UNIVERSITY OF LAGOS
SCHOOL OF POST GRADUATE STUDIES
LLM PROGRAM
SEMINAR PAPER ON SECURED CREDIT TRANSACTION II (PPL 807)
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
GRANT OF LLM DEGREE
TOPIC: GUARANTEE AND INDEMNITY AS SUBJECTS OF SECURITY.
ALE-DANIEL OLAOLUWA
JONATHAN JULIUS IYIEKE
UDEOGU CHIJIOKE
LECTURER: DR. DAYO AMOKAYE
1
-900601020
- 109061060
-109061152
GUARANTEE AND INDEMNITY AS SUBJECTS OF SECURITY
INTRODUCTION:
The word security in legal terms goes beyond the ordinary meaning of security in
public parlance the only similarity which can be deduced is that as in common
usage, the word security means protection. In legal terms however, it is deeper as it
includes how an exposure granted to a debtor is secured by another means of
getting the facility repaid outside the primarily debtor/borrower.
This seminar paper is therefore meant to look at whether or not there exist a means
of securing a facility granted to a borrower under an arrangement providing for
guarantee or indemnity and if there is, to what existent this is realizable; the
shortcoming of either and the preferred remedies inclusive of the security
incidence.
DEFINITION OF TERMS
SECURITY
The word security is capable of many meanings but as it relates to the subject at
hand, it can be defined as an interest vested in a person called “The Creditor” in
certain property own by another called “The Debtor” whereby certain rights are
made available to the creditor over such property in other to certify an obligation
personally owed or recognized as being owed to the creditor by the debtor or some
other persons. The definition is said to be wide enough to comprehend the case of a
security by a guarantor.1
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1. Definition provided per Prof. I.O. Smith in his book Nigerian Law of Secure Credit page
4 paragraph 3 relying on SYKES AND WALKER: THE LAW OF SECURITIES 5TH ED
(1993)
2
INDEMNITY: The word indemnity according to Lectric Law library lexicon2
defines indemnity as an arrangement whereby one party agreed to secure another
against an anticipated loss or damage for example, someone may agreed to turn a
business over to another person for a reduced price if they pay the debts and other
obligations of the business in a broad sense, insurance policies are indemnity
contract. A provision in a lease that requires a tenant to pay (indemnity) a landlord
for damages can also be termed an indemnity.
It is an obligation of one party to reimburse another party for losses which have
occurred or which may occur. It is also defined as payment for damage, a
guarantee against loss, a bond protecting the insured against losses caused by
others failing to fulfill their obligation.
A compensation to make a person whole from a loss already sustained, a contract
or assurance by which one anticipated loss 3
As it is usual in most indemnity cases, it is in a form of agreement and indemnity
agreement is defined as a policy provision designed to restore an insured to his or
her original financial position after a loss. The insured should neither profit nor be
put at a monetary disadvantage by incurring the loss. In other words, indemnity
simply
defined
is
a
legal
exception
from
liability
for
damages4
_________________________________________________________________
2. http://www.lectlaw.com/def/1027htm
3. teach me finance.com http://www.teachmefinance/.co/financial_termii
4. Advanced
English
Dictionary
http://jDictionary.mobile .com
3
the
ultimate
reference
The word indemnity according to Black’s Law Dictionary is a duty to make good
any loss, damage or liability incurred by another or the right of the injured party to
claim reimbursement for its loss damage or liability from a person who has such a
duty.
There is also the contract of indemnity against liability which is a right to
indemnify that arises on the indemnitor default, regardless of whether the
indemnitee has suffered a loss thus, where the indemnity is against liability, the
cause of action is complete and the indemnitee may recover on the contract as soon
his liability become fixed or established even though he has sustained no actual
loss or damage at the time he seeks to recover.
Under such a contract, a cause of action accrues to the indemnitee on the recovery
of a Judgement against him and he may recover from the indemnitor without proof
of actual payment of the Judgement sum4a
GUARANTEE: It is a collateral agreement to answer for the debt of another in
case that person default. 5 On the other hand, the word guarantee or surety-ship is
one by which one person called the guarantor or surety agreed to be answerable for
the liability of the debtor either personally or by way of a charge on the guarantors’
property or both. 6
4a.
