/

GUARANTORSHIP; ANALYSIS OF THE LAW AND PRACTICE IN UGANDA

BY

KAKONA JOEL TANAZIRABA G

LLB/11517/61/DU

A DISSERTATION SUBMITTED TO THE FACULTY OF LAW IN PARTIAL

FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF

THE BACHELORS DEGREE OF LAWS OF KAMPALA

INTERNATIONAL UNIVERSITY

JULY2010
 TABLE OF CONTENTS
TABLE OF CONTENTS ............................................................................................................. i

DECLARATION ........................................................................................................................ iv

DEDICATION ............................................................................................................................. v

ACKNOWLEDGMENT ............................................................................................................ vi

ABSTRACT .............................................................................................................................. vii

TABLE OF CASES .................................................................................................................... ix

CHAPTER ONE

GENERAL INTRODUCTION

1.1 Introduction ............................................................................................................................ I

1.2 Background to the study ........................................................................................................ I

1.3 Statement ofthe problem ....................................................................................................... 2

1.4 Significance of the study ....................................................................................................... 3

1.5 Objectives of the study .......................................................................................................... 3

1.6 Hypothesis ............................................................................................................................. 4

1.7 Scope of the study .................................................................................................................. -'1

1.8 Synposis ................................................................................................................................. 5

I .9. I Literature review ................................................................................................................. 5

I . I 0 Research methoclo logy ....................................................................................................... I0

1.11 Conclusion ......................................................................................................................... 10

 CHAPTER TWO

THE GENERAL NATURE OF GUARANTEES

2.1 Introduction .......................................................................................................................... II

2.2 Nature of guarantees ............................................................................................................ 11

2.3 Formal legal requirements ................................................................................................... 12

2.4 Guarantees distinguished from other contracts .................................................................... 16

2.5 Types of guarantees ............................................................................................................. 17

2.6 Obligations to the intending guarantor ................................................................................ 20

2. 7 Nature of the guarantors rights ............................................................................................ 24

2.8 Rights of a guarantor ........................................................................................................... 25

2.9 Conclusion ........................................................................................................................... 30

CHAPTER THREE

ANALYSIS OF THE LEGAL REGIME ON GUARANTEES

3.1 lntroduction .......................................................................................................................... 31

3.2 Legal regime ()j' guarantees in uganda ................................................................................. 31

3.3 The liability of guarantors ................................................................................................... 32

3.4 When liability arises ............................................................................................................ 37

3.5 Conditions necessary for guarantor's liability ..................................................................... 39

3.6 Vitiating factors ................................................................................................................... 41

3. 7 Determination of guarantees ................................................................................................ 4 3

II
3.8 Conclusion ........................................................................................................................... 50

CHAPTER FOUR

ENFORCEMENT OF GUARANTEES IN UGANDA

4.1 .1 Introduction ...................................................................................................................... 51

4.2 Enforcement of guarantor's liability .................................................................................... 53

4.3 Enforcement of guarantor's rights ....................................................................................... 54

4.4 Problems of enforcement ..................................................................................................... 56

4.5 Consquences of the problems .............................................................................................. 6:\

CHAPTER FIVE

5.1 Introduction .......................................................................................................................... 65

5.2 Recommendations ................................................................................................................ 65

5.3 Wayforward ........................................................................................................................ 67

5.4 Conclusion ........................................................................................................................... 69

REFERENCES .......................................................................................................................... 70

APPENDIX ................................................................................................................................ 71

QUESTIONNAIRE FOR BANK RESPONDENTS ................................................................. 71

iii
 DECLARATION

L kakona Joel Tanaziraba G, hereby declare that this research work is ori gi nal and has n~ver

been presented in any other institution for academic award.

/lL~ J v.Li <~ CS\ 0

Date .... . .. .-:)............ .. . .... ....... .l.-rr.. ............ .. .

~
S igned ............................ .. ...................... ..

MR MUHAMUD SEW AYA

SU PERVISOR

Date ... ... . J~\~·\ ~Y. ......................

IV
 DEDICATION

This research is dedicated to my mother. Mrs Byawano Joy for tireless and selfless efforts in

guiding me to be what I am and for the great commitment to seeing me complete my education.

Even death would not diminish her hope in me. thanks very much for believing in my academic

accomplishment.

v
 ACKNOWLEDGMENT

First of all I would like to thank the Almighty God for the generous love, good health and

wisdom during my studies, Special thanks to madam Nabirye Jennifer and her husband, my dear

uncle Maena Nimrod for their endless love, care, guidance and inspiration during my studies, not

forgetting my dear brothers, l'vfugoya Derrick Eddy. Ojwang Emma, .Iunny, Herher/. for their

moraL emotional support. love care and encouragement remains a debt to me.

I am greatly indebted to my supervisor .\fr Sell·aya Muhamud for guidance, and commitment to

guide me in writing this research paper despite the hectic schedules.

Sincere appreciation goes to my fiancee Shamim for the love and social guidance she has been

able to give me in the hardest times. Finally to my colleagues, Bowen Joshua, Andrew Drudri.

Timolhy, Suji·ah, Mercy, Diana Mumo Nduku, Pamha Emma for the perseverance. and emotional

support during the uphill task. am truly grateful to them all. 1 was indeed privileged. having

studied with them.

llut most esteemed appreciation goes to I 'i.l'ion(i!r il/i'icu especially Mama Maria, who have

given hope to the unpri,·ilegecl children of Uganda, May God keep blessing her Ministry.

vi
 ABSTRACT

Uuarantorship is a green area of study in Uganda with very little information and familiarity

among the academia. This has been caused by the insufficiency of the legal regime. unscrupulous

desire by the creditors. to keep off the guarantors from precisely making informed decisions. The

fact that guarantees are becoming popular with the expanding banking sector. therefore the

research undertakes to discover solutions to the existing problems in the operation oi" the

guarantorship. This research traverses the current legal regime on guarantees and emphasizes on

the inadequacies and suggests an ideal situation. Guarantorship is an asset to the economic

empowerment ot'the public.

