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 as 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 used.

In Associated British Ports v 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 and Ferryways.

MSC assumed responsibility for ensuring that Ferryways had, at all times, sufficient funds to fulfill 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 indemnity.

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 determined.

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.

Comment

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.

This article was published in the June issue of Motor Finance.