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).