Bacardi guaranteed or indemnified to breeze through contractual interpretation

Allen & Overy LLP

Allen & Overy LLP

Once again the court looks at the vexed question of the distinction between a guarantee and an indemnity.

The main dispute arose under a cost-sharing agreement and was referred to arbitration.

This was the trial of a number preliminary issues about the surety obligations under the agreement. I am going to look just one of those.

The court reminded us of the distinction between the two types of surety obligation:

  • under a guarantee the liability of the guarantor is always ancillary, or secondary, to that of the principal, who remains primarily liable to the creditor. There is no liability on the guarantor unless and until the principal has failed to perform their obligation;
  • an indemnity is an independent primary obligation to pay under the circumstances specified.

The court provided (yet another) handy summary of the principles that apply to the rules of interpretation. Neither party was relying on factual context. Both were relying on "commercial common sense" and both focused primarily on the words used.

In reaching its conclusion that the provision was an indemnity, the court held that:

  1. Explicit guarantee obligations were provided for elsewhere in the agreement. The inclusion of a separate obligation, which referred to an agreement to indemnify and used different language to the guarantee obligations, favoured an interpretation of an indemnity. The court noted the principle that the agreement should be considered as a whole and no part of an agreement should be considered as surplusage unless no other conclusion is available;
  2. As a professionally drafted document, the parties were aware of the distinction between the types of obligations and reliance should therefore be placed on the different language used; and
  3. The type of loss covered was consequential loss and extended to losses suffered by parties other than the principal creditor. An obligation that extends beyond losses and costs for which the principal creditor can claim will be, or is more likely to be, a primary obligation.

Judgment: Brown-Forman Beverages v Bacardi

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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