Case No: A3/2012/2132
Neutral Citation Number: [2013] EWCA Civ 452
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Nicholas Strauss QC (sitting as a Deputy Judge of the High Court)
Claim Nos: HC11C04505 & OBM30584
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 02/05/2013
Before :

LORD JUSTICE LONGMORE
LORD JUSTICE RIMER 
and
LORD JUSTICE KITCHIN 
- - - - - - - - - - - - - - - - - - - - -
Between :

	NATIONAL MERCHANT BUYING SOCIETY LIMITED	Claimant/
Respondent	
	- and -		
	ANDREW BELLAMY
	First Defendant	
	-and –		
	STEPHEN MALLETT	Second Defendant/Appellant	

- - - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No:  020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -

Mr Jonathan Miller (instructed by Whitehead Monckton Solicitors) for the Appellant, Stephen Mallett
Mr Andrew Maguire (instructed by The Smith Partnership) for the Respondent

Hearing date: 19 February 2013
- - - - - - - - - - - - - - - - - - - - -

Judgment
Lord Justice Rimer : 
Introduction
1.	The claimant/respondent is National Merchant Buying Society Limited (‘the Society’). From 2000 until December 2008, it had a business relationship with CTF Supplies Limited (‘CTF’). The shares in CTF were originally owned 50/50 by Andrew Bellamy (the first defendant) and Stephen Mallett (the second defendant/appellant), who were both directors of CTF. On 17 May 2002, Mr Bellamy and Mr Mallett gave the Society a joint and several guarantee for the due payment of all sums then or thereafter owing to it by CTF. Mr Mallett left CTF in December 2006 on terms under which his shares were to be bought out. Mr Bellamy continued to run CTF.
2.	CTF became insolvent in 2008. Its business relationship with the Society ended in December 2008. It entered into administration on 13 January 2009 and it went into creditors’ voluntary liquidation nine days later. The Society was one of its creditors. 
3.	By proceedings issued on 8 December 2010, the Society claimed payment by each of Mr Bellamy and Mr Mallett under their guarantee of the amounts of unpaid invoices for goods purchased by CTF. Both defendants defended the claim, which was tried over four days in April 2012 before Mr Nicholas Strauss QC, sitting as a Deputy High Court Judge in the Chancery Division. The judge gave his reserved judgment on 27 July 2012 and upheld the Society’s claims. His order entered judgment against each defendant for £331,627.26, plus interest and with costs. 
4.	Mr Bellamy defended the claim on four grounds. The judge permitted him to appeal on one ground but he has not done so. Mr Mallett defended the claim on two grounds, one of which the judge summarised as being that ‘The Society varied its contract with CTF, or behaved towards CTF in a manner which was not within what was contemplated by the guarantee, with the consequence that he was discharged from liability under it.’ The judge rejected that ground but permitted Mr Mallett to appeal on it, as he has. That ground was developed before us by Jonathan Miller, who also represented Mr Mallett below. Andrew Maguire represented the Society, as he also did below.  
The facts
5.	I gratefully take these from the judge’s judgment.
6.	The Society is an industrial and provident society operating for the benefit of its members, being companies in the construction industry. It negotiates framework agreements with suppliers, with whom the members can then place orders. The Society is in effect a bulk purchaser, which enables it to enjoy substantial rebates which it passes on to its members after deducting its administration costs. The supplier delivers the goods to the premises identified by the member and invoices the Society. The Society pays the supplier and forwards copies of the invoices to members for monthly settlement by them. Thus the Society pays the suppliers and the members pay the Society.
7.	There is no need to refer to the rules governing the Society’s membership, save for (i) rule 12, specifying the period within which members must settle their accounts with the Society in respect of supplies; and (ii) rule 16, requiring members to forward to the Society audited (or at least draft) accounts within five months after the end of the member’s financial year. The judge also found that there was a rule prohibiting there being more than one member from the same group of companies, but that subsidiaries or associates can, however, have separate accounts, backed by a member’s guarantee; or a member can simply specify the address of such a subsidiary or associate as the delivery address for the supplies.
