Disputes regarding the application and purpose of guarantees and indemnities in contractual agreements frequently emerge in English courts. This demonstrates the importance of establishing a clear distinction between the two and their application to prevent potential lawsuits in the future. The recent case of NatWest Markets NV & Anor v CMIS Nederland BV & Anor (2025) can serve as an applicable example.
BACKGROUND OF THE CASE
NatWest (claimant) and CMIS (defendant) entered into seven substantial mortgage-backed financial agreements, which also included seven Deeds of Indemnity. NatWest stated that they are owed £155million according to the Deeds of Indemnity. The owed funds originated from swap agreements entered into with specific entities called issuers. According to the claimant, the defendant agreed to compensate any outstanding payments that issuers were unable to handle.
CMIS, on the other hand, argued that according to ISDA Master Agreements, which establish rules for financial agreements, swap agreements allow the issuers to delay payments—meaning that no money was owed, as the issuers temporarily postponed the payments as they were allowed to do. Additionally, the defendant claimed that the signed Deeds of Indemnity should not be referred to as indemnities but rather guarantees. This distinction is crucial because, in the case of guarantees, the guarantor is only responsible if the original party (the issuers) is already liable.
HIGH COURT'S JUDGEMENT
Judge Nigel Cooper KC determined that although the initial contracts permitted the issuers to delay the payments, it did not change the fact that the funds remained due. The clause to delay payments did not nullify the issuers' obligation to the claimant to make those payments. Most significantly, the judge emphasised that the Deeds of Indemnity executed at the beginning were indeed indemnities rather than guarantees. This established a separate duty to pay for CMIS, regardless of the issuers' circumstances. In addition, the principle of legal co-extensiveness is not applicable in this instance.
LEGAL IMPLICATIONS
This case has once more showcased the importance of understanding the difference between indemnity and guarantee. An indemnity is a separate commitment made by a third party, which is typically not related to the circumstances of the main debtor. It cannot serve as a secondary plan, and an individual providing an indemnity is directly liable for payment, even if the original contract is amended. It is crucial to understand the potential risks involved when signing an indemnity, as the individual who signs it will be obligated to pay regardless of the situation and will not be able to reclaim the funds from the original debtor.
On the contrary, a guarantee is a written promise provided by a third party to make a payment solely in the event that the primary debtor is unable to fulfil their obligations, and typically, they hold a secondary responsibility. In contrast to indemnities, if the original contract is terminated or amended, the guarantor's obligation will become void. Most significantly, guarantors generally have the right to recover their funds from the original debtor.
Therefore, it is essential for businesses and individuals entering into such agreements to understand the risks and obligations that might be associated with indemnities and guarantees.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
