Associated British Ports v Ferryways NV & Anor

Guarantee or indemnity? That old chestnut was one of the issues that fell to be considered by Field J in this case and it is the only part of his decision which is challenged on appeal. The issue arises most often because the law treats the two concepts differentially when it comes to formality. A guarantee is subject to the formal requirement of section 4 of the Statute of Frauds 1677 but an indemnity is not. A guarantee is, in the words of the Statute, a promise “to answer for the debt default or miscarriage of another person”. There must be another person who is primarily liable. The liability of the guarantor is secondary. By an indemnity, on the other hand, the surety assumes a primary liability. The obligation in issue in this appeal raises no question as to form. It was in writing. However, it illustrates another difference between a guarantee and an indemnity. Because the liability of a guarantor is secondary, it is usually discharged by a bilateral variation of the contract between the creditor and the debtor. In the absence of an express provision to the contrary in the contract of guarantee, the giving of time by the creditor to the debtor will generally discharge the guarantor. However, it will not have that effect if the suretyship is one of indemnity: the liability of the surety, being a primary liability, survives. The basic legal principles in this area were developed in the nineteenth century. With justification, they are described in Chitty on Contracts, 30^th edition, Vol II, paragraph 44-099, as “technical and inconvenient”.

There is an ample account of the factual background to this case in the judgment of Field J [2008] EWHC 1265 (Comm). For the purpose of the single issue remaining on this appeal, the facts can be stated more briefly. Ferryways is a Belgian company which was formed in order to operate a roll-on, roll-off ferry service between Ostend and Ipswich. Its share capital was owned as to 40% by the state-owned Belgian investment company Gimvindus (acting through another company); as to 40% by an associated company of MSC Belgium (MSCB), which is in turn indirectly controlled by Mediterranean Shipping Company (SA) Geneva Group, the second largest liner container shipping company in the world; and as to 20% by Mast(GB) Limited, a company owned by the businessmen whose idea had given rise to the project. In furtherance of the project, Ferryways entered into a series of agreements with Associated British Ports (ABP).

By an agreement dated 5 January 2000 (the First Agreement) between ABP and Ferryways, ABP guaranteed a five-hour turnaround of 160 units at its port at Ipswich at designated slot times and at specified rates. The agreement was stated to run for five years. From time to time variations in relation to charging rates were agreed by letter and by an addendum dated 16 June 2001 Ferryways guaranteed an annual throughput of 25,000 units through Ipswich from 7 February 2001 to 6 February 2005. Initially, the business expanded rapidly. However, there were problems with the linkspan across which the trailers traversed at Ipswich. Ferryways wanted ABP to improve it but this required an estimated investment of £6.1 million by ABP, which naturally wanted to secure a long-term commitment from Ferryways. Negotiations led to a new agreement between Ferryways and ABP dated 1 September 2003 (the Second Agreement) which replaced the First Agreement. The Second Agreement was expressed to run from 1 September 2003 until 31 December 2024. It made provision for priority use of appropriate berths by Ferryways, for turnaround time and for the construction of a new linkspan. There was further provision for index-linked charges. Volume was dealt with by way of an annual minimum throughput obligation which also required Ferryways to compensate ABP in the event of a shortfall.

On the same day, 1 September 2003, a written agreement (the Letter Agreement) was concluded between ABP and MSCB. It is enshrined in a letter of that date. Its purpose was to secure the position of ABP by way of recourse against MSCB. It is this agreement that gives rise to the issue on this appeal. It is in the following terms:

“Dear Sirs

We confirm that Ferryways is a member of the same group of companies as [MSCB].

In consideration of … ABP entering into an agreement relating to the Port of Ipswich of even date with this letter (the Agreement), we assume full responsibility for ensuring (and shall so ensure) that, for seven years from the date of this letter, [Ferryways] (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.

We are aware that ABP will rely on this letter in deciding whether to enter into the Agreement with [Ferryways].

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 concluded with terms as to service of process. It was signed by the Managing Director of MSCB. It had been drafted by ABP’s General Counsel, a solicitor.

From about August 2004, disputes arose between ABP and Ferryways about the construction of the Second Agreement. To some extent the position was resolved by an oral agreement at a meeting between representatives of ABP and Ferryways on 23 August 2004. Field J referred to this as the Concession Agreement. However, he concluded that it did not discharge MSCB under the Letter Agreement and there is no issue as to that on this appeal. More importantly, on 17 February 2006, ABP and Ferryways concluded an agreement – the Time to Pay Agreement – which took the form of a supplementary memorandum to the Second Agreement. Field J held that this did discharge the liability of MSCB under the Letter Agreement, which he construed as a guarantee or guarantees and not an indemnity. On behalf of ABP, Mr Richard Millett QC (who did not appear below) now takes issue with that construction, but not with the consequence if the judge’s construction was correct.