vii
TABLE OF STATUTES

BANK OF UGANDA ACT CAP 51

13ANKRUPTCY ACT CAP 67

CIVIL PROCUDURE ACT CAP 71

CONSTITUTION OF UGANDA I 995

CONTRACT ACT OF UGANDA CAP 73

FRAUDS STATUTE OF ENGLAND 1677 CONTRACT ACT CAP

111
1-IARLSBURY LAWS OF ENGLAND VOL 20.4 ED

INTERNATIONALCI-IAM13ERCOMMERCE·s UNIFORM RULES FOR DEMAND

CiURANTEES 1992

LOANS (GUARANTEE) ACT CAP273

MORTGAGES ACT 2009

MAGISTRATES COURTS ACT CAP 16

viii
 TABLE OF CASES

Aldrich v Cooper 1803 8 Yes 382

Allied Bank International Limited v Winl1·ed K Nalusimba & another (2002- 2004) UCLR 31

Anson v Anson ( 1953) I QB 636

,\ssociated Japanese Bank (International) Ltd v Credit du Nord SA ( 1988) 3 AllER 902. ( 1989)
I WLR 255

Bank oflndia v Trans Continental Commodity Merchants Ltd & Patel (1982) I Lloyds's Rep 506

Bank of Uganda v Banco Arabe Espanol( 1997-2001) UCLR 30

Barclays Bank Pic v O'Brien (1993) 4 All ER 417

Bechervaise v Lewis ( 1872) LR 7 CP 372

lioc Group Pic v Ceteon ( 1999) (Comm) 53

13radford v Gammon ( 1925) Ch 132

Bradford Old Bank v Sutcliffe ( 1918)2 KB 833

China & South Sea bank Ltd v Tan ( 1990) 1 AC 536

Commissioners of State Savings Bank of Victoria v Patrick Inter Marine Acceptance Ltd (in Liq)
(1981) 1 NSWLR 175

Cooper v Evans (I 867) LR 4Eq45

Cooper,. National Pro,incial Bank ltd ( 1946) KB I

Craythrone v Swinburne ( 1807) 14 Vcs 160

Dance v Girdler (1804) I 13os & PNR 34

Egbert v National Crown Bank ( 1918) AC 903

IX
General produce Co v United Bank Ltd ( 1972) 2 Lloyd's Rep 255

Goodwin v Gray (1874) 22 WR 312

Hamilton v Watson ( 1845) 12 Cl & Fin 109

Harvell v Foster (1954) 2 QB 367, (1954) 2 AllER 736 CA

Hole Urban District council v Fidelity and Deposit to company of Maryland I Spencer Deposit
Co of Maryland (1916) I KB 25

Jephson v Hawkins ( 1841) 2 Man & G366

Mackenzie v Royal Bank of Canada ( 1934) AC 468

Mahoney v McManus ( 1'!81) 55 ALIR 673

Mallet v Bateman (1865) LR 1 CP 163 at 171

Moschi v Hep Air Services ( 1973) AC 331

Mutual Finance Ltd v John Welton & Sons Ltd (1937) 2 KB 389. (1937) 2 AllER 657

North Ocean Shipping Co Ltd v 1-lyundai Construction Ltd (1979) QB 705. ( 1978) 3 ALLER
1170

en-lara v Alliecllrish Bank ltd & another ( 1985) BCLC 52

( lttoman Bank \ I( S Mawani & Others ( 1965) EA 464

Perry v National Provincia! Bank of England ( 191 0) 1 Ch 464

Prudential Insurance Co v IRC ( 1904) 2 KB 658

ReA Debtor(l937) I Ch 156

Rehema Nakibuka v Bank of Baroda (2002-2004) UCLR 304

Re Fenton, exp Fenton ( 1931) 1 Ch 85

Re Manson. exp Sharp ( 1844) 3 Mont D& De G 490

X
Re Moss ex parte Hallet ( 1905) 2 KB 307

Re Parent Trust and Finance Co Ltd ( 1936) 3 AllER 443.CA

Simson v Cooke ( 1824) 1Bing 452

Stanbic Bank Uganda limited v Atyaba Agencies limited (2002-2004) UCLR 10.

Surgipharm Ltd v Awuondo & Another (2003) 1 EA 344

Swire v Redman ( 186) 1 QBD 536

Thomas v Nottingham Incorporated Football Club Ltd ( 1976) 596

Tournier v National Provincial Bank Ltd ( 1924) 1 KB 461

Ward v National Bank of New Zealand ( 1883) 8 App Cas 755

Western credit Ltd v Alberrv ( 1964) 2 ALLER 938

Wui!T' Jay (1872) LR 7 Q B 756

Vallabbhai P Patel v Central African Commercial Agency (1959) EA 903

Yeoman Credit Ltd v Latter ( 1961) 2 ALL ER 294

xi
 CHAPTER ONE

GENERAL INTRODUCTION
1.1 INTRODUCTION

Ciuarantorship is not a very new word in legal sense (banking contract mainly). The law relating
to guarantee in Uganda is based on common law of England. The legislation on guarantees is
uncertain for we have no precise law on the subject of matter which calls for the engagement or
legislators. The legal regime in Uganda serves to protect the bank(s) who the guarantee is made
in favor of; unfortunately the guarantors often execute the guarantee without necessarily
knowing the legal efficacy attached to it. Further debtors secure guarantees on fhendship basis.
common to find that principal debtor and guarantor are friends according to their varying degree.
This topped with ignorance of the guarantors presents a serious problem.

l'o the banker. all is concerned '' ith is recovery or the money let out to the debtor. L\·en the
available law grants the bank protection against rights to the guarantor available at common law.

1.2 BACKGROUND TO THE STUDY

The development of guarantees started as the simplest method. whereby a trusted merchant or
bank stood as a guarantor for others less well known to the lender. This method became wieldy
used in international trade generally known as acceptance llnancing. Guaranty"s evolvement was
1
part or the development and evolvement or the banking sector.

