Apr 7, 2018

What to Know Before Signing A Guaranty or Surety Agreement | Zaniath Abiri

A guarantee can be defined in legal parlance, as an undertaking to answer for the payment or performance of another person's debt or obligation in the event of a default by the person primarily responsible for it. It most commonly designates a private transaction by means of which one person, to obtain some trust, confidence or credit for another, engages to be answerable for him. Put in another way, a guarantee is a contract to answer for the payment of some debt, or the performance of some duty by a third person who is primarily liable for that payment or performance.

It is a collateral contract, which does not extinguish the original obligation for payment or performance. Guarantee was judicially defined in the case of Nwankwo v. E.D.S.C.S.C.U.A. (2007) 5 N.W.L.R. (Pt. 1027) 377, S.C., as the assurance that a contract or a legal act, will be carried out. A guarantee clause was also defined in that case, to be a provision in a contract, deed or mortgage, by which one person promises to pay the debt of another.

Parties to a Guarantee Agreement.

There are three (3) parties to a guarantee agreement. That is;

1.            the giver of a guarantee is called the “Surety, "Guarantor" or “Secondary Debtor”. There may be co guarantors to any given guarantee agreement, who are usually liable in varying degrees, depending on their personal contracts.

2.            The person to whom the guarantee is given is the Creditor.

3.            The person whose payment or performance is secured by the guarantor is termed "the Principal Debtor", or simply "the Principal".

However, it is important to note that strictly speaking, the Principal Debtor does not usually acquire any right, or undertake any liability under the contract of guarantee and for this reason, he cannot sue to enforce the terms of the contract of guarantee. This is so, unless the agreement is worded in such a way, as to give the Principal Debtor, any such rights.

Liability of the Guarantor.

Usually, the Creditor is entitled to proceed against the Guarantor, once the Principal Debtor becomes unable to repay the debt or interests thereon. It is at this point, that the liability of the Guarantor, is said to have crystallized.

In the case of F.I.B Plc v. Pegassus Trading Office (GMBH) (2004) 4 N.W.L.R. (Pt. 863) 377, the Supreme Court held that the liability of the Guarantor, could take two (2) forms:

1.            the Guarantor may by his agreement, undertake to discharge the liability, only when the Principal Debtor fails in his obligation to pay, after his default in repaying the loan and/or interests on the loan. In this case, the Guarantor’s liability does not arise, until a demand has been made on the Principal Debtor, who has defaulted.

2.            The Guarantor may by his agreement, make himself the “real” debtor technically referred to as “primary obligor”. Thereby giving the Creditor, the option of asking him for the repayment of monies due to him, without first asking the Principal Debtor. In which case, the Principal Debtor simply drops out, so the Guarantor becomes solely liable.

The latter scenario was held to be the position in the F.I.B Plc v. Pegassus Trading Office’s case and the Appellant (Guarantor) was held liable to the Cross-Appellant (Creditor).

It is important to note that the exact scope/nature of liability undertaken by a Guarantor/Surety under the guarantee depends upon its terms and is not necessarily the same with that of the Principal Debtor. While he may guarantee less than what the Principal Debtor owes, the Guarantor’s obligation cannot exceed that of the Principal Debtor. It is for this reason, that a guarantee agreement which imposes on the Guarantor, a greater liability than that of the Principal Debtor is not invalidated but rather, the amount of the liability will be reduced to the amount owed by the Principal Debtor.

Obviously, the Guarantor is not liable, where the principal debt cannot be enforced, as in the case of illegal contracts. Because the liability of the Guarantor is dependent on that of the Principal Debtor and the wording of his agreement, the Guarantor’s obligation is extinguished if the original obligation fails unless it is worded to be enforceable irrespective of the validity of the underlying contract. Finally on this note, when the Principal Debtor's obligations are extinguished, so is the Guarantor's, in the guarantee agreement.

Does the guarantee terminate with the guarantor’s death?

Because guarantee agreements are most often, personal contracts, the death of the Guarantor, usually brings the contract to an end. This is unless, the guarantee agreement is worded in such a way, as to bind the Guarantor’s estate, after death. In which case, the Guarantor’s estate will be held liable to the Creditor, in the event of the default of the Debtor.

In conclusion, as with every other contractual document, before signing that guarantee agreement, be sure to read, read and re-read its terms and conditions, to fully understand what your obligations are, under the contract. Do not assume you understand all the phrases and clauses. It may appear simple and straight forward enough, but you will be surprised how much obligation you may be taking upon yourself. It will be prudent to obtain professional advice before signing one.

Zeniath Abiri

Managing Partner

Abiri & Mustafa LP

Source – LinkedIn