Black’s Law dictionary by Bryan A Gardner Eight Edition page 784
5. Advanced
English
Dictionary
the
ultimate
reference
http://jDictionary.mobile .com
6. Smith v. Wood 1929)1Chap 12 as quoted in the Nigerian Law Secured
Credit by professor. I.O. Smith page 353 paragraph 1
4
The Supreme Court in the case of R.E.A.V Aswani Textile Ltd
7
defined 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.
This definition was also expressed in another form by Gerald Andrew and Richard
Millet in their book “Law of Guarantees” 8 as a contract whereby the surety (or
guarantor) promises the creditor to be responsible in addition to the principal, for
the due performance by the principal of his existing or future obligations.
In the case of WARDENS AND COMMONALTY OF THE MYSTERY V.
NEW HAMSPHERE INSURANCE CO 15 (1991 3 J.I B.F.L. 144) Phillips J.
cited with approval the following definition of a guarantee which is given in
Halbury Laws of England (4th Edition 1993 reissue) at paragraph 10) thus,
“A guarantee is an accessory contract by which the promissor undertakes to
be answerable to the promise for the debt, default or miscarriage of another
person whose primary liability to the promise must exist or be contemplated.”
The implication of the above is that a contract of guarantee presupposes the
existence of another prior contract in form of a loan undertaking which the
principal debtor is primarily liable. The obligation of a guarantor to the principal
creditor is however secondary which will only arise upon the default of the
principal debtor.
_________________________________________________________________
7. (1992) 3 NWLR pt 227 Pg 1 at Pages 3 paragraph G
8. 3rd Edition at page 3 paragraph 2
5
In the case of MOSHI V LEP AIR SERVICE LTD 15 (197 J.A.C 33) Lord
Diplock at page 348-349 referring to the other case of GENERAL PRODUCE
VO. V. UNITED BANK 16 (1997) 2 Lloyd’s Rep 255 refers to two classes of
guarantee which are a promise which will become effective if the debtor fails to
perform his obligations and a promise that the debtor will perform his obligations.
Guarantees, in the form envisage here is to assume a surety-ship obligation or to
agree to answer for a debt. In other words, the contracts of surety-ship fall into two
main categories; contract of guarantee and contracts of indemnity.
There can be corporate guarantee and personal guarantee; it arises where a personal
guarantee for a loan is required in many cases by the lender. A personal guarantee
may be secured by personal assets like the owner’s home equity or it may be
unsecured, based only on the good faith assurance of the borrower. The guarantee
requires the borrower to promise to make goods on the loan even if the business
cannot repay 9
SIMILARITIES BETWEEN GUARANTEE AND INDEMNITY
Guarantees and indemnities have many similar characteristics. In many cases also,
similar duties and rights arises between the parties. This will have effect especially
during the time of seeking to enforce the contract.
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9. http://biz_taxlaw.about.com/od/glossaryp/personalgu
6
DISSIMILARITY BETWEEN GUARANTEE AND INDEMNITY
There are number of dissimilarity between contracts of guarantee and contract of
indemnity and this can be particularly made more feasible when seeking to enforce
the contract.
In the first place, contract of guarantee but not contract of indemnity is prima facie
unenforceable by the creditor if they do not comply with the provision of section 4
of the statute of fraud. In which case, if the agreement creating the guarantee is not
in writing whereas a contract of indemnity made orally can be enforceable if it can
be successfully proved as sufficient to grant a right of claim in favour of the
indemnitee10
In a contract of guarantee there is need for a tripartite agreement which will
include the principal debtor, the promisor and the promisee, that is the principal
creditor. However, in case of indemnity, it suffices to have agreement only
between the creditor/indemnitee and the person giving the indemnity. This much
was so decided in the case of APUGO & SONS CO. LTD V AFRICAN
CONTINENTAL BANK LTD 11
In that case, the appellant was guaranteed an overdraft by the 1st Respondent and
the Federal Ministry of Agriculture undertook to pay to the Bank the proceeds of a
contract with liability for repayment of the entire contract sum in the event of
variation or non compliance arising from the action of the Ministry of Agriculture
without the prior approval of the bank.