Banking began with the linancing of individuals. As merchants expanded their business a need
arose l'or credit. Even in a basically barter system farmers had to be paid promptly. storage was
nccc;;sar\ prior to ship111cnt and \"O) ages ollen took se\"era\ months. Thus was created the first
!i nnnci ng. or what '' t.: no\\ call accounts rt?cei ,·able and inventories. 2

This need for llnances became even more critical as commerce became more specialized.
merchants in grain. olive or cloth learned that they would compete more effectively and that

r William Curram, Banking and Global S)·stem. Woodhead Faulkner Limited 8 market passage Cambridge ( 'BJ 3PF
I !979), 28-29.
:/hid.
profits would be greater than specialization. They would buy and sell in greater volume. in some
cases controlling the market price. they could ship more cheaply and they could become more
expert in their special field. This lessened the dangers of all but natural disasters. Lending
support to this development were the city states first and foremost. these Provided protection but
of equal value to commerce they provided particularly in Italy the important ingredient of
commercial law and a system of money-two bequests !i·om an earlier empire. It then remained
for the banks to supply the third elements- credit. 3

At lirst credit was extended against the deposit of an article of greater value than the debt the
article was returned when the debt was repaid. This soon proved impractical. A method of
mortgaging was developed whereby the article that was security for the loan was not transferred
to the creditor but remained with the debtor who continued to make use of it. Anything short or
these two methods of lending against tangible security required another system. The simplest
method was guaranty; where trusted merchant stood as a guarantor to the less known merchants
4
to the lender.

1.3 STATEMENT OF THE PROBLEM

( iuarantees. just like uther forms of securities ll1r loans has been around and available to the
public lor a long time. Unlortunately the beneficiaries tend to exploit the guarantors. Common
that a guarantor is not aware of the extent of liability carried with the guarantee; cannot imagine
that they may be called upon by the banking institution to make good of their commitment to the
bank. This confusion is created by the principal debtors who do not explain the obligations to the
guarantors; but that is understandable in the sense that if the guarantor is told of every detail may
turn down the request.

To greater dismay. the bankers have no duty to volunteer information to the guarantors or
sureties: they can only answer to queries that are made by the guarantor. This i"urther
disad\"antagcs the guarantors 111 terms ol" knowledge empowerment to act inf()]"]mlllt. The

3
Ibid.
I f/Jid.

2
combinations of factors as will be considered in the research are the main concerns for the little
or no protection to the guarantors in Uganda.

1.4 SIGNIFICANCE OF THE STUDY

The study shall be aimed at focusing on how financial institution. law regulations and policies in
Uganda can be implemented so as to improve on the operation of guarantees: providing adequate
protection to guarantors while at the same time protecting the interest of the lenders-bankers.

It is also intended to explore the levels of awareness of the laws. regulations and policies
g(werning guarantees. The findings '.Yi\1 help provide in information for improvement consistent
progress and achievement of aims and o[Jjectives of institutions and esteemed customers.
Therefore; the study will be vital and timely during this period when the Government of the
Republic of Uganda is working out means of fulfilling prosperity for a11 5 This study will become
a handy tool especially to policy makers. legislators, researchers and guarantee beneficiaries as it
seeks to add and or vary the current knowledge about guarantees in Uganda.

1.5 OBJECTIVES OF THE STUDY

The broad objective of this study is to find out whether existing legislation on guarantees accords
<>ullicicnt protection to the parties in the transaction.

The specific objectives of the study are;-

(a) To analyze the development of the law relating to guarantees/ guarantorship.

(b) To examine the effects of the law on the general operation of guarantorship and liability
borne by the guarantors.

(c) To explore how knowledgeable clients are on the laws policies and regu!Gtions gmwning
guarantees and credit financial services.

: Prospl!riry j(w ufl is the .\'u1hma/ Resi\·Jance Mm·enu:m programnu: imiated hy Presidelll l'owt'ri J.:agwa i\fuse1·eni
imending 10 eradh·afl! jJOI'ertr umong l igunduns, fHJJm:arised in tlu: :3fHJ I presh/em ial cafllfJ"igm.

3
 (d) To critique the way in which banks handle guarantors especially in ensuring repayment
of their loans without caring nbout the rights of guarantors.

(e) To investigate the legal protection of interest of both banking institutions and targeted
clients and guarantors, and

(f) To identify and suggest a more appropriate model of handling guarantorship in Uganda.

1.6 HYPOTHESIS

(a) The legal regime governing guarantorship in Uganda and their enforcement must be
strengthened and revised especially the provisions relating to differential treatment of
parties to the guarantee.

(b) Educating the guarantors on the legal liability to the contracts of guarantee is necessary
to ease tension in their execution and implementation.

(c) Bank of Uganda as the custodian of banking needs to play a more vital role in sensitizing
the public; without which guarantors' exploitation will continue. 6

(d) It is argued that the law. policies and regulations regarding gunrantorship in llgnnda are
insufficient in protecting the interest of guarantors.

1.7 SCOPE OF THE STUDY

The study covers period from 1960s when the banking sector started growing 1n Uganda.
However a lot of greater interest will be drawn to 1980s when banks attracted nttention from
many clients' even rural dwellers. The geographical scope shall be mainly in Kampala where the
greater concentration of banking business is, though rural areas are having micro llnances
situated there to tap the rural savings. The subject scope of this study is the sufliciency of the
protection granted to guarantors/ sureties as a form of loan security or financial accommodation.

r, Art /6], Cons/ itut ion l?{ L'gunda & S'ecl ion .f l}/t he Bank o( L'ganda Acl Cup 51 LaB'S ll C'gundo.

4
1.8 SYNPOSIS
ChajJ!ur one shall giYe the general introduction and background to the study, state the pmblem
being investigated and its scope. The chapter shall also state the purpose of the study, hypotheses
and re\·iew related literature to this study. It will also justify its undetiaking: provide the
theoretical framework of this study discuss the methodology adopted to obtain data !(1J' the stud)
and state as significance.

Chapler two Shall discuss the nature of guarantees generally in light of the formal legal
requirements. This chapter shall also distinguish guarantees from other contracts: obligations
owed to an intending guarantor, and the rights of guarantors. Researcher shall also seek to
establish how the financial institutions handle guarantees. The chapter shall also seek to establish
what has been clone by the institutions (banking) to promote easy operation of guarantees.

( 'hapterlhrer.! The chapter \Yillnnalyze legal regime affecting guarantees. the general guarantor's
liability, conditions that may \'itiate guarantees and further the chapter will consider ho\\ the
guarantee contract can be determined. ( 'lwp!er.fiJUr shall consider the enforcement of guarantees
and the problems associated with the enforcement and any consequences if any accruing from
operation in Uganda and lastly Chapler five will draw conditions and recommendations to the
findings of the study.

1.9.1 LITERATURE REVIEW

l+'illiam Currams '7 book discussed the historical development of guarantees. To him the
guarantees started as the simplest method where a trusted merchant or bank stood as a guarantnr
i'i.Jr others less kno\\'n to the lender. This method became widely used in International trade
generally known as acceptance Jlnancing. Guaranty's evolvement was part of the development
and evolvement of the banking sector.x This book will be important to the research in that ''ill be
relied on in tracing the development of the guarantees until present.

