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The insolvency of one of the companies within a contractual chain can cause major difficulties for all concerned. However, as one High Court case showed, professional drafting of agreements can provide invaluable protection against such risks.
A large contractor had employed a building and civil engineering subcontractor to work on nine major construction projects. Their business relationship was close and inter-dependent and, when the subcontractor fell into financial difficulties, the contractor sought to assist by making advance payments totalling £4 million. The subcontractor nevertheless ultimately entered administration.
The advance was made under an agreement whereby the businessman who owned the subcontractor guaranteed repayment. The contractor launched proceedings to enforce that guarantee, but the businessman argued that the primary obligation to repay the money rested on the subcontractor and that only secondary recourse could be had against him personally.
In rejecting that argument, the Court found that, on a true reading of the agreement, the guarantee took effect as an irrevocable and unconditional indemnity. The businessman had taken on a primary obligation to repay the entire sum and became liable to do so immediately when the subcontractor became insolvent. Summary judgment was entered against him on that basis.