Guarantee or indemnity? A guarantee is a promise to
answer for the debt of another who remains primarily liable, the
liability of the guarantor being secondary. However, with an
indemnity, the surety assumes primary liability.
In the absence of an express provision to the
contrary in the guarantee, any bilateral variation of the contract
between the creditor and debtor, such as the giving of time by the
creditor to the debtor to pay, will usually discharge the liability
of the guarantor. This is not the case with an indemnity, where the
liability of the surety, being a primary liability, survives.
The difference between the two is therefore
essential in terms of enforcement against the guarantor or
indemnifier, and as a consequence, the true nature of the agreement
is frequently in dispute. Whether a contract is one of guarantee or
indemnity will depend on the true construction of the actual words
In Associated British Ports v (1) Ferryways NV
and (2) MSC Belgium NV, MSC entered into a letter of agreement
(LOA) with the claimant, agreeing to ensure that Ferryways met its
contractual obligations under a 2003 agreement between the claimant
MSC assumed responsibility for ensuring that
Ferryways had, at all times, sufficient funds to fulfil and meet
all duties, commitments and liabilities entered into or incurred by
reason of the 2003 agreement as and when they fell due.
Disputes arose between the claimant and Ferryways,
and they entered into a time to pay agreement. After further
disputes, the claimant sought to recover sums due under the 2003
agreement from Ferryways and also from MSC under the LOA. The issue
to be determined was whether the LOA was a guarantee or
The Court of Appeal, agreeing with the judge at
first instance, held that the LOA was a guarantee imposing a
secondary, not primary, liability on MSC. The true construction of
the words in which the promise was expressed had to be
Here, the obligation in the LOA was a “see to it”
obligation, in other words that MSC would see to it that Ferryways
performed its obligations under the 2003 agreement (the primary
obligations) and if it could not do so, only then did the secondary
liability of MSC kick in by way of the guarantee.
However, the subsequent time to pay agreement
entered into by the claimant and Ferryways discharged the
obligations of the guarantor. This was because there was no term in
the guarantee itself providing that any subsequent variation or
time to pay agreement between the claimant and Ferryways did not
discharge the surety.
Any well-drawn contract of guarantee
should expressly permit variation of obligations of the creditor
and debtor or the giving of time to pay, without discharging the
surety. This is not necessary where the agreement amounts to an
indemnity rather than a guarantee.
If you have the benefit of a guarantee, make
sure that before any changes are made to the agreement between you
and the debtor, such changes are permitted by the terms of the
guarantee. If they are not, or the guarantee does not expressly
permit variation of obligations between the creditor and debtor,
ensure the guarantor consents to it.
Greg Standing, a
partner in Wragge & Co LLP’s Finance, Insolvency, Recoveries
and Sales team