To complete the narrative, further disputes between ABP and Ferryways arose between March and June 2006. However, negotiations over a possible new agreement to replace the Second Agreement broke down irretrievably. The parties continued to operate under the Second Agreement until 13 June 2007 when Ferryways ceased trading, its share capital having been acquired by a competitor, the Cobelfret Group, on 1 June 2007. Ferryways was put into liquidation on 27 June 2007 and was declared insolvent by the Belgian court on 7 February 2008. In the present proceedings, ABP sought to recover sums due from Ferryways under the Second Agreement and from MSCB under the Letter Agreement. Field J gave judgment for ABP against Ferryways for damages to be assessed but dismissed the claim against MSCB.

The judgment of Field J on the guarantee/indemnity issue is contained mainly in paragraph 60, which reads:

“… the obligations provided for in both limbs [ie (i) and (ii) in the Letter Agreement] are defined by reference to the duties, commitments and liabilities of Ferryways under the [Second Agreement] and will only become concrete and of practical significance on such duties, commitments and liabilities accruing and if Ferryways is in default thereof. The substance of both limbs is therefore an obligation to see to it that Ferryways performs its obligations under the [Second Agreement] and accordingly both are properly to be characterised in my judgment as giving rise to a secondary liability, rather than a primary liability. This conclusion is more readily reached in respect of limb (ii). My view that limb (i) is a guarantee is reinforced by the holding of the majority in Motemtronic v Autocar that an undertaking to make sure that a company would have the money to meet a contractual obligation was a promise to answer for the debt of another within s.4 of the Statute of Frauds, assuming that the undertaking was an enforceable contractual warranty.”

Whether a document is a guarantee or an indemnity, or whether it imposes a secondary or a primary liability, will always depend upon “the true construction of the actual words in which the promise is expressed” (Moschi v Lep Air Services Ltd [1973] AC 331, at page 349C, per Lord Diplock). It is abundantly clear in the present case, 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 (as to which, see paragraphs 16 et seq, below). Mr Millett submits that the words used in the Letter Agreement, or at least those comprising limb (i), imposed a primary liability on MSCB. He says that Field J fell into error in reaching the contrary conclusion for a number of reasons including: (1) he failed to give any material effect to the words of limb (i); (2) he ignored the true meaning of limb (i) and wrongly treated it as subsumed by limb (ii), thus treating limb (i) as mere surplusage; (3) he wrongly relied on Motemtronic; and (4) he failed to construe the document as a whole, in particular by according no weight to the representation that Ferryways was part of the same corporate group as MSCB, by taking no account of the acknowledgement of reliance in the third paragraph and by failing to attach significance to the fact that the parties chose to refer to the document as a “letter” rather than a “guarantee”.

I am not persuaded by these submissions, whether they are viewed separately or cumulatively. The first and second submissions are interconnected. They seem to me to rest on a misunderstanding of the judgment. It is apparent from paragraph 60 (which is set out at paragraph 8, above) and from a later passage in the judgment (paragraph 87: “… the guarantees in limbs (i) and (ii) … were discharged by … the Time to Pay Agreement”) that the judge considered that limbs (i) and (ii) contained separate, albeit overlapping guarantees. He found the classification of limb (i) more difficult than limb (ii), but that is not significant in itself. The point about surplusage or otiosity cuts both ways. In given circumstances, limb (i) may render limb (ii) otiose and vice versa.

The real issue relates to limb (i). Mr Millett stops short of submitting that the language of limb (ii) imposes a primary rather than a secondary liability. However, he says that the crucial words in limb (i) are “at all times” and that they point to a primary liability to ensure that, from the execution of the Letter Agreement and throughout its duration, Ferryways would have sufficient funds to meet its liabilities under the Second Agreement, whether or not they had yet fallen due. It was an immediate and continuing obligation that was not contingent upon or secondary to any default by Ferryways. In my judgment, it is simply not possible to reach Mr Millett’s destination by focusing on the words “at all times”. Far more significant is the way in which limb (i) defines the obligation of MSCB by reference to Ferryways meeting all its “duties, commitments and liabilities entered into and/or incurred by reason of the Agreement as and when they fall due”. It is, in the hallowed words used by the judge, a “see to it” obligation: MSCB would see to it that Ferryways performed its obligations under the Second Agreement. If Ferryways could not meet its liabilities to ABP “as and when they fall due” (the primary liability), then the secondary liability of MSCB would accrue by way of guarantee. That would have been sufficient to protect ABP 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 is expressed not to discharge the surety. However, such a provision was absent from the Letter Agreement. It is stated in Chitty on Contracts (at paragraph 44-099):

“… in practice any well-drawn contract of suretyship will nowadays expressly permit variation of the obligations or the giving of time, without discharging the surety.”

