Are You Sure?

A recent decision of the High Court has served as a useful reminder and warning to parties of the need to carefully draft contracts of suretyship, and the distinction between indemnities (primary obligations) and guarantees (secondary obligations).

In Ultrabank A/S v Jagatramka [2017] EWHC 2792 (Comm), Mr Justice Teare held that the language used in the contract was indicative of a primary liability and that it provided for an on demand bond which required the defendant to pay a sum to the claimant equal to that which his company was indebted.

The difference between suretyships of guarantee, and suretyships of indemnity

A guarantee is a promise to ensure that a third party fulfils its obligations and/or a promise to fulfil those obligations if that third party fails to do so. It is a contractual agreement that creates a secondary obligation to support a primary obligation of one party to another. The guarantor promises that the borrower will perform its obligations and, if he does not do so for any reason, the guarantor will perform them on its behalf. The guarantor's obligation is contingent on the borrower's primary obligation. It will therefore never be greater than that of the borrower under the primary agreement. An indemnity is a promise to be responsible for another's loss. However, unlike a guarantee, it is a primary obligation given by the indemnifier to the person to be indemnified. It is independent to, and not contingent upon, the obligations of the borrower. This means that if the underlying transaction is set aside for any reason the indemnity will remain valid. Most documents that are usually described as guarantees are actually combined guarantees and indemnities. However, it is important for the contracting parties to make it absolutely clear in the documents whether a guarantee or indemnity or both are being given. Ultrabank case

The claimant company operated and traded ships. It entered into two agreements with a coke-producing company, Gujarat. Mr Jagatramka was the chairman and managing director of Gujarat. Gujarat was indebted to Ultrabank in the sum of c.US$4.25 million. Gujarat and Ultrabank agreed to pay the indebtedness to Ultrabank by way of instalments. This agreement was fortified the same day by a personal guarantee from Mr Jagatramka. The personal guarantee stated that "[Mr Jagatramka was] aware of the Joint Venture Agreement between [Ultrabank] and [Gujarat] dated 6 June 2007 and 5 July 2007 ('the...