Euler Hermes SA (NV) (acting through its registered branch Euler Hermes UK) v Mackays Stores Group Ltd and others  EWHC 1918 (Comm)
This case analysis was originally published on LexisPSL Banking & Finance in August 2022
The court held that the exposure of a party offering a guarantee to another party does not end upon notice of termination of such guarantee, but the effect of termination of any guarantee is dependent on the wording and construction in each case. This clarifies an important issue in the field of commercial and contract law as Marshall J distinguished the guarantees in cases cited by counsel for the defendants, stating that these judgments are specific to the facts.
What are the practical implications of this case?
Guarantees should be carefully worded so that parties are clear at the time when the guarantee is executed and at the time when notice of termination of the guarantee is given, the effect of termination of such guarantees, and in particular, identifying two key elements – the obligations of the principal the subject matter of the guarantee, and the accrual of the liability of the surety to the creditor (in particular, as illustrated by this case, whether termination of the guarantee terminates any demand or payments under the guarantee henceforth, or whether this marks the time from which the subject matter of the guarantee becomes the obligations of the principal to the creditor).
What was the background?
Euler provided a guarantee and bond facility (Facility) to Mackay Stores (MSL). MSL provided a counter-indemnity (Indemnity) which will "at all times indemnify and save harmless [Euler]… from Ultimate Liability". Ultimate Liability was defined as "any liability (actual, prospective, or contingent) and… every other loss… which at any time may be incurred by [Euler] in connection with the Facility".
The Indemnity also provided that "any payment made by [Euler] in respect of Ultimate Liability shall be made at its sole discretion without the need for the authority of [MSL]… " and that "a demand in writing by [Euler] shall constitute conclusive evidence of the fact and the aggregate amount of the liability…".
Euler provided a guarantee (Guarantee) to HMRC pursuant to the Facility in respect of MSL's potential deferred tax liability. Euler sent a termination notice to HMRC stating termination of the Guarantee effective 30 June 2020 (Termination Date). On 8 September 2020, HMRC made a demand on Euler under the Guarantee for two sums (MSL failed to pay such sums by debit, which were sums deferred in the period 1 to 31 March 2020 and 1 to 30 June 2020). Euler made payment and claimed against MSL under the Indemnity.
The court considered:
- Did Euler have liability to pay under the Guarantee notwithstanding that the HMRC's demands were made after the Termination Date?
- If there was no liability under the Guarantee, is Euler entitled to payment of the sums from MSL under the Indemnity?
What did the court decide?
The court held that the effect of termination of a guarantee would depend on the specific wording and construction in each case. Marshall J opined that the wording of the Guarantee was different from that in the cases cited by MSL and with a different backdrop of the deferral of the payment of taxes, for which there is a statutory framework. In this case, the Guarantee was a continuing guarantee but can only relate to such obligations of MSL before the Termination Date which remain unperformed at the time of demand under the Guarantee (even if demanded after the Termination Date).
MSL relied upon the possible length of time that Euler might be exposed to a demand under the Guarantee if they were liable after the termination of the Guarantee. Marshall J commented that such a consideration was not decisive and deemed it unrealistic in this instance in any case.
He also stated (obiter dicta) that even if he had not decided that the demand of HMRC under the Guarantee was valid, he would have concluded that the sum claimed by Euler under the Indemnity was payable by MSL because the wording in the Indemnity set out that a demand in writing by Euler would constitute conclusive evidence of that liability, and even accepting that an obvious or manifest error would preclude such claim, the point was seriously arguable and therefore could not be said to be obviously wrong.
Therefore, Euler's claim succeeded.
- Court: Queen's Bench Division (Commercial Court)
- Judge: Philip Marshall QC (sitting as a deputy judge of the High Court)
- Date of judgment: 25/7/2022