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Guarantees and indemnities and the “conclusive evidence” clause

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22/01/2015

The issue of whether a document is a guarantee (where the liability is secondary and contingent on the underlying obligation) or an indemnity (where the liability is primary and independent of the underlying obligation) regularly comes before the courts. The name given to the document will not be determinative; for example, in Van de Merwe v IIG Capital LLC [1] the Court of Appeal held that a director’s obligation under a document described as a “guarantee” was in fact a primary obligation. A key factor in the Van de Merwe case was the existence of a “conclusive evidence” clause, namely a clause which provides that any certificate presented to the obligor by the beneficiary certifying the amount due will be conclusive evidence of that amount in the absence of “manifest error”.

In ABN Amro Commercial Finance Plc v McGinn [2] the defendant directors argued that the document pursuant to which any liability to the beneficiary, Amro, arose was a guarantee rather than an indemnity and that, as there had been variations made to the underlying agreement, their secondary liability had been discharged under the rule in Holme v Brunskill. The High Court held that the document in question was an indemnity rather than a guarantee:

  • the use of words of indemnification (e.g. “agree to indemnify”), although not conclusive, was indicative of a primary liability
  • the words in the “conclusive evidence” clause, “I shall be bound by any acknowledgement or admission by the Company and by any judgment in your favour against the Company” indicated an acknowledgement or admission of liability by the principal debtor would have sufficed to establish liability even if, on detailed examination, there was in fact no liability
  • the fact that under the “conclusive evidence” clause, Amro was entitled to make a reasonable estimate of contingent liability demonstrated very clearly that the directors’ liability was not dependent upon any conclusive determination of the principal debtor’s liability to Amro.

The court also rejected the directors’ argument that there was a manifest error in the certificate. It held that to resolve the dispute as to the collectability of debts would require a full trial which would defeat the object of the conclusive evidence clause.

[1] [2007] EWCA Civ 542
[2] [2014] EWHC 1674 (Comm)