Indemnity or indemNOTy? The difference between a guarantee and an indemnity

A bank sought payment under “deeds of indemnity” related to swap agreements which were part of a number of Dutch mortgage-backed securitisations.

The mortgage provider refused to pay, a key argument being that the “deeds of indemnity” were in fact guarantees. The mortgage provider argued that its liability was co-extensive* with the issuers (which had the primary liability to pay) and that the issuers had merely deferred payment. Accordingly, said the mortgage provider, the relevant amounts were not due or payable by the issuers under the swaps and consequently were not due to the bank under the “deeds of indemnity”.

The court referred to an earlier case which had set out a useful summary for differentiating between a guarantee and an indemnity:

1. A suretyship contract can include two types of obligations: guarantee and indemnity.
2. The type of obligation depends on the wording used.
3. Suretyship law often has unclear terminology, so it's important to focus on the actual obligation, not just the labels used.
4. The terms “guarantee” or “indemnity” used by the parties are not definitive but can be indicative.
5. The obligation should be identified by looking at the entire contract without any assumptions.
6. An indemnity obligation is a primary payment obligation, not secondary.
7. A true guarantee contract means the guarantor promises to be responsible if the principal debtor fails to perform their obligations.
8. In a guarantee contract, the guarantor's liability is secondary to the principal debtor's liability.
9. A provision that preserves liability when a guarantor would otherwise be discharged usually indicates a guarantee contract. If the provision states the surety is liable when the principal is not, it could indicate either a guarantee or an indemnity.

The court also considered the relevancy of the co-extensiveness principle,* noting:

1. It is not a strict rule and its application will be informed by the true construction of the underlying contract.
2. It is possible for the surety to remain liable even where the principal is released from its obligations to the creditor; this can be the case under a contract of guarantee which the principle does apply to. 

The court found that the “deeds of indemnity” were contracts of indemnity (not contracts of guarantee). The court also confirmed that the co-extensiveness principle did not apply. Ultimately, the purpose of the “deeds of indemnity” was to protect the bank in the event that certain payments under the swaps were not made by the issuers. The mortgage provider had accepted the risk that they may have to pay under the swaps and this approach aligned with the commercial sense of the transaction. 

Judgment: NatWest v CMIS

*Ed: If you weren't paying attention at guarantees school, the principle of co-extensiveness says that a guarantor's responsibility is to pay what the principal owes, but no more and no less. This means that, generally, the guarantor's liability is the same as that of the principal, in terms of amount, time for payment and the conditions under which the principal is liable.