Tuesday 14 June 2011

THE LEGAL BURDEN OF A SURETY OR GUARANTOR

SURETYSHIP OR GUARANTEE – A LEGAL DISCOURSE
In recent times, the issue of guarantee or surety has become a household word. We as corporate people most often receive requests from friends and relations and others requesting us to serve as their guarantors or sureties. Who is a guarantor/surety? And what are the legal status or implications of standing as one’s guarantor or surety? This is the objective of this legal discourse.
WHAT IS A GUARANTEE OR SURETY
In the case of Smith V wood (1929) 1 Ch. At p.14 the Court defines a contract of guarantee or suretyship as one by "which one person called the guarantor or surety agrees to be answerable for the liability of the debtor either personally, or by way of a charge on the guarantor’s property or both”. In a related case of R.E.A Vs Aswani Textile Limited (1992; 3 NWLR,pt.227, P.1 at P.13, para ‘G’) the Supreme court defines a guarantee as “a written undertaking made by one person to a second person to be responsible if a third party fails to perform a certain duty, for example pay a debt”
From the above definitions, it is evident that a contract of guarantee presupposes the existence of another prior contract e.g contract of loan, bank facility, employment etc under which the principal debtor is primarily liable. Its important to point out that the liability of a guarantor or surety under a contract of guarantee is secondary. His liability crystallizes at the failure or inability of the principal debtor (the person guaranteed) to discharge the obligation in the contract.
Many a times, we seem to mistake an indemnity to be the same as guarantee and suretyship. An indemnity is quite different as it is more restrictive. The court in the case of Bentworth Finance (Nig) Ltd Vs Ibrahim (1969; NCLR; P.272 at p.277) made it clear that in a contract of Indemnity, “the indemnitor (person indemnifying the principal debtor) agrees with the creditor to make good all or an agreed measure of any loss the creditor may suffer consequent upon the debtor’s default in meeting his financial obligations to the creditor”. This shows that unlike in the contract of guarantee where the guarantor assumes a secondary position to the liability of the principal, the indemnitor assumes a primary liability, either alone or jointly with the principal debtor (Apugo & Sons Co. Ltd Vs African Continental Bank Ltd (1989; 1CLRQ, p.87)
Secondly, the liability of the guarantor under a contract of guarantee becomes void where it is established that the main contract is void example for lack of capacity of the debtor or other invalidating causes, the same is not the case for an indemnitor, as he remains liable even when the main contract is void. (Wanthier Vs Wilson; 1912, 28 TLR, p.239; Yeoman Credit Ltd Vs Latter; 1961, 1 WLR, p.828)
Thirdly, the liability of the guarantor/surety is normally co-extensive with that of the principal debtor. This means that once the debtor is discharged, the surety/guarantor also becomes discharged. This is not the case in indemnity, as the indemnitor remains liable under the contract notwithstanding that the debtor is discharged under the main contract. (Goulston, Discount Co. Ltd Vs Clark; 1964, 2QB, P.493)
LEGAL IMPLICATIONS OF A GUARANTEE OR SURETYSHIP
From the positions of the courts in the above cited cases, it is clear that so much is expected of one who wants to guarantee or surety another. The guarantor assumes a secondary position as already discussed above. This shows that at the failure of the principal to satisfy the obligations under the contract, the guarantor or surety steps into the principal shoes and becomes liable to the extent of the principal’s liability. This is really a big challenge, hence the need to be sober and careful when undertaking to serve as one.
DISCHARGE OF SURETY OR GUARANTEE
The liability of a guarantor or surety under the Law becomes extinguished under the following circumstances:
·         Payment of the total sum guaranteed by the principal debtor
·         Where the principal debtor is discharged whether on point of law, agreement with the creditor or performance
·         Where there is a variation of contract between the debtor and the creditor e.g raises the limit of the guaranteed overdraft without the consent of the guarantor, where the debtor is allowed to open a second account without the knowledge of the guarantor, where the principal gives an additional security after the contract of suretyship has been made in which the creditor agrees to waive his rights and give time.
CONCLUSION:
Many a times when people appeal to us to be their referee, surety or guarantor, we just accept without taking time to know the implications of our acceptance. In as much as it is not good to turn our back at requests from relations and friends, we should also be double sure of the kind of persons we guarantee and the type of contract they have entered into that we are serving as their guarantor. Let us not be in a hurry to oblige them without doing a proper assessment of what we are undertaking. Its better late than the late.

 

6 comments:

  1. Nice one there Bro. Brief, yet, straight to the point. Keep it up.

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  2. thanks Kunle for stopping bye to be part of my banquet

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  3. Brief and direct. Keep it up.

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  4. Nice piece. But if I stand as a guarantor for someone and want to back out what do I need to do?

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