Guarantees – Two for the price of one

In this article we look at two recent cases on guarantees.  The first examines the pitfalls of comfort letters whilst the second considers the difference between a see-to-it (or performance) guarantee and a conditional payment obligation.

The Pitfalls of Comfort Letters

Readers will recall that comfort letters are occasionally offered, and accepted, where a party does not wish to give a guarantee but is prepared to offer “comfort”.

The intention is that the comfort letter will not be legally binding.  The leading case on the subject is Kleinwort Benson v Malaysia Mining Corporation [1989] 1 WLR 379 where the court found that a key distinction between a letter of comfort and a guarantee is that a guarantee provides a contractual promise as to future conduct and is not merely a warranty or statement of present fact or intention.  Fast forward to the case of IDBI Bank Ltd v Axcel Sunshine Ltd [2025] EWHC 442 (Comm), in which the High Court considered whether a document described as a letter of comfort was, notwithstanding such description, in fact a guarantee.

The bare facts of the case are straightforward.  The borrower had borrowed $67 million from the bank under a facility agreement in March 2014.  On the same day the parent company of the borrower had provided a “Letter of Comfort” (LOC) addressed to the bank, which the bank claimed that it relied on as a legally binding contract of guarantee and/or indemnity. The $67 million the borrower borrowed was transferred to the parent, which used the funds to discharge previous liabilities owed by its group companies to the bank, and which the parent had previously guaranteed. The borrower failed to repay the facility by which time the outstanding liability, following further advances was $143.7 million. The bank sought to recover the outstanding sum from the parent as surety.  The parent claimed that it had been told that the LOC was merely a “paper exercise” and of no legal effect.  The court found no evidence that this was the case.

The label ‘letter of comfort’ was not determinative of its substantive content. It contained legal and binding promises made by the parent to the bank to ensure that the borrower would perform its obligations under the facility agreement, to ensure that the claimant was repaid, and to provide assistance to the borrower to enable it to repay the facility. Another clause stated expressly that the parent would keep the bank indemnified against any loss or damage caused by the disbursement of the facility to the borrower. The court considered this to be a clear promise of indemnity. There was no other possible meaning. The parent was held liable for the loss and damage suffered by the bank.

Comment:  It beggars belief that the parent and its advisers could have got things so wrong given the amounts involved and the relatively straightforward case law on the subject.  However, they did, and this case must serve as a reminder that all parties must treat letters of comfort with the utmost caution.  In this case, the beneficiary of the LOC prevailed but it should be remembered that in the Kleinwort Benson case, the opposite happened.

See-to-it Guarantees and Conditional Payment Obligations

Question:  what is the difference between these two clauses?

• ” (i) we hereby unconditionally guarantee the due and punctual performance and discharge of all the Buyer’s obligations under or pursuant to the Customer Agreement”.
• ” (ii) we hereby unconditionally guarantee … the due and punctual payment on demand of all sums now or subsequently payable … by the Buyer to the Seller under or pursuant to the Customer Agreement …”.

Both clauses featured in a personal guarantee considered by the High Court in the case of Jones v City Electrical Factors Ltd [2025] EWHC 414 (Ch).

The court concluded that part (i) was a “see-to-it” guarantee whereas part (ii) was a conditional payment obligation.  Amongst other things, the court reasoned that the payment obligations of the Buyer under the Customer Agreement were not expressed to be payable “on demand” but rather to be payable within x days of invoice.  Therefore, the expression “on demand” in part (ii) could only refer to the guarantor.

The distinction between these two types of guarantee is important.  In the case of the “see-to-it” guarantee, if the Buyer fails to perform its obligations, the Guarantor’s liability is for damages arising from breach of its obligation (i.e. its failure to ensure performance by the Buyer).

In the case of the conditional payment obligation, it has an immediate obligation to pay the sum in question.  The former gives rise to a liability in damages only, whereas the latter gives rise to a liability in debt.

In the Jones case, a bankruptcy petition could be presented against the guarantor under section 267 of the Insolvency Act 1986, because the debt was for a liquidated sum under the part (ii) wording, whereas the Customer would not have been entitled to do so based only on the part (i) wording.

Comment: Guarantees may seem to be simple documents but, in practice, slight variations in wording can have widely differing consequences.  They need to be drafted with extreme care and thought.