The equitable rules designed to protect guarantors from amendments to the original financing agreements made without his consent do not apply to indemnities under English law.
A company entered into factoring arrangements. The directors entered into indemnities in favour of the factor.
The company went into administration. Despite attempts to collect outstanding customer receivables a shortfall of £8m resulted. The administrators of the company acknowledged that shortfall and the factor relying upon that acknowledgment claimed under the indemnities.
The directors argued:
- The indemnities created secondary not primary obligations and there had been material variations to the financing arrangements to which they did not consent; and
- The factors certificate of the sum due under the indemnities was not binding upon them as there had been a failure to mitigate loss.
The Court decided the indemnity created primary obligations and so was not subject to the same rules as a guarantee. A claim under an indemnity was a debt not a damages claim and there was no duty to mitigate the loss.
The so called rule in Holme v Brunskill that protects guarantors who do not consent to variations of the principle agreements does not apply to an indemnity. The case also confirms that the duty to mitigate which applies in contractual damages cases will have no application in a claim under an indemnity because the indemnity claim is one for a debt not for damages. Indemnifiers should take note and build in a duty to mitigate if that is the commercial deal.