8.	Whilst membership of the Society does not entitle a member to credit, in practice the Society specifies a credit limit for each member. The Society protects itself with credit insurance provided by Euler Hermes UK plc (‘Euler’), the cover in respect of each member being usually equal to the member’s credit limit. If a member wishes to purchase goods for amounts in excess of its credit limit, it must pay the supplier itself. 
9.	CTF’s business was the supply of tools and materials to the building industry. It became a member of the Society in 2000. Its credit limit was originally £30,000. At some later date (by early 2002 at the latest), the Society obtained credit insurance from Euler in respect of CTF and its credit limit was increased to £200,000.
10.	Mr Mallett was the CTF director dealing with financial matters and it was he who ordinarily dealt with the Society. In about November 2001, CTF’s account with the Society was in arrears and the Society’s inquiries revealed that 2001 had been a poor year for CTF. Christopher Hayward, the Society’s Managing Director, asked Mr Mallett for guarantees from him and Mr Bellamy, but Mr Mallett refused on behalf of both. 
11.	By May 2002, CTF’s position had become of greater concern: it had suffered bad debts of £70,000 and was three months late in complying with rule 16 requiring the provision of accounts (CTF’s year end was 30 September). On 7 May, Mr Hayward spoke to Mr Mallett, he again asked for guarantees, and this time Mr Mallett agreed that he and Mr Bellamy would give them. On 9 May, before they were given, Euler withdrew its credit protection in respect of CTF: it was concerned that the latest audited accounts it had for CTF were for the year ended 30 September 2000. On 14 May, Mr Hayward spoke to Mr Mallett again on the telephone, who again agreed that he and Mr Bellamy would give guarantees. The judge found that Mr Hayward made it clear to Mr Mallett that they were required in order for the credit insurance to be maintained, which the Society needed if it was to continue to provide credit to CTF. Following that conversation, Mr Hayward spoke to Euler, which reinstated the credit insurance cover for CTF, and the Society continued to allow CTF its current credit limit of £200,000. Also on 14 May, Mr Hayward wrote to Mr Mallett recording that, in consideration of the Society continuing to offer credit facilities to CTF, Mr Mallett had agreed to provide the guarantees by 17 May. 
The guarantee
12.	Mr Bellamy and Mr Mallett provided the promised guarantee, a joint and several one dated 17 May 2002. It was described as a ‘Personal Guarantee’ and was, so far as material, in these terms:
‘In consideration of your readiness to comply with our desire that you should continue membership of your Society [to CTF] …, we hereby jointly and severally guarantee the due payment to you of all sums which are now or may hereafter become owing to you by [CTF].
Our liability and the liability of each of us shall not be diminished or affected by your giving time or any indulgence to [CTF] or to any of us nor by any release, agreement not to sue, composition or arrangement of any description granted or entered into by you to or with [CTF] or to or with any of us and we shall be liable to you in respect of any obligation accrued hereunder as if we were each of us principal and not surety.
This guarantee shall be a continuing guarantee, subject to the right of any or either of us to give notice of revocation thereof … but no revocation shall in any way diminish or affect our liability to you in respect of any indebtedness of [CTF] incurred under any contract or obligation entered into between you and [CTF] prior to your receipt of such notice …’. 
More facts
13.	With the guarantee in place and the Euler cover reinstated, CTF continued to purchase goods through the Society at a discount and to enjoy a credit limit of £200,000. By the autumn of 2003, however, CTF’s monthly balances were varying between about £240,000 and £280,000, which was in excess of its limit. In October 2004, Mr McCormack (the Society’s accountant) notified Mr Hayward that whilst CTF’s net worth had declined, its trading had so increased that a credit limit of £500,000 was required. CTF was, however, meeting the Society’s benchmark for prompt payment (with no more than 10% outstanding) and the guarantees were still in force. Mr McCormack did not want to seek increased cover from Euler, in case it might cut its current cover. The result was that the Euler cover remained at £200,000 but the Society increased CTF’s credit limit to £350,000.
14.	On 11 March 2005, Euler increased its cover from £200,000 to £400,000, subject to an excess of £150,000. By this stage, CTF’s credit limit was also £400,000, and CTF’s account balances down to this point had generally been kept within its limit. Within 18 months, however, a Society file note of 26 September 2006 recorded that CTF was ‘currently trading over the £400K limit’. 