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10.contract of 10 guarantee supra at page 2 paragraph 10
11.(1969) 1 CLRQ page 87
7
As to whether this undertaking was a guarantee or an indemnity, the court held that
the Ministry of Agriculture did not assume the secondary liability to answer for
the debt default or miscarriage of the appellant (which will be tantamount to a
guarantee) but rather gave to the Bank the right to look for satisfaction of the total
overdraft sum by the Ministry of Agriculture in the event of Appellant’s default, an
arrangement which is tantamount to an indemnity 12
Both the contract of guarantee and the contract of indemnity as described is
primarily a contractual agreement but which bothers on surety-ship to a third party.
This then means that the creation of both agreements will follow the normal
requirements necessary for the creation of valid contract. These will include offer,
acceptance and consideration. However, with regard to guarantee, it must be in
writing to be enforceable. Under the contract of indemnity, it need not be in
writing but it is better to be in written form than otherwise so that parties can be
easily bound by it and creation of terms of agreement can be better defined and
expressed.
______________________________________________________________
12.Nigerian law of Secure Credit by Professor I.O Smith at page 354
paragraph 2
8
TYPES OF GUARANTEE
There is a variety in the type of guarantees to which parties may contract. There is
the specific guarantee relating to a particular defined obligation of the principal
and to no other obligation. There is the widely drawn guarantee agreement
covering any present and future obligations of the principal debtor to the creditor
whatsoever and howsoever arising. The later one is too wide for comfort. It is our
humble opinion that this can lead to all manners of claim including but not limited
to frivolous ones 13
BIPARTITE AND TRIPARTITE GUARANTEES
The most common form of guarantee agreement is the tripartite one in which the
creditor, the principal debtor and the surety/ guarantor are all parties to the contract
and it also means that all the three parties must have agreed to the creation of the
contract of guarantee, in this case, the guarantor’s liability is secondary. Although,
the creditor is an essential party to a contract of guarantee, it is by no means
unusual for a contract to be made between the guarantor and the creditor alone.
This was the position held in the Supreme Court case of
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13.Contracts of guarantee supra pg 8 paragraph 1:09
9
CHAMI V U.B.A PLC 20 (2010 Vol. 2 MJSC page 11 9 at pages 142-143
paragraphs D-G where ONNOGHEN J.S.C held inter-alia that
“It is settled law that where a person personally guarantor the liability of a
third party by entering into a contract of guarantee or surety-ship a distinct
and separate contract from the principal debtors is hereby created between
the guarantor and the creditor. The contract of guarantees so created can be
enforced against the guarantor directly and independently without the
necessity of joining the principal debtor in the proceeding to enforce”
CONTINUING AND LIMITED GUARANTEE:-
The usual form of a
guarantee is that which has a limited period of application but there are some
which may be for an indefinite time and which will be made to apply to series of
transaction. This can be in form of guarantee for an overdraft facilities afforded by
a Bank to a trading company. However, it is common in the contract of guarantee
to include a provision enabling the guarantor to give a specific period of notice to
the creditor to determine his future liability. Where there is no provision in the
contract of guarantee agreement providing for a limit of liability and at the same
time, did not express the guarantee to be unlimited, the construction of the limit of
time such a guarantee will be implied to carry will be subject to the terms
contained in the agreement.
Also a guarantee may refer to an obligation arising under an identified contract or
to a specific obligation. An example of such a case is an obligation to pay the
purchase price under a particular contract of sale or it may cover liability in respect
of any loss, damage, claims, loss, charges and expenses or any other liability
whatsoever and howsoever arising which the principal may incur to the creditor 14
_________________________________________________________________
14.Law of guarantee--- pg 9 paragraphs 1:1
10
DEMAND GUARANTEE
Specie of guarantee agreement that exist is that in which the liability of the
guarantor /surety does not arise until the creditor makes a demand for same. This
may not however be as simple as it looks because the fact that a creditor can be
paid on demand may not grant express obligation on the guarantor, there may be
instances where the default of the principal debtor must be first shown before the
liability of the guarantor can be said to have arisen. This was the position held in
the case of BACHE & CO (LONDON LTD V. BANQUE VERNESET
COMMERCIALE DEPARIS.15
CONTRACT OF INDEMNITY
Another species of surety-ship agreement commonly entered into as a form of
security for facility is indemnity contract. In its widest sense, it may comprise of an
obligation imposed by operation of law or by contract on one person to make good
a loss suffered by another. This can be so in cases of contract of insurance or
contract of guarantee which are within this broad view. However, the expression
“contract of indemnity” is more often used to denote a contract where the person
giving the indemnity does so by way of security for the performance of an
obligation by another.16
________________________________________________________________
15.1973 2 Lloyds report 437
16.Law of guarantees Pg 10 paragraph 1:13
11
CHARACTERISTIC OF CONTRACT OF INDEMNITY
As stated earlier in a contract of indemnity, the primary liability falls on the surety
and that liability is wholly independent of the liability that may arise as between
the principal and the creditor unless the indemnifier undertakes a joint liability
with the principal. Implicit in such an arrangement is that as between the principal
and the surety, the principal debtor is to be primarily liable. This is necessary in
case the surety has to pay first when he will have a right of recourse against the
principal debtor.
