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 (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 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. The claimant later sought to recover sums due under the 2003 agreement from Ferryways and from MSC under the LOA. The issue to be determined was whether the LOA was a guarantee or indemnity.

The Court of Appeal held it to be 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 to "see to it" that Ferryways performed its obligations under the 2003 agreement and if it could not do so, only then did the secondary liability of MSC kick in by way of 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.

Things to consider

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.