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Tech & Sourcing @ Morgan Lewis

TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS

You signed a deal with the US subsidiary of an India-based service provider, and the Indian parent issued a guaranty. Several years later, you are now amending the original master services agreement (MSA) to add to the scope or extend the term, and you are faced with the question of whether you need the guarantor to reconfirm that the guaranty continues in effect to the MSA, as amended— the best course of action is that you do.

If there is a substantial modification of the guaranteed obligations and you do not receive that additional confirmation or acknowledgment, courts have indeed found that the guarantor might be released from liability under the purview doctrine. See Triodos Bank NV v. Dobbs (2005) (releasing the guarantor because the amended terms were considered a “replacement” and not a “variation”). The Triodos case opened the door for guarantors to challenge amended agreements, which allowed courts to pave the way through a line of cases for drafters to protect themselves from these challenges by incorporating into their guarantees certain “unconditional” language, even in the face of material amendments. See Citicorp Leasing, Inc. v. Kusher Family Ltd. P’ship (S.D.N.Y. July 14, 2006) (holding that the guarantors had undertaken a broad guarantee “absolutely and unconditionally”).

Guaranties can additionally be drafted to explicitly prevent a guarantor from seeking this type of relief by including an express waiver of notice of changes. See Citicorp Leasing, Inc. v. United Am. Funding, Inc. (S.D.N.Y. Aug. 5, 2005) (holding that unconditional guaranties preclude affirmative defenses from guarantors); see also Regency Equities Corp. v. Reiss (S.D.N.Y. June 16, 1995). It is important to note, however, that while a waiver of notice language can maintain the legal accountability between guarantor and new contract terms, the purview doctrine will always remain a viable challenge; courts have been known to consider the sophistication of the parties involved and whether the amended terms are so fundamentally different from the original that they must be considered a “replacement.” See Regency Equities Corp.

While a properly drafted guaranty will state that the guaranteed obligations include the original obligations under the MSA, as they may be modified from time to time, the purview doctrine argument will not go away absent express acknowledgement from the guarantor of the new terms or an express waiver of future modifications. As a result, it is prudent, if possible, to obtain a reaffirmation of the guaranty at the time of amendment to the MSA.

A reaffirmation can take many forms. A common form is in the form of a joinder to the amendment, set forth after the signature blocks of the parties to the amendment. Here is a sample joinder:

JOINDER OF GUARANTOR

For valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce Customer to enter into this Amendment, the undersigned, being the “Guarantor” under that certain Guaranty, dated _________, and issued by the undersigned to and for the benefit of Customer (the “Guaranty”) in connection with the execution and delivery of the Master Services Agreement dated _____________ (“MSA”) by Customer and Service Provider Subsidiary, and intending to be legally bound and to bind its successors and assigns, hereby joins in this Amendment as of the Effective Date for the purposes of ratifying the Guaranty and confirming that the Guaranty remains in full force and effect with respect to the MSA, as amended by this Amendment.
Parent Guarantor
By: _________________
Name:
Title:

Whether the purview doctrine argument will prevail is a question of fact, and often hinges on the language in the guaranty, the nature of the modified obligations of the guarantor, and, lastly, principles of equity. The only sure way of keeping that guarantor attached is with express consent.

Summer associate Jean Sebastien Bruno contributed to this blog post.