The facts that obligation to indemnify is primary and independent has the effect
that the principle of co-extensiveness and the requirement of section 4 of statute of
fraud 1677 do not apply to contracts of indemnity. Thus an indemnity not only
effectively shift the burden of the principal insolvency onto the surety but also
potentially safe guards the creditor against the possibility that his underlying
transaction with the principal is void or otherwise unenforceable. The cases of
YEOMAN CREDIT V. CATTER 20 (1961) 1 NWLR Pg 828) and
GOULSTON DISCOUNT CO LTD V. CLARK 21 (1967) 2 QB page 493) goes
to confirm this position.
Furthermore, the discharge of the principal or any variation or compromise of the
creditor’s claims against him will not necessarily affect the liability of the surety
under a contract of indemnity; otherwise, the rights and duties of the parties to a
contract of indemnity are generally the same as those of the parties to a contract of
guarantee.
12
PERFORMANCE BONDS
A related term to the above specie of surety-ship is performance guarantee Bond.
Bonds are simple covenants by one person to pay another, either conditionally or
unconditionally. A performance bond also commonly called a performance
guarantee bond is a binding contractual undertaking giving by a person, usually a
Bank, to pay a specified amount of money to unnamed beneficiary on the
occurrence of a certain event, which is usually the non fulfillment of a contractual
obligation undertaken by the principal to the beneficiary.
Performance bonds are not guarantees in the true sense but are a particularly
stringent form of contract of indemnity. They are often drafted in such a way that
the liability to pay will arise on a mere demand by the beneficiary, even if there is
reason to doubt that the primary obligation has been broken. The rights and duties
of the parties to a performance bond will depend on the terms of the contract which
has been agreed between them, and are not subject to the usual equities which
apply to ordinary contracts of guarantee or indemnity.
INVALIDITY OF GUARANTEED DEBT AND THE OBLIGATIONS OF
THE GUARANTOR
A guarantee is generally suppose to be in respect of payment of a certain sum by
the guarantor to the creditor but where the creditor is incapable of receiving the
sum so guaranteed, it may grant the guarantor the right to escape his liability under
the contract of guarantee. However, the contract may be created in such a way that
parties will agreed in favour of the creditor that nothing will vitiate the right of the
creditor from benefiting the sum guaranteed.
13
ADDITIONAL SECURITY
It is possible that a creditor aside from the contract of guarantee may give
additional form of security in place, separate from the contract of guarantee. In this
wise, it is not impossible that a creditor may also secure his exposure to the
principal debtor by way of a mortgage arrangement of the properties of either the
principal debtor or in case of a private company, the properties of its Executive
Director. Where these exist, the usual term of such an agreement will provide
clearly that the existence of such additional security will not operate as a waiver to
the enforcement of the contract of guarantee.
JOINT AND SEVERAL GUARANTORS
In a situation where the contract of guarantee is made between the creditor and
more than one guarantor, then the implication will be read in a different form as
against where it is between guarantors.
In the first place, where there is more than one guarantor and the agreement
provides that the guarantee will survive the death of one of the guarantors then the
guarantee shall be expressed to be joint and several.
A separate agreement by a guarantor to a joint guarantee, wherein his liability is
vitiated or negotiated will automatically vitiate the entire joint guarantee17,
17.Ellesmere Brewery Coy v. Cooper (1986) 1 QB Pg 75
14
where a guarantee agreement envisage that all will sign the guarantee contract and
one refuses to sign, then the guarantee will be held ineffectual against all the other
guarantor. This was the case in the Supreme Court case of ARAB BANK (NIG)
LTD V. DANTATA18 where the court held that failure of one of the guarantors
under a contract of guarantee to sign the contract actually discharged any other.
