The High Court recently handed down judgment in NatWest Markets NV and another v CMIS Nederland BC and another 2025] EWHC 37 (Comm), awarding €155m to NatWest in a dispute arising out of a series of mortgage receivables securitisations entered into between 2006 and 2008.
A key issue for the court to decide was whether the instrument under which NatWest claimed was an indemnity or a guarantee.
Background
CMIS were residential mortgage providers based in Germany and the Netherlands. NatWest entered into a number of swap agreements with special purpose vehicles (SPVs) set up by CMIS in connection with the securitisation of CMIS’s portfolios of underlying residential mortgage loans. Each swap was documented using the standard 1992 ISDA Master agreement plus confirmation, and provided that NatWest was due certain payments from the SPVs on the occurrence of certain events.
In an attempt to protect against the risk of non-payment by each SPV, in respect of each swap NatWest entered into an instrument with CMIS, in each case titled “Deed of Indemnity” (the Deeds). Pursuant to the Deeds, CMIS covenanted to pay to NatWest, on demand, an amount equal to the amounts due under the relevant swap agreement to the extent not paid by the relevant SPV.
Until January 2017, whenever the SPVs were unable to pay amounts due under the swaps CMIS would pay the sums due to NatWest. However, from here onwards CMIS refused to pay, arguing that it was not liable under the proper construction of the Deeds because:
- the SPVs had exercised certain rights under the swaps which permitted them to defer payments, and as such these amounts could not be considered due or payable; and
- the Deeds were guarantees rather than indemnities. This meant, CMIS argued, that the principle of “co-extensiveness” applied with the result that CMIS was not liable unless the SPVs failed to pay the amounts due under the swaps on the deferred payment date.
Guarantees v indemnities
For a refresher on the basics of a guarantee, see our previous article: A-Z of banking and finance: G is for guarantee. In a nutshell, the distinction between a guarantee and an indemnity was important in this case because:
- Guarantees are secondary and contingent obligations: the guarantor will only be liable to pay the obligations of the primary debtor if that debtor fails to pay. The accompanying “principle of co-extensiveness” means that the guarantor is only liable to the same extent that the debtor was liable to the creditor. If the Deeds were guarantees, then CMIS was only liable to pay amounts to NatWest as and when the SPVs were due to pay under the swaps. If payments from the SPVs under the swaps were deferred, then the principle of co-extensiveness meant that in turn CMIS would have no liability under the Deeds to make payment until the deferred payment date.
- In contrast, indemnities are primary obligations which are independent from the underlying obligations of the third party. Importantly, because the indemnity stands alone it is not released or affected by changes to the underlying instrument (i.e. the principle of co-extensiveness does not apply to an indemnity). If the Deeds were indemnities, then the deferral of amounts payable by the SPVs under the swaps did not impact CMIS’s liability under the Deeds meaning that CMIS was liable to pay the amounts on the original payment date.
Drafting
The court considered the structure of the transaction, how amounts were to fall due under the swaps and the particular wording of the Deeds. The Deeds included a definition of “EMAC Indemnifiable Amounts”, being amounts due but unpaid under the swaps. Clause 2.1 of the Deeds set out CMIS’s agreement to pay, stating that CMIS would pay on demand an amount equal to EMAC Indemnifiable Amounts and that CMIS would be “a primary obligor for any EMAC Indemnifiable Amounts to the extent these are not recovered from the [SPV]”.
Interpretation
The court held that the Deeds were indemnities rather than guarantees with the result that the amounts were due from CMIS on the original payment dates under the swaps (and not the deferred payment dates agreed under the swaps). In construing the Deeds as indemnities, the judge weighed a number of factors, including considering the language used, the relevant surrounding circumstances and the commercial consequences of rival constructions.
Use of language
It was relevant that the Deeds were titled "Deeds of Indemnity" as opposed to "Deeds of Guarantee". Likewise, the Deeds use the language of indemnity not the language of guarantee – "guarantee" and "guarantor" do not appear anywhere whereas "indemnify" and "indemnifier" appear throughout. The judge concluded that although not determinative the choice of language and title carries significant weight in determining the nature of the contract.
The court agreed that CMIS’s payment obligations under the Deeds were properly categorised as primary obligations. In particular, the obligation for CMIS to "pay on demand" certain swap amounts from the date they were due was indicative of CMIS being a primary obligor. The judge held that if the parties had really intended for CMIS to have only secondary liability, then the Deeds would have been drafted in a completely different way.
Relevant surrounding circumstances
The Deeds had been drafted by skilled professionals for the parties who were well-experienced in securitisation transactions and would have understood the significance of the language they were using. Accordingly, if it had been the true intention of the parties that the Deeds were guarantees, then they would have been drafted in different terms which aligned with this intention (for example, they would not have been titled "Deeds of Indemnity").
Consequences of construction
It was not a material factor that the consequence of the Deeds being indemnities would cause CMIS to be at risk of insolvency. Further the court rejected the idea that the size of the sum due if the Deeds were indemnities meant that interpreting it as such would result in such a commercially absurd result that the court should conclude that the parties did not intend this result. The court noted that (as the parties had accepted) one of CMIS and NatWest was inevitably accepting the credit risk of the SPVs.
The judge considered that one of the consequences of characterising the Deeds as guarantees (and assuming that if so, the co-extensiveness principle applied) was to produce an uncommercial result in that “the deeds would respond… in circumstances where they were entirely unnecessary, and they would never respond in circumstances where they were needed.” But were the Deeds indemnities, the result of the drafting was more commercially sensible.
Takeaways
The key takeaway from this judgment for parties negotiating contractual terms is that they should be cognisant of the language they use and ensure it is consistent with the intended purpose of the agreement. Parties should consider the commercial consequences of the words chosen and the overall drafting, as the agreement may be interpreted sometime after it is entered into. In this case, the Deeds were drafted in 2006 and construed in 2025, almost two decades apart, with the result that there was little to no witness evidence available. Clear and unambiguous language which reflects the commercial intention of the parties will be more likely to stand the test of time.
Andrew Dodds
Matt Grant