dcsimg

Parental guidance: how to guarantee the construction of an indemnity clause

Claudia Barry

In GPP v Solar the court offers guidance on distinguishing a guarantee from an indemnity, and holds that two equitable principles of guarantee law do not apply to indemnities.

GPP, as employer, entered into Engineering, Procurement and Construction contracts with a (now insolvent) contractor. Solar, parent of the contractor, was sued by GPP as guarantor and/or indemnifier of the contractor’s obligations under four of those EPC contracts.

Compact Contract’s dedicated readers will no doubt have the guarantee/indemnity distinction firmly cemented in their minds. Guarantees are secondary, contingent, obligations to ensure a third party performs a primary obligation (a “see to it” obligation) and/or a promise to perform that primary obligation if the third party fails (a “conditional” obligation). Whereas indemnities are primary, non-contingent, obligations to satisfy another’s loss, on a pound-for-pound basis.

Of the two relevant sub-clauses in the EPC contracts, one referenced “guarantees”, the other, “indemnify”. They were held to be a guarantee and indemnity, respectively. Such descriptions suggest a clause is what it says on the tin, but are not conclusive. Indicators of an indemnity clause are: (1) calling the indemnifier a “primary obligor” and “not merely guarantor”; (2) avoiding boilerplate guarantee language; (3) referencing “loss, debt, damage, interest, cost and expense incurred” and the like; and (4) describing the obligation as “separate and independent”.

Guarantors benefit from equitable protections, including: (1) the doctrine of “unusual features” (disclosure required by the creditor to the guarantor of unexpected changes to the debtor’s position resulting from debtor-creditor dealings); and (2) the so-called rule in Holme v Brunskill (a guarantee is discharged by variation of the underlying contact unless it’s manifestly insubstantial or not prejudicial to the guarantor).

Although the law is unsettled, the judge held that policy reasons, promoting legal certainty, and indemnifiers’ alternative recourses (e.g. misrepresentation claims), meant that these doctrines do not extend to indemnities.

Comments published on Compact Contract do not necessarily reflect the views of Allen & Overy or its clients.

Read comments below or add a comment

Leave a comment

Your email address will not be published. Required fields are marked *