The decision of the Court must have been informed by the reasoning that the
resolve to become a joint and several guarantor under the contract of guarantee
might have been affected by the identity of the other guarantors, their relationship
to him and their ability to pay any incurred debts so that permitting one of the
guarantors to sign without informing the others would amount to alteration of the
terms of the contract 19
CONTRACTUAL REQUIREMENTS
A contract of guarantee of indemnity govern by the Nigerian law , being a follow
up of the English Law must be formed like any other contract by offer and
acceptance with the intention of creating legal relations and must be supported by
consideration if it is not given under seal. Its terms must also be sufficiently certain
and complete to enable the court give effect to them if not, the guarantee may be
held to be too vague to be enforceable as was decided in the case of WESTHEAD
V. SPROSON 24 (1861) 6 H&N 728 MORRELL V COWAN20
____________________________________________________________
18.1977 NCLR PG 71
19.Nigerian Law of Secured Credit by Professor I. O Smith at page 360
paragraph 2
20.1877 6CTI.D 166
15
OFFFER AND ACCEPTANCE
The determination as to whether there has been an offer and acceptance with
regard to guarantee or indemnity will rely mainly on the construction of the
agreement between the creditor and surety (guarantor/indemnitor).
In the case of M.IVER V RICHARDSON,
21
the defendant gave a letter to the
debtor, A& Co which said
“I understand A & Co have given you an order ------ I can assure you from what
I know of A’S honour and probity, you will be perfectly safe in crediting them to
that amount; indeed I have no objection to guarantee you against any loss from
giving them credit”
The letter was delivered to the Plaintiff creditor by A & Co. Upon default by A &
Co, the Plaintiff now sought to sue the Defendant as guarantor to the transaction
given rise to the claim. The Court held that the wording of the letter did not evince
a clear consent by the Defendant that it should be treated as a guarantee, rather
than as a mere indication that he would be willing to give a guarantee if application
were made to him in future and that there is no notice given to the Defendant by
the Plaintiffs that they were treating the letter as guarantee. To that extent, the
court held that there was neither an offer nor communicated acceptance hence, the
Plaintiffs failed in their claim.
_____________________________________________________________
21.(1813) I.M & S.557
16
However, if upon the words or letter of a surety (guarantee or indemnity), the
creditor acted and which is to his detriment to the knowledge of the surety of
such a detriment, this may be held to be a sufficient communication of the
acceptance of such an offer by the surety. In the case of JAYS V.SALA22 where
the supply of goods by the creditors to the principal in the presence of the surety
was held sufficient to constitute acceptance of a written offer to guarantee payment
for the principal/personal orders. Such reliance on the surety’s promise might also
give rise to the operation of the doctrine of promissory estoppels in an appropriate
situation. 23
Where an offer stipulates express notification of acceptance of an offer or any
other specific mode, failure to comply with that mode of expressing acceptance
will be termed to mean that there is no guarantee.
24
It is necessary that the
agreement creating the indemnity or guarantee specifically states that the mode
specified under the agreement shall be the only mode of acceptance and no more 25
Where there is no express stipulation of the mode of acceptance, conduct
consistent with acceptance may suffice to bind the parties. In this wise, where a
surety in addition to his undertaking to pay made a request to the creditor to adopt
a particular pattern of behavior such as extending credit to the principal, supplying
of goods, or employing someone, his offer may be accepted by the creditor doing
what surety asked him to do 26
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22.(1898) 14 T.L.R, pg 461
23.Law of guarantees(supra) page 14-15, paragraphs 2:02.
24.GUNT V. HILL (1815) 1 STARK PG 10
25.GAUNT V. HILL (SUPRA)
26.JAY LTD V SALA (SUPRA) AT PG 46.
17
In other cases acceptance may be inferred from silence and inactivity on the part of
the creditor. This was the situation in the case POPE V. ANDREW. 27 In that case,
the guarantors asked the creditor’s agent to make a proposal to the creditors that
they should accept a guarantee of the payment of the price of goods delivered to
the debtor by installments. The agent agreed and forwarded the signed guarantee to
the creditors, who kept it for three weeks before returning it. It was held that the
creditors had accepted the guarantor’s offer and were bound by the guarantee. Cole
Bridge J. gave the following instruction to the jury.
