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?
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.