15.	Mr Mallett resigned as a director of CTF on 13 December 2006 and left the company. Under the terms of two agreements, Mr Bellamy paid him £500,000 and the judge found that CTF was obliged to pay a further £869,000 through the redemption of shares over the next seven years. Whilst it would have been open to Mr Mallett to revoke his guarantee, he did not. The judge found that ‘the guarantee was not on his mind at the time’. 
16.	By March 2007, CTF had breached its £400,000 credit limit, its balance standing at £469,000. By May 2007, its balance was £605,000. Its trading was never thereafter brought within its limit and, at its highest point, in July 2008, CTF’s balance stood at £1.135m. In June 2007, Euler refused to increase its cover to £700,000. CTF’s continued breaching of its credit limit was known to the Society’s accountant, Mr McCormack, but his view was that there was no need to do anything about it as CTF was a good company that always paid on time. The judge found that CTF’s trading position ‘must have been’ reported to Mr Hayward, who had taken the same view as Mr McCormack. Mr McCormack retired at the end of 2008, his successor being Julie Langford, who had worked with him throughout 2008.
CTF Midlands Limited (‘Midlands’)
17.	I should set out what the judge said about Midlands, which is relevant to the issues argued on Mr Mallett’s appeal:
‘53.	A substantial part of CTF’s debt arose from purchases by its associated company, [Midlands], which Mr Bellamy had set up on 23rd October 2007. The Society did not initially realise that this was happening, but it was picked up by Mrs Langford in June 2008 when the remittance advices showed that some of the supplies were purchased by that company.
54.	Mr Hayward’s evidence is that this was irregular, but that the same effect could legitimately have been achieved by CTF purchasing the supplies on its account and invoicing [Midlands] i.e. [Midlands] would simply have been the delivery address. Equally, it would have been unobjectionable if [Midlands] had been a branch (as Mr Bellamy had originally told the Society it would be), and not a separate legal entity.
55.	The Society alleges that Mr Mallett knew that CTF was breaching its credit limit, and that he knew of [Midlands’] purchases, through the negotiations with Mr Bellamy and his rights to information under the agreements between them. However, I accept Mr Mallett’s evidence that he was aware of neither. He was not on good terms with Mr Bellamy after early 2006, and had no such detailed knowledge of CTF’s trading.’
18.	The judge found that the unpaid amounts for supplies to Midlands represented £220,174 of the total payments claimed against the guarantors.
The demise of CTF
19.	The judge related how CTF’s balance continued to exceed its credit limit and that, on 9 July 2008, Mrs Langford agreed to increase its credit limit to £700,000 ‘even though the Euler cover remained at £450,000’ (the judge did not say when such cover had been increased from £400,000, so I am not clear whether or not this was a mistaken reference to £400,000, but it does not matter). 
20.	There is no need to detail the subsequent events leading to the cessation of trade between the Society and CTF. Cheques from CTF were dishonoured at the end of November 2008. On 17 December 2008, Euler refused a request to increase its cover to £700,000, and on 20 December 2008 it withdrew all cover. I have given the dates in January 2009 when CTF entered into administration and then liquidation. The balance on CTF’s account with the Society was, after various discounts and rebates, more than £330,000. Euler paid the Society £131,412.30 and the judge found that it would be entitled to recover that sum from anything recovered by the Society in the proceedings.
The judge’s decision on the claim against Mr Mallett under his guarantee
21.	Mr Mallett’s case was that he was discharged from liability under his guarantee because, after he left CTF in December 2006, there were material variations to the contract between the Society and CTF, being variations to which he, unlike Mr Bellamy, did not consent. The variations were (i) the successive increases of CTF’s credit limit from £400,000 to £450,000 in October 2007 and to £700,000 in July 2008 (it is again not clear to me that the judge had made any finding as to the first increase, but he clearly found that the second one had happened); (ii) the repeated breaching of the credit limit, alternatively its informal and repeated variation by the Society’s acceptance of a liability to pay suppliers in amounts exceeding the credit limit; and (iii) the Society’s acceptance of liability to pay suppliers for orders placed by Midlands.