“If a person offers a guarantee and more still if he signs a guarantee by which
he makes himself liable and that be sent to the other party, such other party if he
means not to accept the guarantee is bound expressly to dissent within a
reasonable time and if he keeps the guarantee for an unreasonable time, he is
bound to accept it just the same as if he had accented to it by words and if he has
ever accepted it either by word or by act, he cannot afterwards retract.”
In the case of MOZLEY V. TINKLER
28
Where on its true construction, the
guarantee contemplated communication of acceptance by the creditor although the
conduct that will be held tantamount to an acceptance must be in consonance with
the offer made failing which acceptance by conduct may be refused. In the case of
___________________________________________________________
27.(1840) 9 c& p Pg 546
28.(1835) 1 CR.M & R 692
18
GLYN V. HERTEL
29
where “S” offered to guarantee a loan of £5,000 to be
made by C to D who was already indebted to C for a considerable sum for which C
held a promissory note and other security “C” subsequently cancelled the
promissory note and delivered up the security to “D” who then delivered the same
security back again with a fresh promissory note. It was held that this transaction
did not constitute a future loan within the terms of the offer of guarantee and “S”
was not bound. 30
In usual cases the offer to contract on a contract of guarantee or indemnity is
initiated by the surety. Nothing will however, debar the creditor from initiating the
contract but it then means where the contract of indemnity or guarantee originated
from the creditor then there will be no need for the requirement of an acceptance as
will be the case if otherwise.
REVOCATION OF SURETY-SHIP AGREEMENT
It is rare for a surety to want to change his mind as a guarantor or indemnitor to a
transaction but this is not impossible. The right of revocation by a surety will
depend on whether the change of mind is immediately after making the offer and
before same was either accepted or relied upon in which case, as in a normal
contract, an offer can be revoked anytime by the offeror before acceptance or
before the other party has acted on the promise to his detriment.
__________________________________________________________________
29.(1818) 8 TAUNT PG 208 OR 2 MOORE C.P PG 134
30.Law of guarantees pg 16 paragraphs 2:02.
19
Where however, the offeror or surety as the case may be seek to revoke the offer
after it has been accepted, it will be possible if the agreement
creating the
guarantee provides for revocation of the guarantee. This can be in form of a
specific mode of revocation or upon the occurrence of a specified event in which
case, the contract will be revoked if it complies with the mode so specified. The
agreement of parties will largely determine what happen in this case. If the contract
of guarantee is a continuing guarantee and if it is divisible then, the contract can be
revoked by the guarantor upon the end of a division of the subject matter of
guarantee. Where the requisite notice for the revocation was not complied with,
then the court has not hesitated to reject the purported revocation by the surety or
guarantor. This was decided in the case of MAINTIENDRAIPTY LTD V. ANZ
BANKING GROUP LTD. 31
The next thing to look at is where a notice of revocation has been validity given
and during the period of notice whether the guarantee will still be running. It is
usual that a bank guarantee for example will still be running within the period of
the specified notice of revocation and whether the obligation to pay by the
guarantor mature during or after the notice of revocation 32
_________________________________________________________________
31.(1985) 38 SASR PG 70
32.Law of guarantee pay 268 paragraph 8:09
20
There appears to be no direct authority concerning the revocation of the contract of
indemnity. Although, the obligation of the surety under such a contract is a primary
obligation there seems to be no reason in principle why a continuing indemnity
should not be subject to the same rules as a continuing guarantee. A person may
make a standing offer to indemnify a bank in respect of advances made from time
to time to a customer in the same way as he may make a standing offer to act as
guarantor for such advances. It is likely therefore, that the rules considered above
in relation to guarantees will apply equally to contracts of indemnity.
THE SECURITY INCIDENCE OF GUARANTEE AND INDEMNITY
As stated earlier in this paper, it is implicit in the agreement of guarantee and
indemnity which is better referred to as an agreement of surety-ship that it is a
contract agreement between a creditor, the principal debtor and the guarantor or
indemnitor. It is however, a separate contract that exist between the creditor and
the guarantor or indemnitor this much was so held in the cases of NWANKWO V.
