Associated British Ports v Ferryways NV & Anor

Whether an undertaking is a guarantee or an indemnity depends upon the true construction of its words. A promise to ensure that a debtor has sufficient resources and meets liabilities as they fall due is a guarantee where its substance is to see that the debtor performs its own obligations. The surety’s liability is then secondary.

Unless the guarantee provides otherwise, an agreement by which the creditor gives the debtor time to pay will generally discharge the guarantor. A letter of comfort, properly so called, ordinarily creates moral rather than contractual responsibility. Its label is not decisive: construction of the whole document may disclose a primary contractual obligation despite that description.

Associated British Ports entered into a long-term port agreement with Ferryways. In a contemporaneous letter, MSC Belgium undertook to ensure that Ferryways had sufficient resources to meet its obligations and that it performed those obligations. Associated British Ports later gave Ferryways additional time to pay.

Field J, in [2008] EWHC 1265 (Comm), held that both limbs of the letter created guarantees rather than primary obligations. The time-to-pay agreement therefore discharged MSC Belgium. He dismissed the claim against MSC Belgium, although he gave judgment against Ferryways for damages to be assessed.

The appeal concerned whether the letter instead created an indemnity, another primary contractual obligation, or a legally binding letter of comfort.

1. Appeal dismissed unanimously. The letter created two separate but overlapping guarantees. It did not impose an indemnity or another form of primary liability. Field J’s dismissal of the claim against MSC Belgium was upheld.

2. The classification of an undertaking depends upon the true construction of the words used. Limb (i) was defined by reference to Ferryways meeting its duties, commitments and liabilities under the principal agreement as they fell due. Its substance was a “see to it” obligation. Ferryways remained primarily liable, while MSC Belgium’s secondary liability accrued if Ferryways could not meet its obligations.

3. The words “at all times” did not convert the undertaking into an immediate and continuing primary obligation. Nor did the parties’ corporate relationship, the creditor’s reliance, or the description of the instrument as a letter determine its classification. The absence of a term preserving the surety’s liability following a variation or grant of time was neutral. Since the letter contained no such protective term, the later time-to-pay agreement discharged MSC Belgium’s guarantee.

4. Motemtronic v Autocar provided only case-specific and non-decisive support. Its ratio was that the oral exchange there created no legal obligation. The majority’s further view that any contractual obligation would have been a guarantee unenforceable under section 4 of the Statute of Frauds 1677 was obiter and did not establish a general principle.

5. The alternative characterisation as a binding letter of comfort also failed because it depended upon establishing a primary liability. A letter of comfort, properly so called, ordinarily creates moral rather than contractual responsibility. The parties’ label is not conclusive. Construction of the document as a whole may sometimes reveal a primary continuing contractual obligation despite the use of that label. This discussion did not alter the conclusion that the particular undertaking was a guarantee.

1. Court of Appeal (Civil Division): In [2009] EWCA Civ 189, unanimously dismissed the appeal and upheld the construction of the letter as a guarantee discharged by the time-to-pay agreement.
2. High Court, Queen’s Bench Division (Commercial Court): In [2008] EWHC 1265 (Comm), Field J gave judgment against Ferryways for damages to be assessed but dismissed the claim against MSC Belgium. He held that the letter created guarantees which were discharged by the later time-to-pay agreement.