High Court considers distinction between guarantees and indemnities and the interpretation of payment deferral provisions under 1992 ISDA Master Agreement

In the context of a mortgage-backed securitisation structure, the High Court has found that a mortgage loan originator was liable under deeds of indemnity relating to interest rate swap transactions (following non-payment by the securitisation issuer): NatWest Market NV & Anor v CMIS Nederland BV & Anor [2025] EWHC 37.

The decision will be of interest to financial institutions engaged in drafting and interpreting indemnity clauses; it also offers guidance on the interpretation of payment deferral provisions in the 1992 ISDA Master Agreement (Multi-Currency – Cross Border).

The dispute centred on sums due under deeds of indemnity transferring the risk of non-payment under certain interest rate swap transactions. The primary legal question was whether the deeds were guarantees or indemnities, which would significantly affect the nature of the obligations and liabilities of the parties involved. The court also considered the question of whether the sums claimed were "due" under the 1992 ISDA Master Agreement.

In the present case, the defendant mortgage companies established a series of securitisation special-purpose vehicles (SPVs), which received fixed-rate interest from the mortgage receivables originated by the defendants, and issued floating-rate notes to investors. To avoid a cash-flow mismatch, the securitisation SPV entered into interest rate swaps with the claimant banks, together with corresponding deeds of indemnity with the defendant mortgage companies, to protect the claimant banks against the risk of non-payment by the SPVs. The mortgage companies later disputed their liability under the deeds of indemnity.

The court held that the deeds of indemnity were indeed properly characterised as indemnities and not as guarantees, following Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2010] EWHC 2443 (Ch). This was an important distinction because indemnities create primary obligations, whereas guarantees create secondary obligations contingent on the default of the principal debtor. If the deeds were guarantees, the principle of co-extensiveness would have applied, limiting the liability of the guarantor (the mortgage company) to the liability of the principal debtor (the SPVs). In contrast, as contracts of indemnity, the deeds imposed a primary obligation on the guarantor mortgage companies to make the banks whole, regardless of whether the SPVs had fulfilled their obligation. This finding was based on the specific language used in the agreements and the complex structure they created, which indicated that the parties intended to create primary obligations. The court was influenced by the fact that the documents were obviously drafted by skilled legal professionals for parties which were highly experienced in the securitisation structures.

Regarding the payment deferral provisions in the ISDA Master Agreement, the court found that they only delayed the payment date of the required swaps payments. They did not affect the accrual of the debt obligation or the fact that such amounts were still owed. Consequently, the mortgage companies remained liable to the banks under the deeds of indemnity, despite the payment deferrals.

We consider the decision in more detail below.

Background

The defendants were two Dutch companies (collectively, CMIS) primarily involved in providing mortgages in the Netherlands and Germany. Between 2006 and 2008, CMIS established a series of securitisation SPVs (the EMAC Issuers) to fund its mortgage business. Each EMAC Issuer entered into an "EMAC Securitisation" to purchase mortgage receivables originated by CMIS, funded by issuing floating rate notes (the Notes) to investors (the Noteholders).

The transaction structure created the possibility of a cash-flow mismatch between the fixed-rate mortgage interest received by the EMAC Issuers and the floating rate interest payable by the EMAC Issuers pursuant to the Notes. This potential exposure was intended to be hedged by several interest rate swap agreements with the claimant banks (NWM), pursuant to a 1992 ISDA Master Agreement (Multi-Currency – Cross Border) and its schedule (the EMAC Master Agreements).

To cover any amounts that might become payable to NWM under the swap transactions by the EMAC Issuers (which were SPVs), NWM and CMIS entered into several deeds of indemnity (the Deeds), which (on NWM's case) transferred the risk of any payment shortfall by the EMAC Issuer from NWM to CMIS. In the period up to January 2017, CMIS paid any shortfall to NWM. However, from January 2017 onwards, CMIS refused to pay.

The cessation of payments by CMIS pursuant to the Deeds coincided with a significant increase in the quantum under the hedge (from circa £1.8 million in 2016 to £93 million in 2017). There was a dispute between the parties as to whether this increase was the true explanation for CMIS's change of position and refusal to pay.

NWM subsequently commenced proceedings seeking declarations and the payment of sums due to them under the Deeds.

Decision

The High Court found in favour of NWM, holding CMIS liable for the outstanding sums due under the Deeds.

In reaching this conclusion, the court applied established principles of contractual interpretation. Specifically, the court endorsed and applied the approach in Rainy Sky v Kookmin Bank [2011] 1 UKSC 50 (see our blog post), and Wood v Capita Insurance Services Ltd [2017] UKSC 24 (see our blog post), that the process of construction is a unitary exercise dependent on both the relevant commercial context and the language of the contracts. In particular, the court focused on the language used and understanding the overall scheme of the securitisation structure.

The key issues which will be of interest to financial institutions are set out below.

Commercial context and intentions of the parties

The court noted the Deeds were uncommon documents to find in a securitisation structure and were bespoke, but said this was not a reason to conclude they were not intended to impose potentially significant liabilities on CMIS. It was at least equally arguable that this pointed towards an intention to ensure that – if the EMAC Issuers failed to pay the required amounts to NWM – then NWM was entitled to recover those sums from CMIS (even if the reason for the Issuers' failure to pay was that they did not have the funds to make the required payments).