22.	That case was advanced in reliance on the principle to be found in Holme v. Brunskill (1877) 3 QBD 495. Holme’s case illustrates that if a surety guarantees the performance of a particular contract, an alteration of the terms of the contract will have the effect of releasing him from his suretyship if the alteration is one (a) to which he has not consented, and (b) is such that ‘it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety…’ (Cotton LJ, at 505).  The judge, however, held that such principle had no application to the present case. That was because Mr Mallett had not guaranteed the performance by CTF of the terms of a particular contract between it and the Society. He had simply given an ‘all moneys’ guarantee for the payment of money which, at the date of the guarantee, was then or might thereafter become owing to the Society. 
23.	That difference was, I infer, recognised on behalf of Mr Mallett, whose case therefore depended upon the assertion of the existence of a rather wider principle than that applied in Holme’s case. The judge, in paragraph 77 of his judgment, identified that principle as being to the effect that when there is an existing contract between the creditor and the principal debtor, the terms of which are known to a guarantor who has given a guarantee whose terms are not limited to the securing of liability for the obligations under that contract, a variation of those terms without the guarantor’s consent will discharge the guarantor from his guarantee. Mr Mallett’s case was that as his guarantee had been given at a time when he knew that CTF’s agreed credit limit with the Society was £200,000, any increase of that limit without his consent would automatically release him from the guarantee: and whilst he accepted that he had agreed the increase to £400,000, he had not agreed to any further increase. 
24.	The judge observed that there was no conclusive guidance as to the correctness or otherwise of the claimed principle in the authorities. He regarded it as finding some support in dicta of Pigott B and Pollock B in Sanderson v. Aston (1873) LR 8 Exch 73, at 78 and 79. Insofar, however, as Pollock B was apparently drawing support for his dicta from the cases that had been cited, the judge regarded it as likely that he was referring to Bonar v. McDonald (1850) 3 HLC 226 and Burgess v. Eve (1872) LR 13 Eq. 450. As for the former, the judge regarded it as providing no support for the dicta, since the ground for the decision was that there had been a non-consensual prejudicial variation of ‘the agreement in which the surety has subscribed’, whereas in the present case there was no agreement to which Mr Mallett had subscribed.  
25.	As for Burgess’s case, the judge regarded it as contrary to the dicta in Sanderson. There a father gave his son a promissory note for £2,000. He also gave a bank a guarantee under which, in consideration of the bank discounting the note, various securities he deposited with the bank were to stand as security ‘for the payment of all money due or to become due from him to the [bank] … on any account whatsoever …’. The bank’s case was that the guarantee meant what it said. The case for the deceased father’s estate was that the father’s liability under the guarantee was implicitly limited to at most £2,000. Sir Richard Malins V-C agreed with the bank. In approaching the question before him, he said, at 454, that the court had to put itself as well as it could in the position of the parties at the time of the transaction ‘and from the surrounding circumstances, as well as the words of the instrument, ascertain what was the real intention of the parties to it.’ He said, at 455, that ‘when I look at the surrounding circumstances, I should say that the intention probably was such as is expressed on the face of the instrument’.
26.	The judge regarded Bank of Baroda v. Patel [1996] 1 Lloyd’s Reports 391, a decision of Potter J, as of more help to Mr Mallett, although he viewed it as (i) turning on a concession, not on argument, and (ii) as arguably inconsistent with (a) a passage in the judgment of Phillips J, as he then was, in Wardens and Commonalty of the Mystery of Mercers of the City of London v. New Hampshire Insurance Company, 18 January 1991, unreported; and (b) a dictum of Neuberger LJ, as he then was, in Moat Financial Services v. Wilkinson [2005] EWCA Civ. 1253. I shall return to these authorities.
27.	After his review of the authorities, the judge directed himself, and concluded, as follows:
‘92.	… the question for the Court in all cases is, what is the guaranteed obligation: is it the existing obligation, or does it extend to other obligations, present or future? If it extends to future obligations, it must necessarily follow that it cannot be affected by agreements which alter or increase the liability of the debtor. In deciding what obligations are covered by the guarantee, the approach of the Vice-Chancellor in Burgess v. Eve must be the right one. The court must ascertain this from the words of the guarantee and the surrounding circumstances.
