The Commercial Court has recently considered the circumstances in which a deed shall be construed as an indemnity imposing a primary obligation rather than a guarantee imposing a secondary obligation.
Pursuant to an agreement dated 30 June 2003 (the “Agreement”) the Claimant purchased the debts of its client, Jenks Sales Brokers Ltd (“JSB”). The Defendants were the directors of JSB and each of them entered into a deed of indemnity with the Claimant. The terms of each of the deeds contained a conclusive evidence clause which provided that the Defendants would each be liable by any acknowledgment or admission provided by JSB.
In May 2009, JSB entered into administration and many of the debts were disputed. After as much as possible was recovered by the Claimant, JSB acknowledged in writing that it was indebted to the Claimant in the sum of £8,924,783 (the “Acknowledgment”).
The Claimant commenced proceedings against the Defendants for the recovery of the outstanding sum pursuant to the deeds of indemnity each director had provided. The Defendants denied liability on a number of grounds including that their liability was secondary and not primary, that their liability was discharged by material variations to the Agreement and that the Claimants had not taken proper steps to collect and enforce the debts in question.
The Claimant subsequently served certificates of indebtedness on the Defendants, which it contended were conclusive against the Defendants by virtue of the conclusive evidence clause contained in each of the deeds of indemnity. The Claimant applied for summary judgment.
On the facts, Flaux J found that:
1. a conclusive evidence clause in the deeds of indemnity provided by the Defendants meant that the Defendants’ liabilities under the indemnities were primary as opposed to secondary;
2. the Defendants were not discharged from any liability owing to material variations to the Agreement because of this primary obligation; and
3. the argument that the Claimant had failed to mitigate its loss or contributed to its own losses was not available to the Defendants since the liability owed by the Defendants was primary and not secondary.
Accordingly, Flaux J granted summary judgment to the Claimant on the basis that the Defendants had no real prospect of success on any of the issues.
Flaux J also considered an argument brought by one of the Defendants that he could not be held liable for debts which arose before he signed a deed of indemnity. Flaux J rejected this argument, finding that the loss in question was suffered when the Claimant demanded payment and not at the earlier stage of non-payment by a debtor.
The decision of Flaux J provides guidance as to the circumstances in which a deed shall be construed as an indemnity imposing a primary obligation, rather than a guarantee imposing a secondary obligation. The distinction is significant since a guarantor’s liability is contingent on the underlying obligation of the principal which means that a guarantor shall enjoy the benefit of any defence available to the principal unlike an indemnifier, which does not. The decision of Flaux J also clarifies the point at which a loss is suffered under a discounting agreement, such as that between the Claimant and JSB.
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