/Vil/iam Cw-ram ahm·e nl.

s !hid.

5
Geoffi·ey Lipscombe in his book 9 discusses guarantee as a legal undertaking by one person the
guarantor to a lender to be responsible for the debt of another-borrower. Guarantees are solemn
undertakings which most guarantors do not really understand: guarantees are not strictly security
because the lender has to assess the credit worthiness of the guarantor and will usually require
the guarantor to charge society in support of his or her guarantee.

Dul'id Cox's · '1" book looks at guarantees as collateral security. He states that guarantee is a
collateral security involving three parties in which the third party. the guarantor agrees to be
liable for the debts of a second party. the bank customer. if he does not pay the lirst party the
bank. However Cox gives no treat to the problems faced by guarantors.

Hanson" discusses one of the important points to consider in choosing a guarantor. the tinancial
suitability of the guarantor proposed by the principal debtor. The book observes that. "No mallet·
how satisfied a banker may be as to the integrity of his customer and suitability ol' the
proposition, he may wish to reinforce his position by taking security ... in some cases the only
available security is the guarantee by a third party. This is perfectly acceptable if the third party
i, nl' sunicient means hut any guarantee law the disacl\'antages that in event of the customers
dcllntlt the bank has to look to the guarantor lor payment if a necessary take proceedings against
him people who give guarantees seldom contemplate the possibility that they may be called upon
to pay.,,

11
Med Kyomanywa 's book discusses guarantee as an engagement to be collaterally answerable
lor the debt. default or miscarriage of another person. There can be no contract ol' guarantee
unless there is a prior contract in existence. The principal debtor is liable on the lirst contract and
the guarantor is only liable on the second contract and the creditor bank is a party to both. /\
guarantee must be evidenced in writing. /\ guarantee must be signed by the guarantor and must
be supported b) a consideration unless under seal. Bank guarantees usually express it as
"aCI'ording banking accommodation or continuing the account or giving time" lor repayment.

Geqffrey Lipscomhe. Banking: The Business: Elementm~v Lending and Securily_fhr Lending, Pillmun puh/isht!r, !"
9

ed ( /990) /56.
fiJ DaridCox, Success in Elements (4Banking. unit 11 (/990) 311.
11
DG Hanson, Service Banking: The All Purpose Bank, Bankers books ltd puh/ished, 3rd ed ( 1987) 76-7-:'.
1
Med Kyamanywa, The East A/Ncan Diploma in Banking, Lending Work Book, Distance Learning; U/8 (1005)
J:
IU

6
Kyamanywa makes a general writing on the subject without necessarily Uganda's position on
guarantees.

Mark Hapgood~ '13 book discusses how guarantees arise. It is argued that a guarantee could arise
even where there is no personal undertaking to be liable but a charge or other security has been
given over a surety's property for another's debt or performance of the obligation.

Grace Parrick Twmrine 's ,f.f book also discusses some instances in which guarantees may be
illegal or ultra vires. which are termed as "special cases·· in guarantees. Just like Kyamanywa.
lumwine makes a general writing on the subject without necessarily Uganda's position on
guarantees.

15
David Cox further discussed about valuation of guarantees. Most guarantees are easy to value
in that the money amount is usually stated on the guarantee form. How much a bank would
actually receive from the guarantee if security was realized is a different matter' The valuation
to be made by the manager is an assessment of the status of the proposed guarantor who must be
considered both able and willing to pay if called upon.

6
FE PenJ/ in his book noted that if the manager has doubts he can all upon the guarantor tu
deposit J'urther securit) in support of guarantee. Once the guarantor has been named the bank
management conlirm by seeing him or writing to him. that he is willing to undertake the
responsibility. The guarantor's bank must be written to for a report on his standing status
enqu1ry.

He "further observed that if reply is satisfactory. the guarantor or will be invited to call at the
branch or another branch more convenient to him to sign the guarantee. His signature must be
witnessed and has to come to the bank so that bank can be certain in that signature is genuine unci
not forged.

11 11
.Hark Hdpgood (j( ·. 1\tgcr \ /.u11· <d'Bunking, lJullerll'Orths. I :/ edn. (2003) 70].
Grace Palrick Tunnrh1e. L~.'>,~l'.\ in .·lji·h·w1 Bank in,r, LaH' and Prac/ ice. Ugundu Lmr JVatch (I 1.)98) -1 J I.
11

15
D{l\·id Cox ahore n/0. 323.
u, FE Pern·; the E/eml.!l1fS (iBunking, Methuen& Co ltd 11'ith lnstiflrle q(hankers. !' 1 ed { /9"'"'5; 31"'.
"Ibid.

7
David Cox 18 further discussed how banks obtain a legal title in a guarantee. The mechanics of
taking a legal guarantee are simple when a person offers himself as a guarantor of an account the
manager usually explains to him that in the event of customers default he will be liable to pay to
the amount of the guarantee. The guarantor then signs the bank's form and if he does not
maintain an account being guaranteed. the bank takes steps to check his financial standing by
making a status enquiry on his bank and branch if the reply is satisfactory the advance is granted
to the customer.

He observed further that the major problem of guarantees is that however hard the bank tried to
e\plain the potential liability. the guarantor never e\pects to be called upon to pay. There can be
serious ill feeling between the guarantor and the bank if this should happen: it may be cliflicult to
persuade him to pay without taking court action some thing that a bank would only undertake as
last resott. 19

The solvency of/he guarantor; unless supported by collateral security a personal guarantee otTers
a less stable form of cover. The position of a surety may change without kno\\ledgc. lt is
extremely difficult to keep in touch with financial position or the guarantor 11"0111 time to time~".
Thus it is been emphasized by lv!ukuh11'il that the banker must ensure that an e!TectiYc agreement
or enforceable contract is executed to cover all contingencies as would give the banker a legal
.
reme dy agmnst t IK' gunrantor.-'I

.\led f.yumuny11·u obsen ed that a banker is entitled to assume that guarantor has made himself
acquainted with the financial position of the customer he intends to guarantee and you arc not
bound voluntarily to make any disclosure regarding the customers. However if any information
is given then the disclosure must be a full and fair on. 22

However when the guarantor asks questions bank must make straight forward replies which are
not capable of being misunderstood. As for right to disclosure. having regard to !he mle of"

18
Dtn·id ('ox. ahm't' 11 I 5

'" !Nd
-'''mcd A'raJnumwa tthm·e n /_', 1:!5.
-'' Uracl.!. i\lulwinm oho\'!! n I ...f. -110.
Med K_vamanyll'a ahove 11 IJ, 126.

