Guarantors: Discharge Of Liability

In Associated British Ports (a company created by

statute) v (1) Ferryways NV and (2) MSC Belgium NV [2009] EWCA Civ

206, the Court of Appeal found that a guarantor was not liable

on the basis that one of the parties to the underlying contract had

given the other additional time to pay and the parties had not

included an express provision preventing discharge of the

guarantor's liability in such circumstances.

In January 2000, Associated British Ports ("ABP") and

Ferryways NV ("Ferryways") entered into an agreement in

which ABP provided port services to Ferryways, a company operating

a ferry service between England and Belgium.

Following the expansion of Ferryways' business, the original

agreement was replaced by an agreement dated 1 September 2003. On

the same day, an additional agreement (the "Letter

Agreement") was concluded between ABP and Ferryways in which

one of Ferryways' major shareholders, MSC Belgium NV

("MSC"), agreed to ensure that Ferryways "(i) has

and will at all times have sufficient funds and other resources to

fulfil and meet all its duties, commitments and liabilities entered

into and/or incurred by reason of this Agreement as and when they

fall due and (ii) promptly fulfils and meets all such duties,

commitments and liabilities".

In about August 2004, disputes arose between ABP and Ferryways

which were initially resolved by an agreement dated 17 February

2006 in which ABP gave Ferryways further time to pay –

the "Time to Pay Agreement" ("TPA").

Further disputes between ABP and Ferryways arose between March

and June 2006 and in June 2007 Ferryways was bought by a

competitor, in the same month ceased trading and was declared

insolvent in February 2008. ABP sought to recover the monies owed

to it by Ferryways and proceedings were issued against Ferryways

and, pursuant to the Letter Agreement, MSC.

The case centred on the construction of the Letter Agreement and

whether it amounted to an indemnity or guarantee. An indemnity is a

primary liability (that is, a liability which exists independently

of any other liability). Conversely, a guarantee is a secondary

liability (that is, a liability which exists only in circumstances

in which the primary obligor cannot be called upon or cannot pay)

and if the underlying contract is varied or additional time is

given to pay, then the liability of the surety is discharged,

unless there is a provision preserving the surety's liability

in these circumstances. No such provision had been...