Mr Millett suggests that the absence of such a provision is itself a reason for not construing the Letter Agreement as a guarantee but I agree with the judge that “the absence of the usual protective term is at best neutral” (paragraph 61).

Mr Millett’s third submission - wrongful reliance on Motemtronic – overstates the judge’s reference to that case. I accept that the case involved very different facts. All these cases turn on the construction of the language used. The judge merely referred to it as “reinforcement”. In Motemtronic, the context was not documentary but oral. When the promisee asked: “Where would the money come from if M had to repay £1M?”, the promisor replied: “From wherever in the group the money was at the relevant time. I’ll make sure it is there. I’m good for £1M.” The ratio of the case is that that exchange did not give rise to a legal obligation at all (Aldous and Henry LJJ, Staughton LJ dissenting). However, the majority went on to say, obiter, (Staughton LJ again dissenting), that if there was a contractual obligation it was one of guarantee but was unenforceable by reason of section 4 of the Statute of Frauds. I do not consider that the majority were identifying a principle of general application or that Field J thought that they were. It was merely a case-specific issue of construction which, at one level of abstraction, lent some but not decisive support to the judge’s construction of the Letter Agreement.

The remaining construction points advanced by Mr Millett seem to me to be of little or no weight. The fact that Ferryways was part of the same corporate group as MSCB is entirely neutral. It does not make it any more likely that MSCB was undertaking one type of liability (primary) rather than another (secondary). Likewise, ABP would have been as reliant on one form of protection as the other. Moreover, it is apparent from several of the authorities referred to in this judgment that, in factual situations of some similarity but in which the eventual document is a letter of comfort, the protection previously sought and refused was one of guarantee rather than indemnity or other primary obligation. The ex post facto description of the crucial document as the “Letter Agreement” did no more than attach a neutral appellation. It is not instructive as to the type of obligation created by the document.

For all these reasons, I have come to the conclusion that Field J was correct to construe the Letter Agreement as a contract of guarantee, the enforceability of which foundered on the subsequent Time to Pay Agreement.

Mr Millett’s alternative submission is that the Letter Agreement was a letter of comfort. In one sense it is surprising, verging on surreal, for a promisee in the position of ABP – the would-be comfortee – to assert that a document is a letter of comfort. More usually, such a contention would be expected to come from a promissor – or would-be comforter. However, surprise recedes a little when it is submitted that the document is not just a letter of comfort but a legally binding letter of comfort. If that is what it is, then as with an indemnity, any liability would not be discharged by the Time to Pay Agreement.

The archaeology of this submission is interesting. From the Claim Form down to the Re-amended Particulars of Claim, ABP’s pleaded case was that the Letter Agreement was a guarantee. It was only after MSCB, in its Amended Defence, pleaded amongst other alternatives, that the Letter Agreement was a non-binding letter of comfort, that ABP, by its Amended Reply, pleaded that it was not “a mere comfort letter” but was legally binding. In his written final submissions at trial, Mr Millett’s predecessor put it thus:

“ABP contend that the first limb … is to be construed as a contractual undertaking, alternatively an indemnity …

it is the kind of wording found in letters of comfort – not guarantees … in essence the Letter is a binding letter of comfort of the sort considered by the Supreme Court of New South Wales in Banque Brussels Lambert SA v ANJ [1989] 21 NSWLR 502 and found to be binding.”

This submission, at least in the form of a “binding letter of comfort”, does not seem to have made a great impression on Field J. His judgment does not address the possibility of a binding letter of comfort. When Mr Millett came on the scene, his grounds of appeal contended for “an indemnity or other contract imposing primary liability”. A little later the grounds observe that the document is on its face a letter, other than a guarantee, and that the parties intended it to be “in the nature of a binding and enforceable comfort letter, imposing primary liability on MSCB (at least by the words following (i) in the second paragraph) and not in the nature of a guarantee”. The supporting skeleton argument is to like effect. It makes no reference to Banque Brussels Lambert, but Mr Millett produced that authority in the course of the hearing before us.