8
.\I:'LTecy. if asked for inl'orn1ation by a proposed guarantor. you should arrange a unit meeting of
all parties to discuss the matter or obtain authority in writing of the customer to be guarantee 23

The bank does not suggest name of a prospective guarantor to the borrower for subsequently the
guarantor might contend that thereby the bank had made the principal debtor its agent any
misrepresentations by him might suffice to avoid the guarantee. In the same guide the form of
guarantee is not handed to a principal debtor to enable him to obtain signature of the guarantor.
for if he deceives the guarantor as to the nature of the guarantee. the guarantor could possibly
escape liability so long as he has not been negligent on the plea of "non e.1·1 jitclum" !twl my
deed) .... mistake as to nature ofcontract 24 .

l he guarantor is entitkd to inlcl!'lll himself of any fact which is important in helping him to make
up his mind whether to sign the guarantee or not. However the banker (manager) does not have
to volunteer information. His duty is only to answer truthfully any relevant questions in
2
guarantor may ask; any more might breach the duty of secrecy to his customer. ; After the
guarantee has been signed the surety/ guarantor is entitled to have particulars of his liability at
26
any time but not to have details of or to inspect. The debtors account.

when the guarantor pays off the whole of the debt. he is entitled to claim from bank any security
which has been deposited against the debt not only by the principal debtor but also an\ nthcr
person or body. If the bank has sued the principal debtor. the guarantor would similarly be
entitled to the bcnclit or an) set of or counterclaim or principal debtor may have against the
27
btmk To a' oid this. the usual bank form of guarantee has an indemnity clause and in i[JCt
should be called an indemnity not a guarantee.

-'' Ibid.
;t FE {\'IT\',' uhon.' n/6,3!8.
!.' 1-fw11ilto~1 \'Watson (/8-/5il J Cl & Fin. /09.
·''' FF Per1:r: ahore 11/6. 3/8.
I !Jtd.

9
1.10 RESEARC H METHODOLOGY

The research is based on both qualitat ive and quantitati ve. Th is is intended to enable the
researcher gather information on the subject. The research undertook a defined survey on
guarantees executed and/or executi on by financial institutions especially in Kampala and
neighboring di stricts with a great eco nom ic influence in Uganda.

The researcher carried out a detail ed library research for literature related guarantees in general
and then critically analyzed it to find out how much has been written on the protection or
guarantors. Libraries li ke those of Kampala Internati onal Uni versity. Makerere Univcrsi t) .
In stitute of Bankers' Library and World Bank Library we re of vita l importance throughout the
period of study. At the libraries a consid eration to Law Journals. statutory and case lav\· were o!'
kin interest to the researcher during thi s time or resea rch. Data was gathered through use or
quest ionnaires and open ended questions \\ere preferred to allow gather enough information.

1.1 1 CONCLUSION

After a thorough consideration of the information available about guarantees in Uganda, it is sad
th at much emphasis is given to the cred itors. who are mostly banks. no thing is written about the
chall enges or prob lems faced by the guarantors, thus the most esteemed wish to deliberate on the
subject in the researc h. It is des irable that research is undertaken to fix such lega l insu llicicnc~ .

10
 CHAPTER TWO

THE GENERAL NATURE OF GUARANTEES

2.1 INTRODUCTION

rhis chapter looks at the general nature of guarantees considering at the same time the legal
requirements necessary to establish the guarantee. Also the chapter examines the rights available
to guarantors, their nature and how applicable they are. In the same spirit an attempt is made to
distinguish guarantees from other contracts.

2.2 NATURE OF GUARANTEES

,\ guarantee is a promise to be liable for the debt or failure to perform some other legal
obligation of another. A guarantee obligation is secondary and accessory to the obligation the
perf(mmmce of which is guaranteed. the guarantor undertakes that the principal debtor will
perform his (the principal debtor's) obligation to the creditor and that he (guarantor) will be
liable to the creditor if the principal debtor does not perlorm 28

29
In Moschi v Lep Air Services court held that since the creditor's acceptance of the debtor's
wrongful repudiation of the contract was a right given to the creditors by the law of Contract. the
exercise of that right did not discharge the guarantor from liability under the guarantee nor was it
a material variation of the contract which extinguished the guarantor's liabilit;.

Further the court noted that when creditors accepted the debtor's fundamental breach of the
terms of the contract. including those guaranteed as repudiation of the contract. they were
entitled to sue the guarantor in damages for the total sum guaranteed except in so far as alread)
settled by payment made by the co. and the measure of damages was that net sum.

_'.~Hapgood, Pagels· Law a.{ Banking, Bullerworth Lexi Nexis, It 11 edn. (2001) 70] .
.''' !IY-3! AC 331.

11
2.3 FORMAL LEGAL REQUIREMENTS

Like in the general contract law. guarantees have particular legal requirements which must be
fulfilled so as to bind the guarantor.

311
2.3.1 Writing For a guarantee to be binding it is required that it should be in writing. Sec/ion 3
provides that no action shall be brought where by to charge the defendant upon any special
promise to answer for the debt default or miscarriage of another person unless the agreement
upon which such action shall be brought or some memorandum or note there of shall be in
\Hiting and signed by the party to be charged there with or some other person there un to by him
lawfully authorized.