93.	In the present case, the wording of the guarantee could not be clearer. It covers anything due or to become due, without limit. There is nothing in the surrounding circumstances to support any implied limitation. At the time of the guarantee, CTF was a thriving business which might well have been expected to expand, leading to a requirement for increased facilities, for which the Society would want cover. All parties, including the Society and CTF, and therefore the guarantors, had an interest in maintaining the Euler cover, and possibly increasing it, so as to support CTF’s trading. This required an unlimited guarantee, which would enable the maximum credit facilities to be granted without constant renegotiation of the guarantee.
94.	This was not unreasonable from the point of view of the defendants. They were running the company together, and could control the use of the facilities, and therefore of their exposure. If they disagreed, or if one of them left the business, as happened, the express terms of the guarantee permitted them to determine their liability, and therefore to prevent any further exposure. Mr Mallett did not do so, maybe because he did not fully understand his position, but that cannot affect the objective construction of the terms of the guarantee.
95.	Mr Miller argues that, since the occasion for seeking the guarantee was the obtaining of credit insurance in the sum of £200,000, justifying a credit limit of £200,000 for CTF, this should be treated as a guarantee for a facility of £200,000, with the result that any increased facility not assented to by the guarantors would lead to a discharge. This was precisely the argument rejected, in my view rightly, in Burgess v. Eve. If the parties had intended the guarantee to be limited in that way, they would have said so.
96.	Mr Miller also submitted that, on any view, the guarantee did not cover purchases by a different company, [Midlands], and that an extension of credit facilities for supplies to that company discharged the guarantee; alternatively Mr Mallett was not liable to the extent that the amounts claimed represented supplies to that company. I do not accept either of these submissions. The guarantee covered any sums for which CTF was liable. CTF requested the Society to pay for supplies to [Midlands] and, even if the Society was at first unaware of this, it paid for the supplies. Therefore CTF was liable to the Society, and the guarantee was engaged. Commercially, the difference was of little significance; [Midlands] could just as well have been a branch, or a customer of CTF. As to the latter, there was no requirement in the Rules that a member should only purchase for delivery to itself. Therefore, even if the guarantee had been in respect of the contract as between CTF and [the] Society on the terms as they stood on the date of the guarantee, there would have been no variation engaging the Holme principle.
97.	More generally, it seems to me that this case is in essence no different from a case in which a bank guarantee secures debts due from the customer to the bank, and the overdraft facilities are extended, either formally or by the bank meeting cheques drawn over the limit. I agree with Neuberger LJ [in Moat Financial Services v. Wilkinson] that it would be extremely surprising if the guarantor was thereby discharged. In such a case, by agreeing to pay whatever is due, now or in the future, on any account, the guarantor has made himself liable for the result of future dealings between the bank and the customer. …
99.	I therefore hold that Mr Mallett … remains liable for the sums claimed by the Society. …’.
The appeal
(a) The point based on the increase in CTF’s credit limit
28.	Mr Miller, in advancing Mr Mallett’s appeal, said that the judge had, in paragraph 77 of his judgment, correctly identified the applicable principle (see paragraph 23 above) but had failed to apply it. He submitted that the principle was not a novel one, that it was supported by authority and that it involved no departure from orthodoxy. To restate the proposition a little more fully, it is that if a guarantor gives a guarantee in respect of a principal’s obligations to the creditor, and at the time of the giving of the guarantee the guarantor knows of the terms of an existing contract between principal and creditor, the guarantee will be regarded as given on the faith of that contract. The consequence will be that the guarantee will be interpreted as doing no more than imposing upon the guarantor a liability to ‘see to’ the principal’s due performance of his obligations under that contract. If there is a later variation of the contract that would be prejudicial to the guarantor, he will only be answerable for any liability arising under the varied contract if he has consented to the variation. If he has not, the variation will result in his guarantee being automatically discharged.
29.	Applied to this case, the underlying contract between CTF (the principal) and the Society (the creditor) is said to have been one under which CTF enjoyed a credit limit of £200,000, of which Mr Mallett was aware. His knowledge of that fact means that the guarantee was given on the faith of the existing credit limit and so must be interpreted as impliedly confining his liability under the guarantee to that limit. Whilst Mr Mallett agreed to the variation of the credit limit up to £400,000, he did not agree to the subsequent increase to £700,000, and the effect of that uplift was wholly to discharge his guarantee. He does not even remain answerable up to a limit of £400,000. 
