In the construction industry, it is common for a parent company/guarantor of a contractor to provide a guarantee to the principal. The guarantee usually includes the assumption of liability for any obligation owed by the contractor to the principal should the contractor fail to meet its obligations.
This article deals with the circumstance in which a guarantor may be discharged from its liability under a guarantee (the Ankar Principle) and how drafters of guarantees have avoided such a circumstance (the Anti-Ankar drafting).
Ankar Principle
The Ankar Principle is derived from the High Court's decision in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 548. In short, the Ankar Principle 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 may 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.
Anti-Ankar drafting
Since the Ankar decision, drafters have introduced express terms to nullify the effect of the Ankar Principle (i.e. the Anti-Ankar drafting). Such terms often:
- provide an express power to vary the terms of the contract, including increasing the sum that is guaranteed, without the consent of the guarantor; or
- expressly stipulate that the guarantor's liability will not be discharged even if the guarantor's rights are altered.
The Anti-Ankar drafting has been supported by the New South Wales Court of Appeal in the case of Schoenhoff v CBA [2004] NSWCA 161 (Schoenhoff). In Schoenhoff, the impugned clause provided that:
The bank's rights to call on the guarantee are not affected by any act or omission by us or by anything else that might otherwise affect them under law, including the fact that we vary or replace the borrower's obligations under this agreement.
The Court of Appeal found that the guarantor's liability is not discharged as the clause above had the effect of displacing the Ankar Principle.
Key takeaway
It is prudent for a principal entering into a construction contract to ensure that the guarantee provided by the guarantor is safeguarded by effective Anti-Ankar drafting.
It is also be prudent for a guarantor under a construction contract to read through the obligations carefully, including whether a principal can alter the obligations under the construction contract without the guarantor's knowledge or consent.
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.