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Financial Services Quarterly
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Is it a guarantee or is it an indemnity?
In this case1, the defendant argued that the "Deed of indemnity and right to mortgage" that he had signed was a guarantee and not an indemnity. The defendant also argued that a variation to the original contract relieved him of liability. Both arguments were rejected by the court.
The first argument was made on the basis that the relevant clause referred to loss, and not to payment of the principal debt. As loss would only occur on non-payment by the principal debtor, the defendant argued that his liability was secondary, and therefore was a guarantee and not an indemnity.
The court found that the plain meaning of the deed was to safeguard the lender against loss and that the parties had spoken of indemnity and not of guarantee.
The defendant further submitted that a variation of the loan agreement constituted a departure by the lender from the principal contract without the guarantor's consent, which relieved him from liability. However, the court restated that "a contract of indemnity is not affected by a variation of the principal debtor's obligations"2.
Notwithstanding this, in order to avoid any argument, it is always prudent to ensure that any guarantor or indemnifier consents to any amendment to the terms of the guaranteed or indemnified contract.
Distinctions between guarantees and indemnities
- An indemnity is a promise that "I will see you are paid"
- A guarantee is a promise that "If he does not pay you, I will"
- A guarantee generally arises on the default of the borrower, and is secondary to the main agreement
- An indemnity is a primary obligation that is a distinct, autonomous undertaking not dependent for its content or enforceability on the terms or validity of the undertaking given by the borrower to the lender
- An indemnity provides a significantly more robust undertaking from a lender's perspective
1 NZHB Holdings v Peters (High Court, Auckland CP348-SD02, 20 August 2003, Baragwanath J)
2 Nathan Finance Limited v Martin Simmons Airconditioning Services Limited (High Court, Auckland A1019/85, 17 December 1986, Wylie J)
Enquiries and information
For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.
Disclaimer
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
