Guarantees and Indemnities” - Guarantees or Indemnities?

 

Guarantees and Indemnities” - Guarantees or Indemnities?

Catalyst Business Finance Limited v. Very Tangy Television Limited, Richard Tuckwell, Very Tangy Media Limited [2018] EWHC 1669 (QB).

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 [2008] 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.

The Facts
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

1. Mr Tuckwell's obligations under the Guarantee and Indemnity were primary, not secondary;
2. the certificate of indebtedness issued by Catalyst were conclusive evidence as to both Mr Tuckwell's liability and quantum;
3. there was no manifest error or an error of law on the face of the certificate; and
4. there could be no real prospect of Mr Tuckwell successfully defending the claim against him.

 

The Decision
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;

1. There was an express obligation in the Guarantee and Indemnity that Mr Tuckwell would "indemnify" Catalyst against losses or costs suffered or incurred by reason of a failure by Very Tangy to comply with the terms of the Agreement;
2. The Guarantee and Indemnity contained express provisions that Mr Tuckwell was liable in every respect as a principal debtor and his liability was not affected by an invalidity, illegality, unenforceability, irregularity or frustration of Very Tangy's obligation. These provisions would be pointless if the Guarantee and Indemnity only gave rise to a secondary liability;
3. Although the indemnity was invoked by a failure by Very Tangy to comply with the terms of the Agreement, Mr Tuckwell's obligation was a primary one because it extended beyond losses and costs for which Very Tangy is liable; and
4. Mr Tuckwell would be bound by a certificate of indebtedness prepared by Catalyst for the purpose of determining his liability and that this carries with it the concept that the amount is owed as a debt, and therefore that there is a liability to pay it, not just that it is the quantification of a sum that might be owed subject to establishing liability.

 

Conclusion
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 Ashwort

https://www.pdt.co.uk/thought-piece/andldquoguarantees-and-indemnitiesandrdquo-guarantees-or-indemnities

How Good Is Your Guarantor?: A Reminder Of The Distinction Between A Guarantee And An Indemnity

 October 2018

by Thomas Leyland , Felicity Ewing and Catriona Coleman

Dentons

The High Court recently handed down its decision in Catalyst Business Finance v. Very Tangy Television Limited, Richard Tuckwell, Very Tangy Media Limited [2018] EWHC 1669 (QB). The judgment provides a useful reminder of the differences between a true indemnity and a true guarantee. The distinction between a guarantee and an indemnity is more than just semantics. A true indemnity creates a primary obligation on the surety without the creditor first needing to establish liability for the principal debt. The indemnifiers' obligation is independent of, and not contingent on, the obligations of the borrower. In contrast, a true guarantee is a secondary obligation which enables the guarantor to avail himself of any defences which would otherwise be available to the debtor (for example, that the underlying facility is void or there is a right of set-off). In this case, the court examined the wording of a "guarantee and indemnity agreement" to determine which obligations were, in fact, indemnities.

The facts

In short summary, Very Tangy Television Limited (Tangy) entered into a loan agreement (the Loan Agreement) with Catalyst Business Finance Limited (Catalyst) to provide a loan (the Loan). A Mr Tuckwell agreed to stand surety for the Loan under a personal guarantee and indemnity (the Personal Guarantee and Indemnity). Two advances were made under the Loan Agreement. Some months later, Catalyst sought repayment of the Loan. Tangy did not pay so Catalyst pursued Mr Tuckwell under the Personal Guarantee and Indemnity. Catalyst issued various certificates of indebtedness to Mr Tuckwell certifying the amount payable under the Loan and the interest that had accrued.

Catalyst applied for summary judgment to the effect that: (1) Mr Tuckwell's obligations under the Personal Guarantee and Indemnity were primary obligations and not secondary; (2) the certificates of indebtedness issued by Catalyst were conclusive evidence as to both Mr Tucker's liability and quantum; (3) the only exception was if there is a manifest error or an error of law on the face of the certificate; (4) there is no such error; and (5) there could be no real prospect of Mr Tuckwell successfully defending the claim against him.

The decision

On the facts, Catalyst's application was successful. The judge found that the Personal Guarantee and Indemnity was properly regarded as a "hybrid document in which some of the obligations are primary and some secondary". She went on explain that: "the distinction between primary and secondary obligations is potentially material because if the Personal Guarantee [and Indemnity] is a true guarantee, the principle of coextensiveness applies and the Guarantor is entitled to the benefit of any defences available to the primary obligor", in this case a right of set-off.

