A director’s desperate attempts to keep his sub-contracting business afloat led to him (apparently unwittingly) giving a personal indemnity in order to secure on account payments from a contractor to his company. Unfortunately for the director, however, the chickens came home roost! His company collapsed and the contractor pursued him via the personal indemnity. Could he argue that the personal indemnity was, in fact, a secondary guarantee? The court in Multiplex Construction Europe Ltd v Dunne  EWHC 3073 (TCC) provided a response.
Multiplex Construction Europe Limited (Multiplex) had entered into nine subcontracts with Dunne Building and Civil Engineering Limited (DBCE) across its projects nationwide. DBCE was teetering on the brink of insolvency and the parties decided that Multiplex would make an Advance Payment of £4m to assist with cash flow and entered into an Advance Payment Deed. This Advance Payment was effectively a payment on account of sums that would become due to DBCE in the future for its work on the different subcontracts.
Mr Dunne, a director of DBCE, was joined as a party to this Advance Payment Deed in his personal capacity and was identified as a “Guarantor”, undertaking to be jointly and severally liable with DGL (DBCE’s parent company) to the Contractor in specific circumstances. The key obligation in the “GUARANTEE” section of the Advance Payment Deed is set out below:
“The Guarantor irrevocably and unconditionally guarantees..….jointly and severally to the Contractor that should the Sub-Contractor suffer an event of insolvency (including but not limited to administration, administrative receivership, liquidation, ceasing or threatening to ceasing carrying on its business in the normal course or otherwise) or otherwise not be able to pay back the Advance Payment to the Contractor immediately upon receipt of a written demand from the Contractor, the Guarantor shall immediately be liable to the Contractor for the payment of the Advance Payment…”.
DBCE went into administration and Multiplex brought a summary judgment application against Mr Dunne. Multiplex claimed that the Advance Payment Deed was a contract of indemnity that gave rise to a primary obligation upon Mr Dunne (irrespective of the state of the financial account between Multiplex and DBCE), whereas Mr Dunne contended that it was a contract of guarantee that only contained secondary obligations upon him (and a primary obligation on DBCE), on the basis of which Mr Dunne should be able to set off other sums which he maintained were, or would be, due to DBCE from Multiplex.
Unfortunately for Mr Dunne, the judge agreed with Multiplex’s interpretation. In coming to this decision, the judge looked at the commercial purpose of the Advance Payment Deed. He agreed with Multiplex that the primary purpose was to ensure that Multiplex could look to someone else (i.e. Mr Dunne or DGL) for repayment of the Advance Payment in the event of the insolvency of DBCE.
He then considered the wording of the Advance Payment Deed itself. The fact that Mr Dunne was identified as a “Guarantor” and that the clause in question was headed “GUARANTEE” was not of itself determinative as to whether the document should be construed as a guarantee or a contract of indemnity. What was determinative was the actual wording of the relevant provisions themselves.
Based on the wording of the Advance Payment Deed, the judge held that Mr Dunne’s obligations were primary and in the nature of a contract of indemnity. Similar to an on on-demand performance bond, a contract of indemnity was enforceable on demand on proof of default by the principal or, importantly in the circumstances of this case, on satisfaction of some other event or requirement.
The judge analysed the key obligation in the “GUARANTEE” section set out above and concluded that the Advance Payment Bond was indeed a contract of indemnity, under which Mr Dunne had a primary obligation to repay the advance payment to Multiplex if one of two events were to occur. The two trigger events were as follows:
Trigger 1 - an event of, or akin to, the insolvency of DBCE; and
Trigger 2 – an inability on the part of DBCE immediately to repay the advance payment upon receipt of a written demand.
Based on this analysis, the judge held that Mr Dunne was under a primary obligation to repay the Advance Payment in full to Multiplex. This obligation crystallised on the insolvency of DBCE (i.e. the first trigger event referred to above). Furthermore, as this was effectively a contract of indemnity (and not a secondary guarantee), Mr Dunne’s obligation to repay the Advance Payment was not in any way dependent upon the state of the account between Multiplex and DBCE. Mr Dunne was therefore not entitled to set off other sums that he said were, or would be due to DBCE from Multiplex, irrespective of the amount of those sums. In the judge’s view, Mr Dunne did not stand in the shoes of DBCE so far as the Advance Payment was concerned. Instead, he stood as a surety for that Advance Payment.
Other points of interest in this case included the judge’s reference to the recent 2017 case of Persimmon Homes Ltd and others v. Ove Arup & Partners Ltd and others to counter Mr Dunne’s argument that the contra proferentem rule should apply. As stated in that case, the contra proferentem rule now has a very limited role in relation to commercial contracts negotiated between parties of equal bargaining power, which the judge considered to be the case here. In this context, the judge also commented that the fact that Mr Dunne (“for reasons best known to himself”) chose not to take any legal advice did not change his conclusion in any way.
This case highlights the critical differences between a contract of indemnity and a secondary guarantee. Given the potential risks and significantly higher stakes of entering into a contract of indemnity, the key takeaway is for guarantors to ensure that they know what they are signing up for.
If a guarantor only intends to provide a secondary guarantee and wishes to retain the ability to exercise the rights of set-off and counterclaim that would have been available to the principal, it is vital to ensure that the relevant wording reflects this. The use of “guarantee” terminology will not be sufficient, of itself, to prevent an obligation from being construed as a primary indemnity. The courts will analyse the actual wording of the relevant obligation itself. Finally, in light of Mr Dunne’s bitter experience, it is also clearly imperative for individuals to take legal advice as to the implications of what they are signing up to as a failure to do so may not get you off the hook.
Multiplex Construction Europe Ltd v Dunne  EWHC 3073 (TCC)