A guarantee is a promise between two parties (X and Y)  to fulfil an obligation of a third party (Z)  – X’s liability as guarantor usually only arises if Z fails to pay Y and is secondary to Z’s primary liability.

By contrast, under an indemnity, X agrees to be responsible for any loss to Y, independently of the obligations of Z to Y; X is treated as having a primary liability to Y.

The differences in practice

In a recent case*, an invoice discounter purchased the debts of a company whose directors signed an indemnity in the discounter’s favour.  The company went into administration and many debts were disputed.  After collection of what could be recovered, approximately £9 million remained outstanding and the discounter sued the directors under the indemnity.  The directors argued that the indemnity should in fact be treated as a guarantee and, as such, the claim should fail as their liability was secondary and not primary, that material changes made to the discounting agreement without the directors’ consent meant that they should be released from liability and that the discounter had not taken proper steps to collect and enforce the debts.

The court rejected all these arguments and held that:

(a) the directors had given an indemnity, not a guarantee, and their liability was primary

(b) as it was an indemnity, the protections usually available to guarantors (including the rule that changes to the main agreement normally result in the guarantor being released from liability unless the guarantor has agreed to them or the change is a minor one or does not actually affect the guarantor) did not apply, and

(c) the “failure properly to collect or enforce” argument was essentially an attempt to require the discounter to mitigate its loss – this was not relevant in the context of an indemnity for a debt.

The decision highlights that an indemnity can be more advantageous to the beneficiary (the credit provider) than a guarantee, although whether it manages to obtain one will depend on various factors, including market practice.

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*ABN AMRO Commercial Finance PLC v. McGinn and others [2014] EWHC 1674

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.