30.	Is there any authority supporting Mr Miller’s proposition? I do not interpret any of the authorities to which we were referred as doing so. In Phillips J’s judgment in the Mystery of Mercers case, of which we were provided with a transcript, his review of the authorities led him to express this general statement of principle:
‘In my judgment the cases demonstrate that the construction of the contract of guarantee is of critical importance. It is vital to identify the precise nature of the obligation or obligations guaranteed. In many cases the obligations will be those arising under a specific contract between debtor and creditor. This may be evident from the terms of the contract of guarantee itself, where specific reference is made to the contract giving rise to the obligations guaranteed, or from a consideration of the circumstances surrounding the conclusion of the contract of guarantee, where these show that a specific contract was the subject matter of the guarantee. In such circumstances the terms of the contract giving rise to the obligations guaranteed will be treated as embodied or incorporated in the contract of guarantee. The rule in Holme v. Brunskill will then apply and any variation of the underlying contract which is not manifestly insubstantial or incapable of prejudicing the surety will discharge the surety from his obligations under the contract of guarantee.
Where on the other hand the guarantee is given in respect of obligations arising out of a contemplated course of dealing without reference, express or implied, to any specific contract it will be open to the creditor to vary the terms applying to the course of dealing so long as that course of dealing remains within the scope of the guarantee.’
31.	Those passages show that the resolution of issues such as that raised in these proceedings turns upon the interpretation of the guarantee. If upon its true interpretation it is a guarantee of the due performance of obligations arising under a specific contract, that will be the limit of the guarantee obligations; and, as Holme’s case shows, if the parties to that contract vary it in a way that Phillips J summarised in the first paragraph (which drew on what Cotton LJ had said in Holme’s case), the guarantor will be released. The reason for his release will be because otherwise the variation would have exposed him to a liability to which he had never agreed. 
32.	In most cases, a guarantee directed at no more than ‘seeing to’ the due performance of a specific contract will so provide expressly. Phillips J, however, rightly also recognised that there will be cases in which, although the guarantee does not so provide expressly, it will nevertheless be implicit from a consideration of all the circumstances in which it was given that it was nevertheless also intended to be so directed. In every case, it will be a question of interpretation of the guarantee what its intended ambit is. Holme’s case is a good example of a ‘specific contract’ case.  
33.	By way of contrast to that type of case, Phillips J, in the second paragraph, identified the type of guarantee that is given in respect of obligations arising out of a contemplated course of dealing rather than under a specific contract. In those circumstances, provided the course of dealing remains within the scope of that contemplated by the guarantee, the details of the manner of dealing as between principal and creditor are of no concern to the guarantor; and any variations in them will not affect the continuing nature of his liability. A typical example is the freestanding ‘all moneys’ guarantee in respect of present and future indebtedness commonly given by directors to banks in respect of their company’s liabilities. In any case where a question arises as to the scope of the guarantee, the answer must turn on the true interpretation of the guarantee. The Mystery of Mercers case went to the Court of Appeal ([1992] 2 Lloyd’s Law Reports 365). Phillips J’s decision was reversed on the facts, but his quoted statement of principle was not the subject of criticism. 
34.	In Bank of Baroda v. Patel [1996] 1 Lloyd’s Law Reports 391, a company, AEL, imported goods and the terms of its facility letter with its bank, the plaintiff, required it to obtain ECGD cover. The defendant gave the bank an ‘all moneys’ guarantee for AEL’s liabilities to the bank, being a guarantee that did not, on its face, relate to any specific contract between AEL and the bank. In relation to a number of importing transactions, AEL did not, as the bank knew, obtain ECGD cover; and the consequence of several uncovered transactions was that AEL’s liability to the bank increased. The bank sued the defendant on his guarantee. Potter J held that the operation of the bank facility in relation to transactions where there was no ECGD cover amounted either to a variation of the facility or at least to an operation of it that was sufficiently prejudicial to the surety to discharge him from liability under the guarantee.