Similarly, the court did not accept that the scale of the payments now demanded by NWM from CMIS (which may lead to CMIS becoming insolvent) was a material factor which it could properly take into account in construing the Deeds. There was no evidence that concern about the risk of such significant exposures was in the mind of either party at the time the Deeds were concluded. Further, it could not be said that the possibility that CMIS owed NWM such a significant sum was such a commercially absurd result that the court should conclude that this was not what the parties intended. As both parties accepted, whichever party was right as to the construction of the Deeds, one of them was inevitably accepting the credit risk that the EMAC Issuers would not be able to pay the required sums under the swaps to NWM.

However, the court considered it relevant that both parties were experienced in securitisation structures of the type in issue and advised by law firms very experienced in drafting the documents required for such structures. Those advisers would be well aware of the difference between contracts of guarantee and contracts of indemnity as well as the potential impact of language suggesting possible primary obligations on CMIS. In this regard, it considered there was considerable force in the argument made by NWM that if the Deeds were intended to have the limited effect suggested by CMIS, then the Deeds would have been drafted in substantially different form.

Nature of the Deeds: guarantees or indemnities

The court considered whether the Deeds were a contract of guarantee or a contract of indemnity, applying the principles summarised in Vossloh. The distinction is crucial because:

• Indemnities create primary obligations, whereas guarantees create secondary obligations contingent on the default of the principal debtor.
• If the Deeds were guarantees, the principle of co-extensiveness would apply, limiting the liability of the guarantor to the liability of the principal debtor.
• If the co-extensiveness principle applied in this case, CMIS's liability would be limited to the same extent as the EMAC Issuer's liability, ie CMIS would only be liable if the EMAC Issuers were liable and had defaulted on their obligations.
• In contrast, if the Deeds were contracts of indemnity, they would impose a primary obligation on CMIS, regardless of whether the EMAC Issuers fulfilled their obligations.

The court found that, stepping back and looking at the Deeds and securitisation documents generally, the documents and the structure they created were complex and carefully drafted to work together. The documents were obviously drafted by skilled legal professionals for parties which were highly experienced in the securitisation structures. If the intention of those parties and their advisors was to draft a deed of indemnity which was in reality a contract of guarantee or to ensure that CMIS had no greater liability in respect of the EMAC swaps payments than the EMAC Issuers, then the court considered that the contract would have been drafted in very different terms.

There was nothing in the language of the Deeds which pointed to the purpose being only to ensure that CMIS complied with its responsibilities as issuer administrator for distributing the EMAC Issuer's assets, rather than imposing primary payment obligations on CMIS.

Further, the court accepted NWM's position that the fact that the document was titled "Deed of Indemnity" and used the language of indemnity rather than that of guarantee was of significance in the context of the Deeds. These agreements were drafted by skilled professionals, who would have understood the significance of the language they were using. Accordingly, while neither the title nor the language of the Deeds was necessarily conclusive as to the nature of the agreements, this was a case where the choice of title and of language did carry significant weight in determining the nature of the contract.

Were the sums claimed by NWM "due" under the EMAC Master Agreement

Pursuant to clause 2.1(i) of the Deeds, CMIS would only pay NWM under the Deeds where sums were "due" under the EMAC Master Agreement. Accordingly, another critical issue was whether the sums claimed by NWM were “due” under the EMAC Master Agreements.

CMIS contended that: (i) the EMAC Master Agreements deferred the payment of any shortfall by the EMAC Issuer until that Issuer had sufficient funds to pay; and (ii) for as long as any of the required swaps payments were deferred, they did not fall due under the Deeds so CMIS had no obligation to indemnify NWM.

The court emphasised that (as per Videocon Global Ltd v Goldman Sachs International [2016] EWCA Civ 130, Deutsche Bank AG v Sebastian Holdings Inc [2024] EWCA Civ 245 and Lomas & Ors v JFB Firth Rixson Inc [2012] EWCA Civ 419 (see our blog post)) the language of the payment deferral provision in the EMAC Master Agreements postponed the payment date of the required swaps payments, but did not affect the accrual of the debt obligation, or the fact that such amounts were owing. Further, in the context of clause 2(1)(i) of the Deeds, the word "due" was used to refer to sums which were accrued due so that there was an existing obligation in debt irrespective of whether payment had been deferred.

The court also highlighted that:

• The fact that CMIS agreed to arrangements which with the benefit of hindsight have exposed it to the risk of a large claim was not a reason to prefer CMIS's construction; it is possible that one side may have agreed to something which with hindsight did not serve its interest (as per Wood v Capita).
• The purpose of the Deeds (objectively established) was to protect NWM in the event that the relevant EMAC Issuer failed to make payment to NWM of (inter alia) certain swaps payments when such payment fell due under the swaps. CMIS accepted the risk that it might be called upon to make payments under the Deeds in circumstances where the EMAC Issuers had insufficient funds to pay.

Accordingly, for the reasons above, the court found in favour of NWM and held that CMIS was liable to pay the outstanding sums due.