2.3.2 Consideration
Like all other contracts 31 . a guarantee must be supported with good consideration but failure to
record the consideration in writing will not of itself make the guarantee unenforceable:"
However Perry suggests that the consideration must be reai. 33 Where the consideration 1s
expressed in terms that are ambiguous as to whether it is past future. extrinsic e\ idenec '·1 1s
admissible to shO\\ that it is good consideration.

l"o determine vvhether the consideration gl\'en by the creditor is actual performance or an act
stipulated in the guarantee or his executory promise to do that act will depend on the construction
of the document; in the former case the guarantee will not become binding on the guarantor
unless and until the act is performed. where as in the latter it will be immediately binding 35

However the practice 1s that banks make forms of guarantee containing a statement or the
consideration. thus very difficult to avoid a guarantee on the basis of no consideration 3 ''

11
' Con/rae/ Act C'ap-:3 LIB'S o(Uganda. See Section .f <~f'stallfte q(Fraucb; 1677 <~/"England.
;: Bakihinga, Controcf Lull' in Ugamlo, Founlain Fuhlishers, 1' 1 edn, (200/) .J.
'' S' 3 .\lerl'llJllile Ln1· .·lmendme/11 Act rd"Eng,/und.
u F. F. Jlerrl': Lau· and Fraclicl!, Relaung to Banking; Alethuen, Co Ltd. ./'11 ediNon. 1983 a/ pg 2-:5.
' /Fi_~more on E1·idence.
·'·' HaJ1;JJJod ahm·e n.l8, -o.J.
·'" J lv!ilnes Holden, The Lm1' and Practice (4Banking, Securiliesfbr Banker's Ad\'Cmce, l'ol2. 8'1! ed (/99]) JOJ.
Para 18-4.

12
In Val!ahhhai P Pule! \' ( 'emml Afi'icon C'ommercial Agen(l'J 7the respondent had sued the
appellant on two promissory notes of "·hich the appellant was guarantor. The appellant before
liling a defense applied to the court to have the plaint rejected under O.vii. r.ll. of the Indian
Code of civil procedure. on the ground that it disclosed no cause of action. in that it failed to
plead the consideration for the guarantee. The magistrate accepted this submission and rejected
the plait. The respondent's appeal to the high Colllt was allowed on the ground that, whether or
not it was necessary to plead consideration, the plaint to which the promissory notes themselves
were annexed alleged facts showing consideration. On further appeal the appellant sought to
have the judgment ol'the magistrate restored.

Court held that in an action against the guarantor or a promissory note consideration should be
pleaded or shown in the plaint. That the plaint with the attached promissory notes raised a
presumption ol' consideration. namely a request by the guarantor appellant. suf!icient to disclose
a cause of action against him.

Where a guarantee is executed just before the overdraft is granted, the accommodation is the
consideration (the consideration moves towards the principal debtor) and this is sufficient
support if the bene !It is sought for the guarantor, this is presumably the satisfaction of securing
the principal debtor accommodated 3 R
When the overdraft has already been granted and then guarantee is sought some change in
amount or availability in terms of time should be indicated. otherwise the contract uf guarantee
ma; lttil for lack or consideration."'

I here fore although the consideration need not be stated. it invariably is. a usual form or words
being. "in consideration of the bank opening and/ or containing an account with the principal
debtor" The continuation of the accommodation that is the forbearance of the bank in not
terminating the arrangement and calling for repayment is then sufficient consideration.·10

' I I 959) EA 903.

''F.£ Fern'; ibid n33. 1-5.
,., Ibid -
,.. Ibid.

13
However, to cover future advances both on a current account and by other methods an1ilable to a
bank customer. it is usual to add some form of words as •· ... or otherwise giYing credit
''ccommodation or granting time to the principal debtor. whether alone or jointly with another or
others:'' There alter the bank should be sate on this ground unless the principal debtor is allowed
to open other accounts and pays credit into them which should reduce or terminate the liability
of the guarantor but do not do so because they are held separately. 42

Thus in National Bank of Nigeria Ltd v Oba MS Awolesr'3 a guarantor signed a form of
guarantee in which the form of words was; "in consideration of the bank continuing the existing
account with the principal debtor for as long as granting time to him." The guarantor guaranteed
on demand in writing the due payment of all advances. liabilities. whether made before or alter
the date hereof to or l<.lr the principal" Subsequently the principal debtor opened a number 2
account. These credit balances were all drawn out again before the bank finally called upon the
guarantor and it \\US held by the .ludiciul Commillee o{!he Prh:v Council that the words
"cominuing !he existing uccow1(. suggested that the parties to the contract of guarantee did not
contemplate that a second account should be opened, but to the contrary meant that it was
expected that the original account existing as at the elate of the guarantee should be continued
unbroken, so that all entries should pass through it. The opening of the second account was an
unauthorized departure from the terms of the contract of guarantee. for this permitted the
position of the guarantor to be prejudiced in that it was possible for the principal debtor to make
payments in without pro tanto benefiting the guarantor.

It is easy enough to avoid this difliculty by requiring the guarantor to assume liability i<.lr any
debt on the existing account or on any uther accuunt which may be subsequently opened ur I(Jr
any liability other \\ ise contracted. such as a discounts hills. promissory notes. negotiations
extra·'·'

n Ibid.
'-'Ibid
13
(196-1)1 WLR 1131: (1965)2 L/oyd.1· Rep389.
N F.E Perry, ibid n33. pg176.

14
2.3.3 Agreement
As in the case of any other contract, a valid guarantee requires a sufficient agreement .this
process is reached by otTer and acceptance. The agreement should be capable of legal
enforcement and equally important is the need to establish the legal debt owed by the principal
ckbtor. The original debt is not discharged as between the parties and the debtor is not released
15
from indebtedness by the e:-.:istcnce of the guarantee.'
I he guarantee is a collateral in fact in that it merely strengthens the personal obligation or the
debtor and does not create any interest in the loan so granted in favor of guarantors IYho become
liable as such notwithstanding that there was no consideration for their guarantee.;"

7
Thus in Grindluys Bunk (U) Lid v James Oco/u & or.s·; the High Court of Uganda observed that
under the law of Guarantees. a guarantor for a loan need not have a personal proprietary interest
in the loan granted on his guarantee.

2.3.4 Disclosure of information

.\ contract or sure!) ship is not in the general sense a contract uberrimae tidci (of the utmnst
good litith) wherein mere non disclosure 1vithout limtcl ora materiallnct will automatically make
the contract voiclablc.;s In Hamilton v Watson~ 9 it was observed that if the bank is not asked lor
information. need not volunteer to the surety information as to how the debtors account has been
conducted, whether the debtor is already overdrawn or whether he has been punctual and
honorable in his dealings.

