“Guarantees and Indemnities” - Guarantees or Indemnities?
The judgment will be of great interest and value to invoice financiers and commercial lenders when considering the drafting and enforceability of their guarantees and indemnities. Not only does it affirm a lender’s entitlement to rely on a conclusive evidence clause (following Van der Merwe v IIG Capital LLC  EWCA Civ 542), but it also provides helpful clarification on the distinction between a guarantee and an indemnity.
An indemnity creates a primary obligation on the surety to pay a debt that is independent of the liability of the borrower under a finance facility, so it is not necessary to prove first the borrower is liable for the principal debt under the facility. A guarantee meanwhile, is a secondary obligation that is usually contingent on the borrower’s default. Generally, any defences available to a borrower (i.e. set-off or allegations that the facility, or any of its provision, are unenforceable) will ‘co-exist’ and be available in equal measure to the surety.
Catalyst Business Finance Limited (“Catalyst”) entered into a loan agreement (“Agreement”) with the First Defendant, Very Tangy Television Limited (“Very Tangy”). The Second Defendant, Richard Tuckwell (“Mr Tuckwell”) entered into a personal guarantee and indemnity (“Guarantee & Indemnity”) to secure the advances made to Very Tangy under the Agreement. The Agreement provided that Catalyst would advance to Very Tangy a loan up to £500,000 in various tranches subject to Very Tangy providing the information requested in the Agreement. Very Tangy failed to provide all the information requested so Catalyst only made two advances under the Agreement. Very Tangy failed to repay those sums upon demand and Catalyst made demand upon Mr Tuckwell under the Guarantee and Indemnity. Catalyst issued proceedings and Very Tangy served a defence and counterclaim, arguing that Catalyst had been obliged, and had failed, to lend the entire £500,000, which gave rise to a claim in damages of over £8m. Mr Tuckwell argued that the Guarantee and Indemnity created a secondary obligation, so he was entitled to the benefit of the potential set-off of Very Tangy’s counterclaim
Catalyst applied for summary judgment on the grounds that
Mrs Justice Jefford found that the Guarantee and Indemnity was properly regarded as a “hybrid document” in which some of the obligations are primary and some secondary. She explained that the distinction between primary and secondary obligations is potentially material because if the Guarantee and Indemnity is a true guarantee, Mr Tuckwell is entitled to the benefit of any defences available to Very Tangy including a right of set-off. After careful consideration of the Guarantee and Indemnity, she ruled that Mr Tuckwell owed a primary obligation for the following reasons;
This decision emphasises the importance of a well drafted guarantee and indemnity. The court will look at the substance, not the form, of a guarantee and indemnity to determine what the parties intended. Therefore, it is important that your guarantees and indemnities incorporate as many of the protective measures (described in this judgment) as possible. A well drafted document will undoubtedly increase your prospects of success and reduce your costs in litigation.
We have years of experience of drafting and enforcing guarantees and indemnities and all other security documents so if you have any concerns over the strength or enforceability of your existing finance and security documents, please do not hesitate to contract William Angas, Noel Ruddy or Ben Ashworth.
The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. PDT Solicitors LLP accepts no responsibility for the content of any third party website to which this webpage refers.