Indemnity or guarantee? The construction of Deeds of Indemnity under a securitisation transaction

In NatWest Market NV & Anor v CMIS Nederland BV & Anor [2025] EWHC 37 (Comm), the High Court considered whether seven Deeds of Indemnity in a securitisation transaction were indemnities (i.e. primary obligations on the indemnifier) or guarantees (i.e. secondary obligations that were contingent on the default of the obligor). The construction adopted would determine whether liability to pay had been triggered; the Court held that the Deeds of Indemnity should be construed as indemnities. The decision illustrates the approach the Courts will take to the interpretation of commercial agreements and how they will seek to hold parties to their bargain.

The Court also considered whether payments under a master agreement were “due”, finding that they were. The Court confirmed that the contractual payment deferral provisions deferred the payment date but not the accrual of the debt, therefore claims could be made under the indemnity from the original payment date.

Background

NWM (the Claimants) were a group of companies which provided hedging structures for mortgage-backed securitisations. CMIS (the Defendants) were a group of companies which acted as the ‘originator’ in the securitisation structure, with the primary business of providing residential mortgages.

The Defendants established a set of SPVs (the ‘EMAC Issuers’) which received fixed rate interest payments from the underlying mortgage assets of the securitisation, and paid out floating rate notes to the noteholders.

To hedge against the potential cash-flow mismatch between the fixed and floating interest rate payments, the EMAC Issuers then entered into a set of swap agreements with the Claimants (based on a 1992 ISDA Master Agreement (Multi-Currency – Cross Border)) (the Master Agreements).

Under these Master Agreements, certain payments to the Claimants ranked behind payments due to noteholders in the payment waterfall. The Claimants were therefore exposed to the credit risk of non-payment by the EMAC Issuers. In the event the EMAC Issuers could not pay due to lack of funds, payment deferral provisions in the Master Agreements allowed the EMAC Issuers to pay any shortfall on the first payment date they did have sufficient funds to pay.

The Claimants and Defendants also entered into Deeds of Indemnity (the Deeds) to transfer the credit risk of a payment shortfall by the EMAC Issuers from the Claimants to the Defendants. Under these Deeds, the Defendants were to pay certain ‘indemnifiable amounts’ under the Master Agreements on demand, provided they would have the ‘same benefits, protections and defences at law’ that were available to the EMAC Issuers. In the period to January 2017, the Defendants made such payments to the Claimants where the EMAC Issuers failed to pay. From January 2017, the Defendants refused to pay these amounts to the Claimants and contended they were not liable under the proper construction of the Deeds.

The issues

The dispute principally turned on the construction of the Deeds and the Master Agreements. The two main issues considered by the court were:

1. whether the Deeds were to be construed as contracts of guarantee and, if so, what was the consequence; and
2. whether the Relevant Amounts (the indemnifiable amounts) were ‘due’ under the Master Agreements (and therefore under the Deeds)

Decision

Issue 1: Guarantee or indemnity?

The Claimants argued the Deeds were contracts of indemnity, therefore the Defendants had a primary obligation to the Claimants to pay the amounts due regardless of the position of the EMAC Issuers. The Defendants contended the Deeds were contracts of guarantee, therefore their liability was secondary, and as the EMAC Issuers had deferred the payments, no liability attached to the Defendants until the EMAC Issuers failed to pay on the deferred date.

The Court held that the Deeds were contracts of indemnity rather than contracts of guarantee.

The Deeds were on their face entitled ‘Deeds of Indemnity’. The relevant operative provisions used the language of indemnity, not guarantee. The payment obligations under the Deeds crystallised when amounts were due under the Master Agreements (i.e. not only when the EMAC Issuers failed to pay). The Court noted that the Deeds, which were negotiated documents prepared by external legal counsel, were part of a portfolio of securitisation documents and given that context, if they were intended to be guarantees, they would have been drafted completely differently. The Court also found that the Defendants’ obligations were not co-extensive with those of the EMAC Issuers.

In support of their argument that the Deeds were contracts of guarantee, the Defendants had relied upon wording in the Deeds which they argued established that their liability was no greater than that of the EMAC Issuers. The Court found that the Defendants had a primary obligation under the indemnities to pay the Claimants, which applied even when the EMAC Issuers could defer their payment obligations under the Master Agreements due to insufficient funds.

The Defendants also sought to rely on the fact that the payments demanded by the Claimants may cause them to be insolvent. The Court held this was not relevant. The effect of the obligations under the Deeds was that the Defendants were taking on credit risk. The Court also concluded that “there is no evidence that the risk of such significant exposures was in the mind of either party at the time the Deeds were concluded”.

Issue 2: Relevant Amounts ‘due’ or ‘payable’?

The Defendants argued that as the EMAC Issuers had exercised their right to defer payments under the Master Agreements, the amounts were not ‘due’ until those deferred dates. The Claimants argued that the deferral postponed the payment date but not the accrual of the debt.

The Court affirmed that the word ‘due’ can refer to the accrual of a debt, the fact that the debt is payable, or both. It is therefore necessary to look at the context and language of the relevant agreements to ascertain the meaning of ‘due’.

The Court held that the purpose of the Deeds was to protect the Claimants from the possibility of the EMAC Issuers’ non-payment of indemnifiable amounts due under the Master Agreements. The Defendants therefore accepted the risk that they might be called upon to make payments under the Deeds in circumstances where the EMAC Issuers had insufficient funds to pay. Taking into consideration the context of the agreements, the Court held that the indemnifiable amounts were ‘due’ even if they were not yet ‘payable’ under the Master Agreements; the payment deferral provisions deferred the payment obligation but not the accrual of the underlying debt. As such, amounts under the Master Agreements were still ‘due’ under the Deeds and the Defendants were required to pay these amounts under the Deeds. This was consistent with the commercial purpose of the securitisation.

The Court granted the Claimants declaratory relief and ordered the Defendants to pay sums amounting to approximately €155m under the Deeds.

Key takeaways

This decision is a reminder that the English courts will construe commercial contracts both by reference to the ordinary meaning of the words used by the parties and the overall commercial context. The courts will be slow to arrive at an interpretation which departs from that, particularly where the contract has been negotiated by legally represented parties as part of a suite of documents commonly used in a commercial transaction.

The case also highlights that, where the interpretation of contractual obligations is disputed, the consequences to the parties of being held to their contractual obligations (e.g. in this case, the Defendants argued that the Claimants’ interpretation exposed them to insolvency) is not directly relevant to contractual interpretation.

With thanks to Chee Ling Wu for her assistance in preparing this post.