Tuesday 27 August 2013

GUARANTEE CONTRACTS IN KENYA



What is a contract of Guarantee

A contract of guarantee is a contract whereby the surety or guarantor promises the actual or potential creditor of a 3rd person (the principal debtor) to be responsible to him in addition to the principal debtor of his existing or future obligations. It imposes an obligation which is secondary to that of the principal debtor, meaning that the surety’s liability depends upon default by the principal debtor.


J O DONOVAN & J PHILIPS in the modern contract of paragraph 1-88 distinguishes a contract of guarantee from the contract of indemnity in the following terms;

“…..in a contract of indemnity a primary liability is assumed whether or not a 3rd party makes default whilst, in a  contract of guarantee the surety assumes a secondary liability  to the creditor for the default of another who remains primarily liable to the creditor.

The contract of indemnity therefore is a contract by one party to keep the other harmless against loss and is not dependant on the continuing liability of the principal debtor………in other words an indemnity imposes  a primary obligation which is independent of the continuing obligation of another”

From the foregoing description of a contract of  guarantee, the liability of the guarantor arises on the default of the principal debtor, this was clearly stated in Kenya Commmercial Ltd VS Mwanzau Mbaluka & another (1997) klr 6512 that;

“The liability of the guarantor would only arise where there is a default by the principal debtor and where there is a default by the principal debtor and there has been a formal demand to the guarantor to pay the sum.”

Must the principal debtor demand the guarantee to pay?

In Surgipharm   Vs  Awuondo &  Another(2003)1 Ea;2003 Klr 193 Nyamu J, it was held that on the default of the principal debtor causing loss to the creditor, the guarantor is apart from a special   stipulation, immediately liable  to the full extent of his obligation without being entitled to require either being entitled  to require either notice of the default or previous recourse against  the principal debtor.  
Where there is no express or implied requirement in the guarantee for a demand & no
circumstance rendering a demand upon him,the guarantor is liable without  being requested to pay also see HALSBURY LAWS OF ENGLAND(4ed Volume 12)


Further in Kenya Commmercial Ltd VS Mwanzau Mbaluka & another (1997) klr 6512 that;

“The liability of the guarantor would only arise where there is a default by the principal debtor and where there is a default by the principal debtor and there has been a formal demand to the guarantor to pay the sum.”

Does variation discharge a surety from liability?

The rule in Pigots case 1614 is to the effect that any material alteration, not approved by all the parties to the original document,made to a deed or other instrument after the execution of that instrument or deed renders it void,the rule applies to the alteration of a contract of a guarantee by the creditor,or a 3rd party,without the surety’s consent


In Raiffessin Zentrale Vs  Cross Shipping 2000 1 WLR 1135 Potter L.J identified two categories of materiality for the purposes of the rule in pigots case namely;
 
I.      The first where there is an alteration that affected the very nature and character of the instrument,
II.      The second where the alteration was potentially prejudicial to the surety’s legal rights and obligations.this test was applied  in Bank of Scotland Vs Butcher 2003 EWCA civ 67

In Kanyoro vs Wakarwa Printers 2005 KLR It was held that any material variation of the contract between  the creditor and the principal debtor, will discharge the surety,who is relieved from  liability by the creditor dealing with the principal debtor   see HALSBURY LAWS OF ENGLAND(4ed Volume 30)  paragraph 253.

In AKIBA commercial Bank Limited VS RAYE & another (2008) 1 EA 8It was held that the position of the law is that unless notified of any variation of the   terms or extension of a loan facility, a guarantor becomes discharged from liability.