In Associated British Ports (A company created by statute) v Ferryways NV – Butterworths Law Direct 23.3.09 in January 2000, the first Defendant ferry service provider entered into an agreement with the Claimant port operator. In September 2006, that first agreement was replaced by a second agreement. At the same time, the Claimant and MSBC (the second Defendant), the company which owned 40% of the first Defendant's share capital, concluded a written agreement which provided, inter alia, that the second Defendant would: '... assume 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 time 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 ... The construction, validity and performance of this letter shall be governed by English law and we submit to the exclusive jurisdiction of the High Court in London in connection with any disputes arising out of this letter' (the letter agreement).
In February 2007, the Claimant and first Defendant concluded a further agreement (the time to pay agreement) which took the form of a supplementary memorandum to the second agreement. The Claimant and first Defendant continued to operate under the second agreement until June 2007, when the Defendant ceased trading and was put into liquidation. It was eventually declared insolvent, in February 2008. The Claimant issued proceedings against the first and second Defendants, seeking to recover sums due under the second agreement and the letter agreement from each party respectively. At the hearing of those proceedings, in June 2008, the judge found that, inter alia, the letter agreement constituted a guarantee or guarantees, giving rise to a secondary liability on the second Defendant's part, rather than an indemnity giving rise to a primary liability for the sums due. He further held that the time to pay agreement had discharged the second Defendant's liability under the letter agreement. The Claimant appealed.
In dismissing the Claimant’s appeal, the Court of Appeal held that, applying established authority, whether a document was a guarantee or an indemnity, or whether it imposed a secondary or a primary liability, would always depend upon the true construction of the actual words in which the promise was expressed.
In this case it was abundantly clear, not least from the terms as to choice of law, exclusive jurisdiction and the service of process, that the letter agreement created and was intended to create legal rights and obligations. It was not merely a letter of comfort giving rise simply to moral obligations. It contained a 'see to it' obligation: the second Defendant would see to it that the first Defendant performed its obligations under the second agreement. If the first Defendant could not meet its liabilities to the Claimant as and when they fell due (the primary liability), then the secondary liability of the second Defendant would accrue by way of guarantee. That would have been sufficient to protect the Claimant but for the legal significance of the subsequent time to pay agreement and would still have protected it if the letter agreement had included the common provision found in guarantees whereby a subsequent variation or time to pay agreement between the creditor and the debtor was expressed not to discharge the surety. However, such a provision was absent from the letter agreement in the instant case. In all the circumstances, therefore, the judge had been correct to construe the letter agreement as a contract of guarantee, the enforceability of which had foundered on the subsequent time to pay agreement.
It held that a letter of comfort, properly so called, was one that did not give rise to contractual liability. The label used by the parties was not necessarily determinative; it was a matter of construction of the document as a whole. The court's task was to ascertain what common intentions should be ascribed to the parties from the terms of the documents and the surrounding circumstances.