The practice is that a bank is entitled to assume that the guarantor has made himsel r acquainted
with debtor's reputation and financial position. However banks are required to exercise care to
avoid any possible charge or misrepresentation. Where any information is to be given. it must be
full and fair and if the guarantor asks questions banks have to make unequivocal replies 5 "

'' G'race J\4ukuhll'a, Essays in .·Ui·ican Banking Lull', Uganda Lml' 1Yatch ( J998) -1 I 9.
"' ibid
r Civil suit no /07/1/978.
'" TG Reeday, Law Relating to Banking. f' (1985) 31!.
"' (18~5) 12 C! & Fin 109.
;u Reed(z\', ibid n-18, 311.

15
2.4 GUARANTEES DISTINGUISHED FROM OTHER CONTRACTS

2.4.1 Guarantee and indemnity

Contracts of guarantee and contracts of indemnity may perform similar commercial functions in
providing compensation to the creditors for the t~~ilure of a third party to perform his obligations.
However there is a conceptual distinction between a contract of guarantee and a contract of
indemnity in that under a contract of indemnity the indemnifier undertakes an independent
obligation which does not depend up on the existence of any other obligation which does not
depend upon the existence' of any other obligor 51

In Western Credil Lid 1' AiiJei)/ 2 Court of Appeal held the claim failed because the contract
signed by the surety was a guarantee of the due performance by the hirer of the purchase
agreement not a contract of indemnity and as the hirer had duly performed his obligations, the
purchase company. Couldn't recover under the guarantee; more over there was no ·loss' suiTe red
by the hire purchase company, for the company had merely failed to obtain the profit that they
would have derived if the hirer had not elected to terminate the contract this decision was based
on the fact that hire purchase company intended to pursue the surety lor loss or pro tit incurred b)
the hirer electing to terminate the hiring before the end of the hiring period.

;\ contract or indemnity is a contract by one party to keep the other harmless against loss but a
contact of guarantee is a contract to answer lor the debt default or miscarriage of another 11 ho is
to be primarily liable to the promise per Holroyd Pearce L.J in Yeoman ( 'reclil Lid\' Luller.; 3

The contracts of indemnity have the following characteristics;-

!) There is need to be only two parties interested; the person giving the indemnity and th~

person to whom it is given.

2) The person giving the indemnity is primarily liable rather than secondarily liable th~

indemnifier is liable to pay ultimately the amount suffered by the creditor.

J) The person gi1·ing the indemnity usually has some interest in the transaction apart li·llm
his indemnit).' 1

'I 1-/a/.r.,·hlll:l' La\1's r!/Enp,lanJ -!'" ed;,ion Rl!issul! l'o/ JO Para 109.
,_, i/96-1)2 ALL £1? VJS.
·'-' (/96/J 2 ALLER 29-1 at296.

16
Whether a contract is one of guarantee or indemnity is a question of construction the fact that the
parties have their a agreement as an indemnity or as a guarantee may provide some guide
especially if the expression is used in the heading or repeated a number of times in the body of
the agreement. 5 5 In Yeoman v Latter56 consideration was given to the style and adopted in wring
the agreement and also the terms there in to find that the agreement was one of indemnity.

2.4.2 Contract of insurance

The insurer under a contact of insurance agrees 111 consideration of the payment to him of a
premium to pay a specillcd sum to the insured up on the happening of a specified event per
57
( 'hunnel J in Prudential Insurance Co " /RC : where that event is a default by the debtor or
obligor. the contract bears a striking resemblance to a guarantee.

However, there are distinctions between the nature of the two types of contracts and between the
obligations which they create. Insurer like under indemnity under takes a principal rather a
secondary obligation to the creditor. An insurer's liability is not a third person's liability whereas
a contract can not be a guarantee unless it is ancillary to be primarily obligation of another
person to which the guarantee liability is sccondary 5 R

2.5 TYPES OF GUARANTEES

a) Specific guarantees: These covers one isolated debt only, and can t) pically be taken as
security for a personal loan. Banks rarely take this form of guarantee because or its inllexibilit)
5 1
for it will not cover any other borrowing or liabilities that the customer owes to the bank '

Further, if the exact terms of the guarantee are not met, then the guarantee will be ineJTective
example a guarantee of £500 has been taken as security for a loan or £500 agreed by the bank to

7111
.i-IR.B Vermeesch and KE Un((f!,ren. Business Lmt· c?fAustria. Bul!erll'orth 's. ed (199]) 950.
" Hupguod. ?agr!t.\ · /.u11· 1!! Bunking . ihid n }8
''' !hid n 53.
i/90~! l KB 658 u1 MJ.
!-lof1guud' /\i,l!.t'/.\ r(m ~~;/Junf..lll,!!,. thid n5-!.
·' FF /)o\'le F.!' & fl ( /errurd flenonul ( 'o/!1'.\'t' fur Ot~nk.t•n: Practice (dBunking /, ,)'ecurities j()J· :ldi'UIIl'l'S \'of]
rel'tsed edt lion, Aurt/111 ick hth!Jsha.~ ( /1)8-:J {l!ssun 16-J.

17
enable the customer to buy a car. As a result of a discount that he negotiates. he only needs to
botTO\\ £400. In these circumstances. the specific guarantee would be ineffective. even though
the amount advanced is less than amount of the guarantee 60

b) Continuing and limited in amount guarantees: In practice, this is the most common type of
guarantee, for it secures any bank account or liability that the principal debtor owes the bank. It
will be drawn up to cover all monies now or hereafter owing by the principal debtor either alone
or jointly in respect of any account or liability subject to a limitation of say £5.000. Such a
guarantee liability covers any indebtedness or liability (such as a joint or partnership account)
and will even pick up cmy liability he owes to the bank as surely such as where he had
61
guaranteed the account or another person or company.

c) Continuing and unlimited in amount: This type of guarantee will include a clause similar to
that of continuing and limited guarantee but that part of the all monies clause which states
-- ...... subject to a limitation of.." Will have a horizontal line drawn through it and the guarantor's
signatures) placed by the deletion as confirmation. This, in effect means that bank can recm·cr
62
any amount from the guarantors) which the debtor owes to the bank

In Surgipharm Ltd ,. ,/1\'llom/o & Another. "3 the plaintiff brought an application seeking
summary judgment or alternatively striking out or the defense filed by the defendant of the
judgment on the ground that the defenses were scandalous. fl·ivolous and vexatious. The
plaintiffs claim was for goods supplied on credit to a third party and guaranteed by the
defendant. The application turned largely on the effect of a guarantee. There was a limit of Ksh
75000 in the initial application although from the subsequent dealings between the parties. higher
amounts than the Ksh75000 were contemplated as appeared from the accounts. The guarantee
itself was unlimited in amount and of a continuing nature. There was no stipulation in the

1 11
; !hid
/hid
'' """.
•·' /]0(}3Jt !:.·/ 3././

18
guarantee for notice of default or demand upon default by the guarantor. A second unsigned
guarantee was also exhibited whose purpose was intended to cover further forbearance including
_,uit c1r intended "inding up.

