Tomlin Orders and Guarantees – Re PME Cake ltd  EWHC 1783 (Ch)
25 Jul 2022
What happens to a guarantee when the underlying liability had earlier been the subject of litigation and settled by a Tomlin Order? This was a question which was recently considered in the case of Re PME Cake Ltd  EWHC 1783 (Ch).
In that case, the Craigs had leased property which they owned to a firm, PME Harrow. PME Cake guaranteed the obligations of PME Harrow under the lease. The Craigs brought a claim for breaches of covenant against PME Harrow. The claim was settled by a Tomlin Order under which PME Harrow was to pay a total of £300,000 to the Craigs. PME Harrow failed to make payment. The stay under the Tomlin Order was lifted, and PME Harrow were ultimately ordered to pay to the Craigs £302,208.60.
In the circumstances, the Craigs served a formal demand for payment of £302,208.60 on PME Cake under the guarantee, and in the absence of payment, a statutory demand was served. PME Cake applied to restrain the presentation of a winding-up petition.
PME Cake’s primary submission was that the Tomlin Order had created a new legal relationship which replaced the old one. Under the new agreement enshrined in the Tomlin Order, PME Harrow had been released of any liability for the breaches of the lease covenants, with that liability instead being replaced by a monetary obligation to pay £300,000 to the Craigs. PME Cake was not a party to that agreement, and because PME Harrow’s liabilities for breach of the lease covenants had been released by agreement between PME Harrow and the Craigs, so too was PME Cake effectively released as guarantor for those liabilities.
The Court dismissed the application, holding that PME Cake remained liable as guarantor for the sums. The Court considered the following matters:
- The reality was that the Tomlin Order pertained to the only claim between the parties, which was the breach of covenant by PME Harrow. It would be artificial to regard any sum payable pursuant to the Tomlin Order as being anything other than a payment by PME Harrow in satisfaction of its liability in relation to said breach of covenant.
- The guarantee was not restricted to covenants to be found directly in the lease, but instead extended to an indemnification against all losses, damages, costs and expenses arising or incurred as a result of non-performance or non-observance of any covenant. Given that the sums payable under the Tomlin Order was (effectively) causatively linked to the breach of covenant, the scope of the guarantee was wide enough to cover those sums.
While this case confirms the earlier Court of Appeal decision of Collin Estates Limited v Alain Robert Buckley that a guarantee extends to sums owing under a Tomlin Order settling the guaranteed liability, there is a certain policy unease of leaving the guarantor, a third party who played no part in that Tomlin Order, responsible for picking up the pieces thereafter.
There is some tentative suggestion that a guarantor may be able to raise by way of defence that the obligations alleged to be breached in the first instance were not breached at all, but the scope of this is not entirely clear, especially in circumstances where the primary obligor would generally have been unable to rely on that once pen had been put to paper in the Tomlin Order. In any event, such a response by the guarantor would only answer the issue of liability, with the issue of quantum still likely resting on the sums agreed under the Tomlin Order, such that the guarantor would in practice have no real way to dispute the sums which should be recoverable for accepted breaches of guaranteed obligations.
Litigators may consider the following matters when approaching cases involving guarantee relationships:
- A party with the benefit of a guarantee may, where there are potential issues as to breach of the underlying obligations or quantum relating to said breach, opt to begin litigation against the primary obligor (who in some contexts may be less capable of mounting a full-throated defence) with the goal of obtaining a favourable settlement by Tomlin Order to enforce against the guarantor.
- Where there is litigation between the primary obligor and the obligee, the guarantor should consider whether to take a more proactive role to the litigation, and may want to consider being involved in any potential settlement process between those parties. Guarantors could also consider incorporating provisions in the guarantee which require the obligee to inform them upon proceedings being commenced against the primary obligor.
The simple facts of this decision also meant that certain questions were left open to be answered when other opportunities arise:
- What would happen where the agreement in the Tomlin Order settled the guaranteed liability, but had also proceeded to resolve other matters in dispute between the parties unrelated to the guarantor in the process, such as to produce a total monetary figure for repayment in full and final settlement of all the disputes?
- What would happen where the agreement in the Tomlin Order settled the guaranteed liability by imposing various non-monetary obligations which were in turn breached? Would the guarantor be liable for the full losses arising out of the breaches of those non-monetary obligations?