In the recent case of NatWest Market NV and anor v CMIS Nederland BV and anor [2025] EWHC 37 (Comm), the High Court has clarified the distinction between a guarantee and indemnity in a securitisation transaction, and the effect of payment deferral provisions. The case is another recent example of the English courts interpreting contracts according to the commercial objective purpose of the transaction.

The judgment will be welcomed by lenders, as it clarifies that they can claim against an indemnitor from the original payment date, regardless of any contractual payment deferral arrangements. 

Background 

In 2006-2008 NWM entered into swap agreements with several special purpose vehicle (SPV) companies established by CMIS as part of a standard mortgage-receivables securitisation structure. The structure allowed the SPV issuers to hold their assets separately from CMIS (keeping them off CMIS’ balance sheet). 

The parties also entered into seven “Deeds of Indemnity”, under which CMIS agreed to pay NWM certain amounts if the SPV issuers failed to meet their payment obligations, transferring the risk of non-payment by the SPV issuers from NWM to CMIS.

Under the deeds, CMIS committed to pay NWM any "Indemnifiable Amounts" on demand, as the "primary obligor".

CMIS initially paid the amounts to NWM, but from 2017 refused to continue payment, arguing that it was not in fact liable under the proper construction of the deeds.

NWM sought declarations that approximately €155m was due, which could not be recovered from the SPV issuers but was (it said) recoverable from CMIS under the deeds.

The Court’s primary task was to determine whether the deeds were indemnities (which would mean that they imposed a primary obligation on CMIS) or guarantees (creating a secondary obligation contingent on payment default, and limiting CMIS’ liability to the same extent as the SPV issuers’). The Court also examined whether the sums claimed were "due" under the 1992 ISDA Master Agreement.

A guarantee or an indemnity?

The court applied the following principles in Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2011] 2 All ER (Comm) 307 to determine whether the deeds were indemnities or guarantees.

• Indemnities: an indemnity imposes a primary payment obligation on the indemnifier, independent of, and not contingent on, the obligations of the principal debtor. The indemnified party can claim under the indemnity without needing to prove that the principal debtor has defaulted. Even if the underlying transaction is set aside, the indemnity will remain valid.
• Guarantees: a guarantee involves the guarantor promising to the creditor to be responsible for the due performance by the principal debtor of its obligations if the principal debtor fails to perform. The guarantor's liability is secondary and only arises if the principal debtor fails to perform. It is generally limited to the extent of the principal's liability, adhering to the principle of “co-extensiveness”. 
• Labels not to be confused with substance: the Court said it is an area “bedevilled by imprecise terminology” where the term “guarantee” or “indemnity” can be misleading.  Labels may or may not be indicative of what the parties intended: it is the substance of the obligation that matters.

CMIS claimed the deeds were contracts of guarantee, meaning their liability was secondary and contingent on the issuers' failure to pay. Given the SPVs had exercised their right under the swap agreements to defer payment, the relevant amounts were not due or payable; and as the deeds constituted guarantees rather than true indemnities, the principle of co-extensiveness applied. On this basis, they argued that no liability attached to CMIS unless and until the SPVs failed to pay the relevant amounts on the deferred payment date.

NWM argued that the deeds were contracts of indemnity, creating a primary obligation for CMIS to pay the amounts due, regardless of the SPV issuers’ payment status. They contended that CMIS’ construction would strip the deeds of commercial purpose, as the payment obligations would only be activated when the SPV issuers had sufficient funds to pay, and not in other circumstances, contrary to business sense.

What did the court decide?

Indemnities or guarantees?

The Court determined that the deeds were contracts of indemnity, not guarantees. This meant CMIS had a primary obligation to pay the amounts due under the swaps. The principle of co-extensiveness did not apply, and CMIS could not rely on the payment deferral provisions to avoid liability. 

Language used

The judge noted that the deeds were titled "Deeds of Indemnity", and the verb "indemnify" appeared twice in the recital. In contrast, "guarantee" or "guarantor" were absent. The "on demand" payment terms and CMIS's role as "primary obligor" also supported a primary obligation found in an indemnity.  

The Court observed that the parties were experienced in securitisation and had been advised by law firms used to drafting such documentation who would have been “well aware” of the differences between guarantees and indemnities and the effect of primary obligation wording. Though some wording used was more common in a guarantee, this was explicable as “belt-and-braces” drafting. If the deeds were intended to have the limited effect suggested by CMIS, they would have been drafted in substantially different form.

Purpose of securitisation structure overall

The Court held that the purpose of the deeds was to protect NWM in case an issuer failed to pay. CMIS had accepted the risk that it might be called upon to make payments under the deeds in circumstances where “the [issuers] had insufficient funds to pay".

There was “no good evidence” that counter-indemnity claims were considered at the time of drafting. The “bespoke” nature of the deeds did not mean they were not intended to impose significant liabilities on CMIS. 

Risk of insolvency a relevant consideration?

The risk of CMIS becoming insolvent was a general risk for noteholders and was expressly contemplated by the securitisation documents. It is possible that one side may have agreed to terms that, in hindsight, were not in their best interest (Wood v Capita). The potential insolvency of CMIS was not a material factor in interpreting the deeds. NWM’s construction was consistent with the objective commercial purpose of the structure.

Payment deferral proposals

CMIS claimed the issuers had exercised their right to defer payments under the ISDA Master Agreements, meaning the amounts were not "due" or payable until the deferred dates. NWM argued that deferral only postponed the payment date but did not affect the accrual of the debt. 

The Court ruled that the Payment Deferral Provisions defer the payment obligation but not the accrual of the underlying debt. Consequently, amounts under the Master Agreements are still "due" for the purposes of the deeds, even if payment is deferred. CMIS must pay these amounts to NWM under the deeds, as the deferral does not affect the accrual of the debt. 

What does this mean for me?

Following the new Securities Regulation coming into effect in November 2024, the government is expected to continue consultations into 2025. This means the structuring and management of securitisation transactions will remain a key focus.

While both indemnities and guarantees provide a form of security in securitisation transactions, they operate differently. An indemnity provides direct compensation for specified losses, whereas a guarantee provides a backup obligation that comes into play only if the primary obligor defaults. 

This sensible decision suggests that the Courts will reject attempts to avoid the obvious consequences of the language used in technical documents which form an established part of securitisation arrangements (and, indeed, banking contracts more generally). Parties should be aware that labelling isn’t everything: the substance of the obligation in the commercial context should also be considered. Nevertheless, the Courts are willing to hold security providers to their bargains.

For lenders and financial institutions, the judgment is a reminder that indemnity provisions can be relied on to claim payments from indemnifiers as from the original payment date, regardless of any payment deferral arrangements.