35.	Potter J dealt with this issue at 396ff. He noted that the guarantee was an ‘apparently “free-standing” agreement covering all [AEL’s] accounts and liabilities to the bank and makes no specific reference to the facility letter …’. He also, however, recorded the concession by counsel for the bank that, accepting the points about the guarantee just quoted, the guarantee was ‘to be read in conjunction with the terms of [the facility letter], that being the occasion for the granting of the guarantee’. He referred to Holme’s case and directed himself that ‘if the action of the bank is properly to be regarded as a variation of the terms of the contract and there is no clause in the guarantee apt to cover such an eventuality, that is, at least prima facie, an end of the matter’. Potter J held that it was an end of the matter. 
36.	I regard it as likely that counsel’s concession made a material contribution to that conclusion. The effect of the concession was apparently that the guarantee was to be read as being a guarantee of AEL’s liabilities to the bank arising under the facility letter. The facility letter imposed a term as to the obtaining of ECGD cover, being a term from which, to the prejudice of the surety, both AEL and the bank had departed. Given the concession, it is easy to see how Potter J arrived at the conclusion he did. Like the judge, I would not regard the Bank of Baroda case as instructive for the disposition of the present case. The effect of counsel’s concession was to make the case a ‘specific contract’ one of the type discussed by Phillips J in the Mystery of Mercers case. There must, in my view, be a question as to whether Potter J would have decided this issue the same way if the concession had not been made. 
37.	I should refer to Moat Financial Services v. Wilkinson [2005] EWCA Civ. 1253, to which the judge attached some weight, although I do not regard it as advancing the position very far. Its only significance is an obiter comment by Neuberger LJ in paragraph 11 that ‘if a bank lends more money to a debtor over and above the amount originally borrowed and guaranteed by the guarantor, that would not release the guarantor’. Whilst I would respectfully regard Neuberger LJ’s instincts as likely to be right in most cases, I would not regard his dictum as reflecting a universal principle that will apply in every case: the position in any case must always depend upon on its particular facts.
38.	Where does this leave Mr Miller’s submission? In my judgment, the submission does not work because it is, with respect, contrary to basic principle. The proposition is that a guarantee will be treated as in the ‘specific contract’ class if, at the time it is given, the relationship between principal and creditor is governed by a contract of which the guarantor knows the terms. In such a case, the guarantee will be regarded as given on the faith of that contract, and as being confined to ‘seeing to’ the principal’s due performance of it. So put, the proposition is dependent exclusively upon the guarantor alone having knowledge of the contractual terms; and, as I follow it, as having the mechanistic effect of turning every guarantee, however expressed, into a ‘specific contract’ guarantee.
39.	The proposition is wrong. A guarantee is merely a particular type of contract. The relevant question – in this as in every case – is ‘what is the nature of the guarantee obligation that the guarantor has assumed?’ That is the question that Phillips J, in the Mystery of Mercers case, recognised as the critical one. It is the question that in St Microelectronics NV v. Condor Insurance Ltd [2006] EWHC 977 (Comm); [2006] Lloyd’s Law Reports Vol 2 525, at paragraph 36, Christopher Clarke J said underlies all cases such as this; and it is the question that the judge also asked himself in paragraph 92 of his judgment in this case. The answer to the question turns on the interpretation of the guarantee, as to which there are no special rules. A guarantor is likely in most cases to know the nature of the business relationship between the principal and the creditor. So is the creditor. But proof of such knowledge by either or both parties to the guarantee does not, by itself, tell you anything conclusive about the nature, terms or intended effect of the guarantee. That depends upon the true interpretation of its language, an inquiry involving ‘the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract’ (Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896, at 912, per Lord Hoffmann). In engaging in such an inquiry, it may well be appropriate to have regard to the commercial arrangements which were at the time in place between the principal and the creditor, which will form part of the background against which the guarantee is given. But the proposition that the interpretation of the guarantee is conclusively dictated by knowledge that the guarantor may alone have had is inconsistent with the now well-settled approach to the construction of written instruments, including guarantees, and is wrong.