ECONOMICAL DEVELOPMENT CO. SOCIETY 2002 1 NWLR Pt 749 Pg
513 at page 535, paragraphs E-G where the Court of Appeal held inter-alia that
“The appellant who promised to answer for the debt and to do so alone, cannot
be heard to complain that any other person was not joined with them. No claim
was made in the writ against any other person. The claim was founded only on
redemption of contract of guarantee freely entered by the Appellants. As the debt
has been duly established and the appellants did not deny the guarantee. I
cannot see how the Amike – Ezzamgbo farms ltd is a necessary party. To the
Appellant’s the company may be a desirable party but in law, it is not a necessary
party whose presence is essential for a due determination of the claim before the
court.”
21
This was also so held in the recent Supreme Court case of KHALED BARAKAT
CHAMI AND UNITED BANK FOR AFRICA PLC 33
The implication of the above is that a contract of indemnity or guarantee is a
separate agreement between the creditor and the guarantor /indemnitor and as
such, it gives security to the creditor to realize his exposure. Where the surety
(guarantor or indemnitor) has fulfilled his obligation under the contract of suretyship to the creditor, he assumes the position of creditor and can enforce his right to
recover whatever he has paid to the main creditor based on his surety to which the
principal debtor is liable.
The surety can also be at liberty to create a separate agreement between himself
and the debtor inform of a separate guarantee or indemnity which will make the
principal debtor liable to the surety arising from whatever claim that may have
been adjudged due to the creditor.
Upon the payment of the sum assured in the guarantee or indemnity fully to the
creditor, the surety is automatically discharge from the obligation arising from the
agreement binding the surety to pay the creditor. Where the principal debtor in line
with the agreement primarily entered into between himself and the creditor has
fully repay the outstanding due to the creditor, it then means to all intent and
purposes, the surety’s obligation to pay the creditor has been discharged.
______________________________________________________________
33.(SUPRA)
22
Where part of the exposure by the creditor to the principal debtor was repaid by the
principal debtor then, it is the balance shown to be outstanding that the surety will
be obligated to pay to the creditor. As to the part repayment made by the principal
debtor to the creditor, the usual stance is that, the surety has been discharge
therefrom.
The topic, guarantee and indemnity as subjects of security posses a lot of issue.
Unarguably, a contract of guarantee properly created is a separate contract and thus
provide a form of security for the realization of the exposure of a creditor aside
from that of the principal debtor liability. A guarantee is usually provided by a
third party who is a direct beneficiary of the loan the subject of the contract of
guarantee.
However, in some cases, a contract of personal guarantee by a Director of a
Company can be created which will make the Director or Directors of a company
that benefited from a loan facility to be personally liable for the repayment of the
indebtedness of the principal where the principal debtors, the company, a separate
entity from the individuals that formed the company, has failed to pay upon due
demand by the creditor.
There are however, some limitations to the usefulness of the contract of guarantee
as a form of security for the realization of a creditor’s exposure to the principal
creditor. In the first place, a contract of guarantee is a normal contract that has to
follow the normal procedure of offer, acceptance and consideration. The failure of
the ingredient for creating a valid contract will vitiate the guarantee. The other
important thing is that, a contract of guarantee must be in writing so as not to
offend the provision of section 4 of the statute of fraud 1677 which specifically
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stipulated that a contract of guarantee must be in writing without which it may be
held invalid.
Where in the case of a personal guarantee, the guarantor dies before the due date of
satisfaction of the guarantee, the possibility of enforcement of same against the
estate of the deceased guarantor is very much in doubt. However, a contract of
guarantee can be duly assigned to another person for realization. Thus where a
creditor who has a guarantee issued by another person in his favour is in need of
facility from another source upon fulfillment of the necessary ingredient of
assignment of choses in action or contract the creditor can assign the realization of
his benefit from the guarantee to another person as security for his intended future
loan from another source.
There is however, the need that such assignment follows the required mode. This
was the case in the recent decision of the court of Appeal in the case of JULIUS
BERGER NIG LTD V.T.R.C LTD.34 In that case, the 1st Appellant’s had issued
two local purchase orders (LPOS)
in favour of the PIT A PAT
INTERNATIONAL NIGERIA LTD (The 2nd Defendant at the High Court)
for the supply of certain products. To enable it meet and satisfy the LPOS. PIT A
PAT COY sought and obtained a loan facility from the Respondent to which
payment for the LPOs due to the company from the 1st Appellant were said to be
assigned. The Respondent then sued on the facility to realize the payment.
