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GUARANTEES


Problems associated with guarantees.

Extent to which a guarantor remains bound under the guarantee even after the terms of the principal lending have been varied.

In the Donde Bill there was a proposal to get rid of guarantees,

What is a guarantee?

It is a written promise by the guarantor to answer for the debt of another and that other is the principal debtor made to a person namely the lender to whom that other is already or is about to become liable.

Under the Law of Contract Act Cap 23 the guarantee must be in writing or there must be a Memorandum of it in writing signed by the guarantor. 

The banks will ordinarily or as part of their requirements for lending purposes require that the principal borrower should furnish security by providing a guarantor.  This is a common method by which bankers seek to protect themselves against loss on advances. 

To effectively protect itself the banks will usually frame the bank guarantees so as to apply to all accounts of the principal debtor whether such accounts are solely in the name of that principal debtor or whether such accounts are joint accounts or partnership accounts so that if the principal debtor has two accounts with outstanding facilities at the bank, the bank will ensure that the language of the guarantee covers both accounts for instance.

The guarantees will also usually be framed in such broad terms so as to extend to the liabilities of the principal debtor in the capacity of that debtor in principal form or in the capacity of that debtor as a surety or as a guarantor for lending to another party.

There are situations where the guarantee is given by more than one person i.e. where there is more than one guarantor to the guarantee.  In that event the guarantee should stipulate whether the obligation of the guarantors is several or joint and several.  If the obligation be joint only, it means that if the lender sues one of the guarantors and obtains judgment against that guarantor, he cannot subsequently bring an action under the same guarantee against the other guarantor.  But in the case of the guarantee being several  the remedy by the bank can be pursued against both guarantors at different times.  The caution is that when one is dealing with a joint guarantee one has to sue all the guarantors.

The banks invariably provide in the language of the guarantee that the liability of the guarantors is joint and several.

The other measure that a guarantor should take or the other factor that a guarantor should be alive to is whether the guarantee is limited or unlimited.  If it is intended to be limited meaning that the liability of the guarantor should not exceed a certain limit, then the guarantor should ensure that the instrument of the guarantee so provides.

A further distinction is also made between specific guarantees and continuing guarantees.  A specific guarantee is where provision is made for the advance of a specified sum and the guarantee is only applicable to that particular advance and it ceases on the repayment of that amount.  A continuing guarantee is designed to cover a fluctuating or running account and it secures the debit balance at any time irrespective of payments which clear past advances.

HOW DOES ONE BRING TO AN END THE INSTRUMENT OF GUARANTEE?

Most guarantees will provide that a guarantor wishing to determine the guarantee must give notice to the lender and pay into the bank the amount that may be due.  The guarantee may simply provide that the liability of the guarantor will cease upon the expiry of a specified notice to be given by the guarantor to the bank and upon payment of all outstanding sums notified by the bank upon receipt of such notice.

The bank has to be careful coz the effect of this is that the guarantor can give notice to the bank should the bank receive notice that is responds by stating the amount that is outstanding.

DEATH OF A GUARANTOR

Does the death of a guarantor determine a guarantee?  It does not necessarily determine the guarantee unless provision to the contrary is provided.  The other way to bring the guarantee to an end is for the principal debtor to discharge his liabilities with the bank and therefore if the lender releases the principal debtor, it follows also that the guarantor is discharged.

Mahand Singh v. Ubayi [1939] A.C. 601

This is authority for the proposition that where the creditor releases the principal debtor, the guarantee is discharged.

This follows the principles in Rees V. Barrington following a case bearing those names.

The other way in which the guarantor may be released is where the creditor agrees to vary the terms of the lending with the principal debtor to the prejudice of the guarantor.

Holme v. Branskill [1878] 3 QBD 495

This has been followed by our courts in the case of

Harilal and Co. v. The Standard Bank Ltd. [1967] EA 512

In this case, Standard Bank advanced a facility to the principal debtor which was secured by a guarantee of the wife of the principal debtor.  That was in 1955.  in 1962 the Bank was dissatisfied in the way in which the account was being operated and it

 
 
 

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