I can dispose of this submission briefly. It turns on establishing the taxonomy of the Letter Agreement as imposing a primary liability, whether it is a “binding letter of comfort” or “other contract” (not being a guarantee). Having come to the same conclusion as Field J, namely that the Letter Agreement did not give rise to a primary liability, the same result must follow and for the same reasons when one considers this alternative submission.

However, it is appropriate to add a little on the notion of a binding letter of comfort. Banque Brussels Lambert, too, was a case in which a creditor had sought reassurance from an associated company – in fact, the parent company – of the debtor. The parent company would not provide a guarantee but it did provide a “letter of comfort” (as the Court was content to describe it) in which it stated that

“it would not be our intention to reduce our shareholding in [the subsidiary] from the current level of 45%.”

It undertook to give notice of any subsequent decision to dispose of the shareholding and confirmed that

“it is our practice to ensure that our affiliate … will at all times be in a position to meet its obligations as they fall due.”

The Court held that the letter gave rise to legal obligations enforceable by an action for damages for breach of contract after the shares had been sold without notice. After some discussion of the international development of letters of comfort and reference to some periodical literature concerning their equivalents in French and German law, Rogers CJ said (at page 522E-G):

“First, there are … considerations … in relation to letters of comfort generally, which explain why, consistently with intending to make a legally binding commitment, a company may wish it not to have the character of a guarantee. Secondly, the letter makes clear that the defendant is not assuming secondary liability for the debts of the principal debtor … The statements made in the letter are more remote from the liability of [the associated company] to repay the facility … Nonetheless, the promises, had they been fulfilled, were calculated to put the plaintiff in a position to receive payment from [the associated company]. It is these features which both distinguish the letter from a guarantee but make the defendant’s argument based on that undoubted fact an irrelevance.”

Thus, the letter of comfort gave rise to a valid claim that the parent company was in breach of two enforceable promises.

To the extent that this reasoning accepts the possibility of a primary contractual liability to the creditor of another, arising from the insistence of the creditor on such a contract, it is uncontroversial. It seems to me that the confusion arises when such a contractual liability is contained within a document described as a “letter of comfort”. I regard a letter of comfort, properly so called, as one that does not give rise to contractual liability. The label used by the parties is not necessarily determinative. It is a matter of construction of the document as a whole. Thus, in Kleinwort Benson Ltd v Malaysia Mining Corp at first instance, [1988] 1 All ER 714, Hirst J found in favour of a bank which sought to enforce “letters of comfort” provided by the parent company of the bank’s debtor. However, his decision was reversed by the Court of Appeal [1989] 1 All ER 785. Ralph Gibson LJ said (at p.795c-d):

“The court would not, merely because the parties had referred to the document as a comfort letter, refuse to give effect to the meaning of the words used. But in this case it is clear, in my judgment, that the concept of a comfort letter, to which the parties had resort when the defendants refused to assume joint and several liability or to give a guarantee, was known by both sides at least to extend to or to include a document under which the defendants would give comfort to the plaintiffs by assuming, not a legal liability to ensure repayment of the liabilities of its subsidiary, but a moral responsibility only.”

Nicholls and Fox LJJ agreed. In other words, the letter was what I have called “a letter of comfort, properly so-called”.

Kleinwort Benson was considered in Banque Brussels Lambert and was partially relied upon but it does not seem to me to encourage the notion of a “binding letter of comfort”. It is more a case of acknowledging that contractual obligations may arise from a document when properly construed, even though, misleadingly, the label “letter of comfort” has been applied to it.

At one stage of his judgment in Banque Brussels Lambert (p.523F-G), Rogers CJ was critical of the approval of the Court of Appeal in Kleinwort Benson. That criticism does not resonate in this Court, any more than it did at first instance in Re Atlantic Computers plc (in administration) [1995] BCC 696, 699 (per Chadwick J). Here the position remains that a document expressed to be a letter of comfort will usually not give rise to legal obligations (except, perhaps, as a warranty of present intention) but sometimes a primary continuing legal obligation may arise as a matter of construction, notwithstanding the rubric of a letter of comfort. As always, “the court’s task is to ascertain what common intentions should be ascribed to the parties from the terms of the documents and the surrounding circumstances” (Kleinwort Benson, per Ralph Gibson LJ, at p.789B).

As I have come to the same conclusion as Field J on the central issue of construction, I would dismiss this appeal.

I agree.

I also agree.