Simon Mills wins in Commercial Court on distinction between guarantees and indemnities

23rd May 2014

Although a guarantor has been described as a “fool with a pen”, at least he can rely upon any defences available to the principal debtor. In that sense his liability is said to be co-extensive with that of the principal debtor. On the other hand, an indemnifier is under a primary liability to pay and cannot rely upon the underlying debtor’s defences.

On 23 May 2014 Mr Justice Flaux gave summary judgment for a discounter in the Commercial Court case of ABM Amro Commercial Finance Plc v McGinn [2014] EWHC 1674 (Comm). He held that Defendants’ liabilities under their indemnities were primary rather than secondary so that they could rely on any defence
available to the company and were not discharged from liability by any subsequent material variation of the underlying discounting agreement. The judge also held that they could not contend that the Claimant failed to mitigate its loss or caused its own loss by failing to collect debts which were recoverable, and that both the liability to pay, and the amount, could be conclusively determined by a valid certificate.

However, the main point of interest is the Judge’s finding that the Claimant’s loss arising out of the relevant breach of the discounting agreement did not arise upon the actual breach (e.g. because the company’s debtors had failed to pay the assigned debts), but only after the Claimant had finally made demand under the agreement. Although non-payment by a debtor certainly constituted a breach of warranty, the agreement also provided that the client would raise a credit note which would be debited to the current account, which was a running account with a single balance. Accordingly, until it had made demand, the Claimant cannot be said to have suffered any losses as a result of breach of warranty.