Guarantee or indemnity? Conclusive Evidence Clauses

Guarantee or indemnity? Conclusive Evidence Clauses

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Author: Robert Syms

In ABN Amro Commercial Finance Plc v McGinn and others [2014] EWHC the court considered whether deeds intending to indemnify a factor's losses under an invoice discounting agreement were an indemnity or a guarantee.

In addition, the court looked at the operation and effectiveness of a conclusive evidence clause.

Guarantees and indemnities are central to the strategy of financial risk management in many commercial contracts and lending relationships.

Facts

ABN entered into an invoice discounting agreement (the Agreement) with a company (X) by which it purchased all of X's current and future debts. As is commonplace in these arrangements, ABN was entitled to terminate the Agreement on X entering insolvency and require X to repurchase all outstanding debts and demand payment of the balance due. The demand would be based on the account ABN kept to record all transactions with X (the Current Account).

Security for the Agreement was provided by deeds of indemnity (the Deeds) between the directors of X and ABN. The Deeds contained a conclusive evidence clause as to indebtedness which indicated that an acknowledgment or admission of liability by X would be sufficient to establish liability. It also allowed ABN to make a reasonable estimate of any contingent liabilities.

X entered into administration. In accordance with the Agreement, ABN demanded payment of the balance due on the Current Account.

When X failed to pay the amount demanded, ABN commenced proceedings against X's directors to recover the amount due under the Deeds. ABN served certificates of indebtedness on the directors, which ABN claimed as conclusive under the terms of the conclusive evidence clause in the Deeds.

The directors argued that the Deeds were guarantees and created a secondary liability and not a primary liability. As guarantees the directors' liability could be discharged by a number of variations to the Agreement. They also claimed that there were errors in the certificates and that there were a number of disputes as to quantum.

ABN issued an application for summary judgment against the directors on the basis that they had no real prospect of success on any of the issues.

The Court's findings

The court rejected the argument that the Deeds were guarantees. It held that use of words referring to 'indemnity' and 'indemnification' were indicative of the Deed being an indemnity i.e. a primary obligation.

In making that finding, it was 'compelling' that ABN was entitled to make a reasonable estimate of contingent liabilities under the Deeds.

The wording of the conclusive evidence clause was such that the acknowledgment or admission of liability by X was sufficient to establish liability. No further examination was necessary. As the purpose of the conclusive evidence clause was to avoid disputes as to quantum, the Judge would not accept argument that there were errors in the certificate. The court did not find it necessary to conduct a trial to establish whether certain debts could be recovered.

Following Re Charge Card Services Ltd [1987] the court determined that ABN's Current Account was a running account. Where an individual debtor did not pay an invoice ABN did not at that point suffer loss it simply reduced the amount in the running account. ABN had only suffered loss when it demanded immediate payment of the Current Account from X under the Agreement.

Practical tips

  • The heading or description of a document as a 'guarantee' or 'indemnity' is not conclusive. The court will always look beyond the title of a document and assess the true nature of the obligations.
  • As a guarantor's liability is secondary to that of another it is common for guarantors to try to evade liability by arguing that changes to the underlying guaranteed agreement discharged them from their guaranteed obligations.
  • Always consider incorporating an indemnity clause into a guarantee as a safeguard against arguments regarding secondary obligations.
  • Inserting a robust, well drafted conclusive evidence clause into a guarantee or indemnity can help to avoid lengthy and costly arguments about how much is due to be paid.

About the Author

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Robert Syms

Senior Associate

03700 86 8897

Robert is a Senior Associate in our commercial disputes team in Reading. He is an experienced litigator, having handled a wide range of complex and high value commercial and business disputes, successfully progressing and defending claims through High Court proceedings, arbitration and all forms of alternative dispute resolution.

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