedings commenced by summary summons before the High

Court (O'Neill J.) the case having been placed in the judges' list by the Master.

The action was for the recovery of a sum of money allegedly due by the appellants to the respondent on foot of a guarantee in

writing. The appellants sought in the High Court to have the action adjourned for plenary hearing but in a reserved judgment

the learned judge of the High Court came to the conclusion that the defendants had no bona fide defence and gave judgment

against them for €268,085.28 together with costs.

The appellants have appealed that judgment but the appeal is confined to the following two grounds of appeal:

"1. The learned trial judge erred in law and in fact in holding that material alterations in the terms of the contract

between the principal and the creditor, without the consent of the surety did not have the result of discharging the

surety.

2. The learned trial judge erred in law and in fact in holding that the plaintiffs were entitled pursuant to clause 3. of the

guarantee to vary the terms thereof without reference to the procedures contained in paragraph 12. of the 'standard

terms and conditions of trading' which terms were incorporated into the contract of guarantee."

Notwithstanding the wording of the grounds of appeal it was quite clear to this court that the two points being raised on the

appeal were issues of law which were capable of being finally decided by this court on the hearing of this appeal. It was agreed

by all parties that this court should finally dispose of the case whether it be in favour or against the respondent.

The principal creditor in respect of the debt alleged to be guaranteed was Brian Kavanagh Newsagents Limited. The respondent

supplied goods to that company under what were described as "standard terms and conditions of trading". These were twelve

in number but the terms relevant to the arguments in this case were 8, 9, and 12 and I think it useful to cite them in full as

follows:

"8. All goods from the warehouse are invoiced on delivery and Direct Delivery goods are invoiced each week and a weekly

statement is produced for all accounts. Any goods supplied are payable by direct debit on each Tuesday if due for payment

and the credit terms are five weeks for both warehouse and Direct Delivery. In the case of Direct Delivery two weeks credit is

granted while processing the invoices and three weeks credit is granted on the statement. The Board of ADM Limited reserves

the right to change the credit terms from time to time.

9. Without prejudice to any other rights which ADM may have, if the customer fails to pay the invoice price in full by the due

date the customer shall not be allowed any discount given in respect of that invoice or in any other way agreed, and the

customer shall pay interest on any overdue amount from the date on which payment was due to that on which it is actually

made at 2 per cent over the single A rate quoted by the AIB Bank from time to time and the customer shall reimburse to ADM

all costs and expenses (including legal costs) incurred in the collection of any overdue amount.

12. None of the terms of this agreement may be varied or waived in any manner or degree unless such variation or waiver is

made in writing and under the seal of ADM."

The guarantee on foot of which the respondent are suing was made on the 7th of December, 1999 between the appellants and

the respondent. That guarantee contained a number of terms but for the purposes of the arguments in this case only two of

them are relevant that is to say clauses 1 and 3 which read as follows:

"1. In consideration of ADM's agreement, at the request of the Guarantor to supply or to continue to supply goods and

services to or at the direction of and to give credit to Brian Kavanagh Limited (hereinafter called 'the customer') the

Guarantor Guarantees to ADM that the customer will pay ADM for all the goods and services supplied to the customer, or

at its direction, after today (and for goods supplied up to today which amount to £ ) in accordance with the terms of

trading of ADM and the Guarantor agrees to pay on demand all outstanding indebtedness of the customer to ADM arising

from its account with ADM (including such interest as may arise on that indebtedness and the legal costs of collecting

such indebtedness and interest) in full in the event of the customer defaulting in the payment of any monies due by it to

ADM.

3. ADM may release or compromise the customer's liability to it or grant time to the customer or other indulgence to it

without effecting (sic) the liability of the Guarantor under this Guarantee."

I should mention in passing that the learned High Court judge decided that nothing turned on the reference to a limit with a

blank amount and unsurprisingly there is no appeal against that decision.

In his replying affidavit in the application for summary judgment the first-named appellant refers to various account numbers set

out in the special indorsement of claim and grounding affidavits and he alleged that, when analysed, the claim related to

amounts due on four different dates i.e. the 5th of November, 2000, 6th of October, 2000, 8th of October, 2000 and 16th of

August, 2001. He then said that he was advised by his solicitors and counsel that if the High Court construed clause 1 of the

guarantee strictly and in accordance with law, it crystallised on the occurrence of the first default the argument being that the

respondent continued trading notwithstanding the default and did not immediately enforce payment. Mr. Kavanagh, in his

affidavit, submitted that the only sum which could be lawfully due and owing was a sum of £1,864.11 which was the amount

due on the date of the first default i.e. the 6th of October, 2000. The appellants submit, as they did in the High Court, that the

continued trading in this manner constituted a material alteration in the terms of the contract between the principal and the

creditor and that this was done without the consent of the surety. That being so the surety was discharged in accordance with

the general law of principal and surety. The appellants do not accept that any such alleged alteration would be covered by

clause 3 of the guarantee unless the alteration itself was carried out in the manner provided for in paragraph 12 of the

"standard terms and conditions of trading" or in other words by a document under seal.

I believe that these submissions are entirely misconceived. The question is not whether the necessary consent was obtained to

an alteration of the terms of trading nor whether the variation was in the appropriate form but whether any alteration took

place at all. To continue trading with a customer who is in breach of terms binding on him is an indulgence. It is not alteration

of the agreement or any of its terms. The question of the applicability of clause 3 does not arise.

In volume 20 of Halsbury's Laws of England at paragraph 318 the following legal principle is set out:

"If there is no binding agreement to give time, mere omission on the creditor's part to press the principal debtor for

payment will not discharge the guarantor, even if the debtor subsequently becomes insolvent, unless the creditor is

bound to use the utmost efforts to obtain payment from the principal debtor before suing the guarantor."

A large number of authorities most of them quite old are cited in support of this proposition. One of the listed cases is an Irish

case Belfast Banking and Co. v. Stanley (1867) I.R. 1 CL 693. That was a case heard by the Court of Queen's Bench (O'Brien J.

and George J.). In an agreed judgment delivered by O'Brien J. the following statement of principle appears:

"Admitting this, however, we are of opinion that the statement in the defence of the plaintiffs having neglected for so

long a time to make any demand or take any proceeding on foot of the note, is not a sufficient ground for discharging

the defendant from his liability as surety. It is a case of mere nonfeasance on the part of the creditor; and it is clearly

settled by the several authorities to which we have been referred, and amongst others by the cases of Wright v.

Simpson; MacTaggart v. Watson and Madden v. McMullen that the mere nonfeasance of the creditor, or his neglect to

enforce his demands against the principal debtor, would not be a sufficient ground for discharging the surety from his

liability to the creditor, particularly where it does not appear that the creditor was ever required by the surety to take

any such proceedings."

Mere forebearance to sue, or gratuitous indulgence by a creditor is not sufficient to release a surety (see Rouse v. Bradford

Banking Co. 1894 A.C. 586. The principles are correctly summarised in The Law of Guarantees by Andrews and Millett (Third

Edition) at page 303 as follows:-

"In the absence of an obligation to pursue him (the principal debtor) timeously the surety will not be discharged by mere

passivity on the part of the creditor, that is an omission to pursue the principal. This is so even though the principal

subsequently becomes insolvent. The settled view is that it is the responsibility of the surety to see that the principal

pays, and not that of the creditor."

Having regard to the view which I have taken, therefore, the two express grounds of appeal do not really arise. I would dismiss

the appeal.