________________________________________________________________
34.(2010) 9NWLR PT 1198 PAGE 80 AT PAGES 105-106 paragraphs F-G
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The issue of assignment became the subject of determination by the court and it
was held that upon satisfying the requirement of assignment a debt can be validly
assigned by the creditor to another in satisfaction of his liability to the assignee.
As good as the contract of guarantee may be to serve as security to a facility
granted by a creditor, it has its inherent defects and unattractiveness.
In the first place, the right of the creditor under the doctrine of priority may be
precarious since it is an equitable right that can only be enforced by an action in
Court. The first hurdle is proving the existence of the priority in the Court of law
properly constituted to handle such matters.
The second hurdle is the time within which Judgement can be obtained in view of
the usual delay in hearing court matters in Nigeria today. The third hurdle is that
where the Judgement has been obtained there is the right of Appeal which the
guarantor may exercise and which may delay the creditor from realizing his claim
based on the guarantee.
Most importantly, where the guarantor is liable to another person whose security is
superior to the contract of guarantee like a legal mortgage, the right of the creditor
is subject to the legal mortgage.
If there is any problem within the contract of guarantee that makes it unenforceable
as stated earlier, then the creditor may have lost his right to the realization of his
exposure on the contract of guarantee leaving him at the mercy of the principal
debtor.
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On the contract of indemnity, the position appears to be the same mutatis mutadis
except that a contract of indemnity need not be in writing and that in the case of
Indemnity, the surety is primarily liable to pay the indebtedness without first
ascertaining the inability of the principal debtor to pay on demand.
PROBLEMS AND SOLUTION
The first problem that arises here is that there is no provision for registration of a
contract of guarantee and indemnity. The implication is that, a creditor may not be
aware of the existence of a guaranty or indemnity created earlier from the one he is
seeking to rely on.
The second problem is that, where certain information are not brought to the
knowledge of which would have informed his decision on an exposure which
information which if known later is capable of rendering the guarantee or
indemnity invalid, the creditor is likely to loss his right to claim under such a
contract without any fault of his.
This can be in the form of execution of the contract or any other issue. It is
suggested that as in the case of clearance of cheques by a central body, the Central
Bank, the registration of mortgage for property with proper record at the land’s
registry, guarantees and indemnity should be a subject of collation and registration
to avert the attendant fraud and provide for proper application of the doctrine of
priority
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CONCLUSION
A guarantee is not the same as indemnity. A contract of guarantee is an
undertaking by the promisor to be answerable to the promisee for the debt or
default by another person (the principal debtor) whose primary liability to the
promisee must exist or be contemplated 1 See Hydro-Quest (Nig) Ltd v. B.O.N
(1994) 1 NWLR (Pt 318) 41 at 53. Ejiogu v. N.D.I.C (2001) 3 NWLR Pt 699 at
1. It is an undertaking by the guarantor to the creditor that he will ensure that the
principal debtor perform the principal obligation, in other word, if the debtor fails
to fulfill the principal obligation, the creditor can recover from the guarantor as
damages for breach of guarantee whatever sum the creditor could have received
from the debtor himself. See MOSHI V. LEP Air Services Ltd (1973) AC 331
From the above, it is very clear that guarantee is an accessory, or secondary
obligation which in principle is coterminous with the obligation of the principal
debtor and is enforceable only in the circumstances in which the guaranteed
obligations is enforceable and requires the default of the principal debtor in order
to render the guarantor liable to action.
An indemnity is a contractual agreement in which the indemnitor is primarily
under obligation to the creditor by ensuring that the creditor is paid. The incident
of indemnity in the case of guarantee is that it ensures that the creditor in addition
to personal promise of the debtor secure to his money as agreed particularly in the
event that, the debtor is unable to pay as agreed or promised.
The Contract of indemnity and guarantee are part of the means by which a creditor
can secure his exposure aside from the security provided by the primary debtor.
This however is subject to the fulfillment of the necessary requirement of the law
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and can be determined by the construction of the contract giving rise to the
guarantee/indemnity and whereas this is at the exclusive preserve of judicial
decision as may be decided by the court of law properly constituted to decide the
right of parties under the contract so created.
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