Mrs Justice Jefford found that, under the terms of the Personal Guarantee and Indemnity, Mr Tuckwell owed a primary obligation for the following reasons.

1. There was an express obligation in the Personal Guarantee and Indemnity that Mr Tuckwell would "indemnify" Catalyst against losses or costs suffered or incurred by reason of a failure by Tangy to comply with the terms of the Loan Agreement.
2. One of the operative clauses in the Personal Guarantee and Indemnity contained:
   
   a. an express reference that Mr Tuckwell was "liable under this deed in every respect as a principal debtor"; and
   
   b. an express provision that Mr Tuckwell's liability was not affected by "an invalidity, illegality, unenforceability, irregularity or frustration" of Tangy's obligation,
   
   and that these references would be "pointless" if the Personal Guarantee and Indemnity only gave rise to a secondary liability.
3. Although the indemnity was invoked by a failure by Tangy to comply with the terms of the Loan Agreement, Mr Tuckwell's obligation was a primary one because it extended "beyond losses and costs for which the Borrower [Tangy] is liable".
4. Mr Tuckwell would be bound by a certificate of indebtedness prepared by Catalyst "for the purpose of determining [his] liability" (clause 5) and that this "carries with it the concept that the amount is owed as a debt, and therefore that there is a liability to pay it, not just that it is the quantification of a sum that might be owed subject to establishing liability" (paragraph 47).

Conclusion

This decision highlights the importance of precise drafting of personal guarantees and indemnities. The name of the document (as a "guarantee" or an "indemnity", for example) will, of course, not be conclusive. In these cases, the courts will look at what the parties intended by the words they chose to use in the documents. From a lender's point of view, the drafting is particularly important as the onus to establish a primary obligation, in the form of an indemnity, will fall on the beneficiary (i.e. the lender).

Ref. https://www.mondaq.com/uk/trials-appeals-compensation/744492/how-good-is-your-guarantor-a-reminder-of-the-distinction-between-a-guarantee-and-an-indemnity

The differences between an indemnity and guarantee

30 January 2019

The differences between a guarantee and an indemnity are often overlooked and underappreciated. Indeed, it is not uncommon for people to mistakenly view the two obligations as synonymous.

In commercial transactions, parties are often asked or required to provide a guarantee, an indemnity, or both. These types of obligations can usually be found in everyday commercial contracts such as supply agreements and loan documents.

It is, therefore, important to understand and appreciate what the differences are between a guarantee and an indemnity before agreeing to them.

The differences between a guarantee and an indemnity obligation were recently highlighted by the English High Court in Catalyst Business Finance v. Very Tangy Television Limited, Richard Tuckwell, Very Tangy Media Limited [2018] EWHC 1669 (QB).

The case provided a vital reminder that a guarantor is obligated to answer for another party’s default. The guarantee creates a secondary obligation on the guarantor; so that, in a supply agreement for example, the supplier can look to the guarantor for recovery of damages upon a purchaser’s default under the agreement. However, it is worthwhile to note that a guarantor, in these circumstances, is entitled to the benefit of any defences available to the defaulting party. On the facts in the case, the English High Court determined that the guarantor in a loan agreement was entitled to a right of set-off as this defence was available to the defaulting primary obligor.

On the other hand, an indemnity obligation creates a primary obligation on the party providing the indemnity. An indemnifier undertakes an original and independent obligation owed to the principal party. This means that the indemnifier’s obligation, unlike that of a guarantor’s obligation, is not contingent on the actions of the defaulting party, and, in a loan agreement for example, the creditor does not need to establish liability of the borrower for the principal debt. The party giving the indemnity cannot rely on any defences or right of set-off that the borrower may have. Also, the amount required to be paid under an indemnity obligation could potentially be greater than the amount required to be paid under a guarantee obligation. This is because the indemnity creates new obligations.

Often, as in the English High Court case, the terms “guarantee and indemnity” are used together in a contract. Naming an obligation as a “guarantee”, an “indemnity”, or both would not be determinative of whether it creates a guarantee, indemnity, or both. Therefore, it is important to carefully examine the contract to determine what the obligation is. Further, creditors and suppliers should carefully consider the wording in their contracts to ensure that obligations in those documents will protect them.

Should you wish to discuss any of the above and how it may affect you, please do not hesitate to contact Mike Roberton (DDI: (09) 356 8240; mike.roberton@glaister.co.n

Ref. https://www.glaister.co.nz/articles/the-differences-between-an-indemnity-and-guarantee/