Fundamentals of guarantees and related instruments

1. Fundamentals of guarantees and related instruments Gabrielle Samuels August 2010

2. Outline

3. Guarantee

4. Guarantee features Secondary Principal debtor must default before the Guarantor can be liable

5. Indemnity

6. Indemnity Primary The Creditor can look to the indemnifier regardless of whether the principal debtor has defaulted

7. Guarantee or Indemnity?

8. Guarantee or Indemnity?

9. Guarantee or Indemnity?

10. Guarantee or Indemnity?

11. Guarantee or Indemnity?

12. Guarantee or Indemnity?

14. Clause analysis

15. Non-competition � Beneficiary claims Parallel claim against guarantor

16. Guarantor claimsIndemnity from principal

17. Guarantor claimsIndemnity from principal

18. Guarantor claimsSubrogation

19. Guarantor claimsSubrogation

20. Guarantor claimsContribution

21. Restricting competing claims/ maximising recovery Contractual prohibition of indemnity, subrogation, contribution rights until guaranteed debt paid in full Turnover trust � monies received in breach Prohibition of competing proofs in any relevant liquidation / beneficiary may direct proof to be made and turnover of receipts Watch for extension of non-compete clause to any sums owing to guarantor from the principal Suspense accounts partial payments by guarantor �suspended� beneficiary makes full claim in principal�s liquidation

22. Cherry v Boultbee (1839) 4 My. 8Cr. 442)

23. Technical grounds for avoidance

24. Variations to principal contract Material variation of the principal contract will discharge the surety unless consent is given Prejudices the guarantor Not necessarily beneficial

25. Consent given in guarantee Typical wording:

26. Triodos Bank v Dobbs [2005] EWCA Civ 630 (effectiveness of advance consent) Any true �amendment� or �variation� to principal obligation would bind guarantor BUT advance consent to variation of principal obligation indicates consent to continuation of existing guarantee. Not (necessarily) consent to extension of guarantee to new obligations under the principal contract AND one must distinguish between a true variation of existing obligation and entering into a new obligation. There is a �limit on the power to vary� If a new principal obligation is entered into, the guarantor is discharged

27. Consent at time of variation Written consent of guarantor specifically agreeing changes to principal contract / that guarantee continues to bind If �limit on power to vary� is exceeded, will take effect as a new bargain (Counsel�s advice) If principal obligations are to be extended, beneficiary needs guarantor�s express consent to extension of guarantee

28. Performance bond/demand guarantee Contractual undertaking to pay on occurrence of certain event e.g. failure to complete works on schedule / contractual default �Event� is evidenced by documents only surveyor�s report statement of breach No defences to payment (save for established/obvious fraud) Typically issued by banks � standard form

30. Van der Merwe v IIG Capital LLC [2008] EWCA Civ 542 Individual �guarantors� Instrument containing many features of a modern guarantee (on-demand, an indemnity, waiver of defences, �principal obligor�, conclusive certificate as to amount due) Marubeni presumption rebutted Lesson: Include explicit language

31. Key points Guarantee/indemnity distinction is blurred by the typical drafting of �guarantee� instruments The waivers of defences given for the benefit of a beneficiary are �standard� � but guarantors should consider in the light of their own circumstances/ expectations Scope and effect of non-competition clauses should be carefully considered

32. Fundamentals of guarantees and related instruments Gabrielle Samuels August 2010