Case Report: The Guarantee/Indemnity Distinction

25th June 2018

This case highlights the importance of the distinction between primary and secondary obligations in a contract of suretyship. It also shows that the meaning of the words used in a contract will be determinative (including that merely using the word ‘guarantee’ will not be enough to ensure the obligation is that of a guarantee) and that the commercial context and background will also be relevant.

The case

Multiplex Construction Europe Limited v Dunne [2017] EWHC 3073 (TCC). A contractor (Multiplex) recovered a £4 million advance payment that had been paid to its sub-contractor under a personal ‘guarantee’. The case considered contractual interpretation as well as primary and secondary obligations and the guarantee/indemnity distinction.

Multiplex advanced £3 million (later increased to £4 million) to its sub-contractor (Dunne Building and Civil Engineering Ltd) in a major construction project. The advance was set out in an ‘advance payment deed’ which required that the sub-contractor’s parent company (Dunne Group Ltd) and Managing Director (Mr Dunne) were jointly and severally liable as guarantor.

The guarantee said that “should the sub-contractor suffer an event of insolvency”, the guarantor “shall immediately be liable to the [Multiplex] for the payment of the Advance Payment and shall indemnify” it against any loss suffered in relation thereto.

The sub-contractor (and its parent company) went into administration five months later.

Primary/secondary liability and the important difference

There was consideration as to whether Mr Dunne’s liability was primary or secondary. If his obligation to pay under the deed was a primary obligation, it would be in the nature of an indemnity and if secondary, a guarantee. The distinction is important because if the obligation was primary (and had the effect of an indemnity) Mr Dunne would be required pay the £4 million to Multiplex with immediate effect. If the obligation was secondary (and had the effect of a guarantee) Multiplex would need to establish its losses suffered as a result of the sub-contractors insolvency before making any recovery from Mr Dunne.

The court said that the obligation on Mr Dune was primary, meaning he was required to pay out under an indemnity (when the trigger event of the insolvency of the sub-contractor kicked in).

The court considered that the words used in the clause confirmed the nature of the obligation. The use of the word ‘immediately’ was held to be crucial because it would not be possible to repay immediately if any accounting exercise was required to be carried out (i.e. the calculation of Multiplex’s losses as would be needed under a guarantee).

The commercial context was also important as the reason behind Multiplex making the advance payment was to provide substantial cashflow assistance to the sub-contractor, no doubt in an attempt to ensure delivery of the project. Further, the commercial reality was that the £4 million paid by Multiplex was required by it to be guaranteed, jointly and severally, by the parent company and Mr Dunne and to be repaid immediately if the sub-contractor became insolvent – to ensure that the advance was sufficiently secured.

Mr Dunne’s obligation was therefore primary under a contract of indemnity (despite being referred to as a ‘guarantee’), this conclusion being reinforced by the use of the word ‘indemnify’ in the clause.

The court said there was no need to refer to the contra proferentem rule (where ambiguous contract terms are interpreted against the party seeking to rely on them) as there was no ambiguity in the term – and further that there was equal bargaining power between the parties so it would have been of severely limited effect in any event.

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