Guarantee or indemnity?

This case provides a good summary of the distinction between a guarantee and an indemnity.

The appellant in this case¹ entered into an agreement (the Agreement) with the first defendant, which operated a roll-on roll-off ferry service. The Agreement made provision for priority use of berths by the first defendant, for turnaround times, and for the construction of certain facilities. There was provision for index-linked charges and for an annual minimum throughput obligation, which required the first defendant to compensate the appellant in the event of a shortfall.

At the same time, the appellant entered into a written agreement (the Letter Agreement) with the second defendant, which was a company in the same group as the first defendant. The purpose of the Letter Agreement was to secure the position of the appellant, by way of recourse against the second defendant.

Under the terms of the Letter Agreement, the second defendant assumed "full responsibility for ensuring (and shall so ensure) that, for seven years from the date of this letter, [the first defendant] (i) has and will at all times have sufficient funds and other resources to fulfil and meet all duties, commitments and liabilities entered into and/or incurred by reason of the Agreement as and when they fall due, and (ii) promptly fulfils and meets all such duties commitments and liabilities."

Following certain disputes that had arisen between them, the appellant and the first defendant entered into a "time to pay" agreement. The first defendant subsequently ceased trading and was later put into liquidation.

The appellant sought to recover sums due from the first defendant under the Agreement and from the second defendant under the Letter Agreement.

In the lower court, judgment was given in favour of the appellant against the first defendant, but the claim against the second defendant was dismissed on the ground that the Letter Agreement constituted a guarantee that had been discharged by the "time to pay" agreement entered into between the appellant and the first defendant.

The appellant appealed, arguing that:

• the words "at all times" used in the Letter Agreement pointed to a primary liability on the part of the second defendant under an indemnity, and not a secondary liability under a guarantee; and

• in the alternative, the Letter Agreement was a legally binding letter of comfort.

The Court of Appeal considered whether the Letter Agreement was a guarantee or an indemnity, and made the following observations:

• Whether a document is a guarantee or an indemnity, or whether it imposes a secondary or a primary liability, will always depend on the true construction of the actual words in which the promise is expressed.

• It was not possible to reach the conclusion that the words "at all times", as used in the Letter Agreement, pointed to a primary liability on the part of the second defendant.

• Of much greater significance was the way in which limb (i) of the Letter Agreement defined the obligation of the second defendant by reference to the first defendant meeting all its duties, commitments and liabilities entered into and/or incurred by reason of the Agreement as and when they fall due.

• It was a "see to it" obligation: the second defendant would see to it that the first defendant performed its obligations under the Agreement. If the first defendant could not meet its liabilities to the appellant "as and when they fall due" (the primary liability), then the secondary liability of the second defendant would accrue by way of guarantee.

• The court acknowledged that this would have been sufficient to protect the appellant but for the "time to pay" agreement, and would still have protected the appellant if the Letter Agreement had contained the common provision found in guarantees whereby a subsequent variation or "time to pay" agreement between the debtor and creditor expressed not to discharge the surety.

The Court of Appeal went on to consider whether the Letter Agreement was a guarantee or a letter of comfort, and noted that if the Letter Agreement was a legally binding letter of comfort, then, as with an indemnity, any liability would not be discharged by the "time to pay" agreement, due to a legally binding letter of comfort being a primary liability.

The court held, for the same reasons set out above, that the Letter Agreement did not constitute a legally biding letter of comfort because it did not give rise to a primary liability.

¹ Associated British Ports v Ferryways NV [2009] EWCA Civ 189

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