40.	The judge embarked, in an orthodox way, upon the exercise of interpreting the guarantee and gave cogent reasons for concluding that it was a conventional ‘all moneys’ guarantee that was in no manner intended to be linked to, or limited by, the then credit limit applying to the trading arrangements between CTF and the Society. He therefore found that it fell within the second of Phillips J’s two classes in the Mystery of Mercers case. In my judgment, his approach was unimpeachable. On the face of the document, the guarantee was a freestanding, ‘all moneys’ guarantee that was not linked to the credit limit to which CTF was then entitled, its language pointing away from any such linking. The judge referred to no evidence that might have justified such a limitation being read into the guarantee, nor did Mr Miller. Indeed, the judge found that there was nothing in the surrounding circumstances supporting any such implied limitation. That is not surprising. The logic of Mr Mallett’s case is that his guarantee for the payment of ‘all sums which are now or may hereafter become owing to you’ by CTF meant no more than a guarantee of the payment of ‘all sums which are now or may hereafter become owing to you by CTF but only up to a limit of £200,000 or such greater limit as I may agree to’. If the parties had intended that his liability should have been so limited, the guarantee would have said so. It did not. 
41.	I add that whilst Mr Miller’s submission was in substance directed at the conclusion that the guarantee is to be read as having such a limited interpretation, the submission stopped short of inviting the court so to interpret it. That piece of forensic restraint was, I infer, perceived to be a necessary part of Mr Mallett’s case, which would otherwise take him nowhere. That is because if the true meaning of his guarantee was that he was guaranteeing CTF’s liabilities only up to a ceiling of £200,000 or any increased limit to which he agreed (and he agreed an uplift to £400,000) it makes no sense that he should not remain answerable up to £400,000, even if he was not answerable for any liability in excess of it. By a process of reasoning unsupported by any logic that I could identify, Mr Miller submitted, however, that the non-consensual increase to a credit limit of £700,000 discharged the guarantee altogether. Why? Such an increase was not prejudicial to Mr Mallett, since on his case he is not answerable for any excess over £400,000, and so the principle in Holme’s case can have no application.
42.	In my judgment, Mr Mallett’s case is unsupported by authority, is contrary to the principles that apply in relation to the interpretation of contracts, including guarantees, and lacks merit. I would reject it. 
(b) The Midlands point
43.	Mr Miller’s further submission was that, if wrong on his point based on the increase of CTF’s credit limit, Mr Mallett was anyway discharged from liability under his guarantee, because of CTF’s dealings with the Society in relation to Midlands, which we were told is wholly owned by Mr Bellamy. 
44.	There is a suggestion in the judge’s judgment that what was happening was that Midlands was buying the goods that were delivered to it (see paragraph 17 above). What, however, was really happening, as I understood to be accepted in argument, was that CTF arranged through the Society for the purchase of supplies that were to be delivered to Midlands, and CTF itself became answerable to the Society for the cost of those supplies. This is the arrangement reflected in paragraph 96 of the judge’s judgment (see paragraph 27 above). Mr Miller’s submission, however, was that it follows that CTF was incurring liabilities to the Society for the benefit of another company in which Mr Bellamy had an interest. That was said to be outwith the intention of the guarantee, which was said to be merely to be for the guarantee of liabilities incurred to the Society by CTF for its own benefit.
45.	The difficulty with that argument is that nothing is known about CTF’s trading relationship with Midlands. What is known is that it does not appear to have been suggested at the trial, let alone found by the judge, that there was anything commercially improper about such relationship – that is, that the incurring by Mr Bellamy on behalf of CTF of the relevant liabilities to the Society involved any breach of duty to CTF or that the circumstances in which CTF incurred liabilities to the Society for the supply of goods to Midlands was other than part of a proper trading relationship between CTF and Midlands. I understood Mr Miller to accept that if Midlands had been an unrelated customer of CTF, it would be difficult to see why the incurring of like liabilities by CTF to the Society would have been outwith the contemplation of the guarantee: as the judge said, there is no requirement in the Society’s rules that a member should only purchase for delivery to itself. On the face of it, all the liabilities incurred by CTF to the Society were properly incurred in the course of its business; and Mr Mallett proved no case at the trial that they were not, even in relation to the Midlands supplies. The guarantee was therefore engaged. 
46.	In my judgment, there is no substance in this point either.
Disposition
47.	I would dismiss Mr Mallett’s appeal.
Lord Justice Kitchin :
48.	I agree.
Lord Justice Longmore :
49.	I also agree.