Parent company guarantee

Vossloh Aktiengesellschaft v Alpha Trains (UK) Limited

Parent company guarantees Under a traditional PCG the guarantor parent is liable to the beneficiary only if its subsidiary, is in breach of the underlying contract between the beneficiary and the subsidiary. This form of guarantee is sometimes referred to as a conditional guarantee. A conditional guarantee is better for the parent company because its liability is triggered only if the beneficiary demonstrates that the subsidiary has failed to perform its obligations. This is much weaker for the beneficiary because demonstrating breach by the subsidiary may require litigation which is somewhat a different proposition than simply writing a letter of demand to the guarantor.

Under an indemnity the parent company's liability may be triggered as soon as the beneficiary serves a compliant demand. The beneficiary does not have to prove that there has been a breach of the underlying contract. This type of agreement is also known as a demand guarantee and because it is far more onerous for the parent guarantor. In Vossloh, as often, the document contained the words: In the Vossloh case the parent company agreed that it would act as "a principal debtor and not merely as a surety". The parent company also agreed that it would pay any sums to the beneficiary "on demand". So on the face of things the document appears to create a guarantee of the second variety - an on demand indemnity. However, elsewhere the document assumed the subsidiary would have to be in default in the underlying contracts.

Ambiguity in the document as a whole allows the guarantor to deny responsiility under the document which, again, requires the beneficiary to resort to the courts. The law had always been protective towards guarantors as underwritten by the Statute of Frauds 1677 which sets the guarantee apart from all almost other contracts by requiring guarantees to be in writing and historically ambiguity has been construed againt the beneficiary, as happened here.

Go back

Subscribe to our RSS feed