Guarantee vs. Indemnity

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ABN Amro Commercial Finance PLC v McGinn (2014) [2014] EWHC 1674 (Comm)

This decision is a reminder of the distinction between the primary obligations under an indemnity and the secondary obligations under a guarantee. The so-called rule in Holme v Brunskill that protects guarantors who do not consent to variations of the principle agreements does not apply to an indemnity.

In this case, a company's directors provided indemnities to the bank to support factoring facilities provided to the company. When the company went into administration, the bank sought to recover under the indemnities but the directors denied liability, arguing that the indemnities should be viewed as guarantees which had been released as a result of material amendments made to the terms of the original facility agreement.

The court decided that the contractual obligations were indemnities and so had not been released as a consequence of the changes made to the underlying agreement. The court pointed to the language used in the relevant clause (e.g. "agree to indemnify" and "agreement to indemnify"), which, although not decisive, strongly suggested the assumption of a primary liability. Also, the fact that the bank was entitled to include a reasonable estimate of contingent liability showed that the directors' liability was not dependent on any definitive determination of the company's liability to the bank and this was to the court a "compelling indication" that the obligations were primary and not secondary.