The ckkndants were challenging the applicatiun on the grounds that there was a limitation of
credit in the application facility. that a demand letter was not issued or sent to them. and that the
second unsigned guarantee discharged the previous guarantee. Court held that if a guarantee is
unlimited, the limitation of credit in the application facility is irrelevant to the guarantee. The:
limitation of credit of the facility as per the application was wiped away by the terms of the
unlimited guarantee. It was not necessary to send out a demand lener since the guarantee was not
a demand guarantee and the debtor was immediately liable to the full extent of his obligation
with out being entitled to require notice of default. The second unsigned guarantee did not in ht\\
discharge the previous admitted and signed guarantee because it was extrinsic to it and \\US

d~..·;.lling \\'ith a ~.JilTcrcnt situation. H did not reYoke or a!ter the previous guarantee in any \\a).

dl Demand guaral!tccs and ped"ormam:e bonds

Arl ]{a) of rhe ICC"., Unijimn Rulesji>r Demand Guw·cm/ee.\· 6·1 defines a deilland guara!1<ce 8,

any guarantee bond or other payment undertaking, however named or described by a bank.
insuranc<: company nr other body or person given in writing for the payment or money on
presentation in con!(HTtlity with the terms ol· the undertaking of a written demand l(w paynv:nt
and such other documents for example a cntiiicmc hy an architect or engineer. a _judgntcnt •li"

arbitral award) as may be specified in the guar,Jntec.

There ts alwavs a principaL guarantor and a bcneliciary. where the bcnelkiary und the pnncipal
(dcbuH·) nrc rv"lid~!H in different jurisdiction:-.. tile guacantor will usu:1lly be ~1 bank in
hcndiciary·s c\.Juntry £illd then; is nn interposition betwe'.!n th\.~ principal nnd guarantor a hank in
the principal"s country.'' 5

1
" lnu:.-nu/ iuu·:71 ( ftlimhcl' f!/ ( 'r;Jnlllt.!l (.e. Puh/iculion -J.5a. puhl islu:d in Ot·,'oher I IJY }, iJliO!t.!tlj!·um Pa'l,c'l \ L:1n , Jj
U~tnkin,'J.· I ]' 11 r.:d al 7Jf.J .
.,,; 1hid
The bank is an instructing party and relations between the guarantor and instructing party arc
usually governed by a counter guarantee under which the instructing party gives an undertaking
to the guarantor in the same terms as the guarantor"s undertaking to the beneficiary. 6 ''

Performance bonds an: a form of demand guarantee: they tend to be used where the underlying
obligation is not the payment of money but the performance of other obligation such as those
. . un dera bu1'Jd'mg contract. ~
ansmg

2.6 OBLIGATIONS TO THE INTENDING GUARANTOR

A contract of guarantee is not a contract uberrimae fidei (of utmost good faith) but there are
parallels between it and a contract of life assurance. The difference is that neither the borrmYing
customer nor the bank is under any duty to disclose material facts to the prospective guarantor
which might affect his decision whether or not to enter into the security""

The duty of secrecy to the customers has meant that bank can not discuss the affairs concerning
the customers account without prior consent. The practice is that where a guarantor inquires
about certain facts. the banker organizes an interview with the intending guarantor and the
customer; the customer has to indicate non objection to his or her affairs being discussed
69
openly

The bank has no responsibility to give or volunteer any information concerning the customers
account, either a sit stands at the present, or in the past. However the guarantor must not be
misled, for if he is then the guarantee will be voidable at his option, and the bank could lind itsel!'
. to pay. 7"
unsecure d 1. f"Il ca II ed upon I11m

\\hen the bank obtains authority ll·mn the client/ customer to disclose, it must answer any
question accurately, and iL in any discussions or correspondence. it becomes apparent that
intending guarantor is under a misapprehension, then he/she must be corrected. If the bank does

r.r. Art 2 (c) (URDG). n62.

,. Ibid.
M'.J.E Kelly, Practice ofbanking /,Pitman Pubt;sher, 211" edilion (1987), p-12-1.
(o') /bid.

., ibid

20
not have its customer"s authority to disclose, and it becomes apparent that the guarantor might be
misled, then naturally before bank takes matters further it will approach its customer so that there
is no breach of secrecy. 71

71
ln Cooper v National Provincial Bank ltd the aspect of guarantee security was discussed: Mr
Cooper gave two guarantees to the bank, but claimed later that he was not liable on those
documents to him. when the guarantees were signed, that the customer's husband was an
undischarged bankrupt and was signing as an agent on the customers account. Cooper also
sought to avoid liability by saying that the bank's accounts has been operated unsatisfactorily in
the past. as cheques had been drawn when there were no covering monies and these had
subsequent!; been slopped by the drawer. The court did not accept these defenses and held that
there was no obligation on the part of the bank to disclose information about the customer"s
account and the guarantees were good security.

There is not even any obligation to explain the maximum liability under the guarantee or it terms
and effects if the prospective guarantor is a stranger to the bank. ln 0 '!-laru "Allied Irish Bunk
ltd & another, 73 Harman J rejected an application for leave to amend a draft defense to plead that
the bank owed a duty of care since to explain the guarantee to the prospective guarantor on the
~rounds that no such dutv could exist if the latter was not a customer of the bank. Although
11 here he or she is customer the position may be diiTerent. Lloyd> Bank,. /Jwulr-'in this case the
guarantor an elderly farmer had been a customer of the bank for many years, his son formed a
company which banked at the same bank branch, the guarantor went to discuss giving a
guarantee to secure the company over draft, the guarantor relied solely on the advice of the bank
manager to advice him about the over draft and said he always trusted the bank manager and
simply sat back and did as was told. Court held that the bank owed a duty to ensure that the
guarantor formed an independent and informed judgment. Since the bank had not clone so the
guarantee and legal charge were set aside for undue influence.

!hid
· 1/9~0) KB I
·. ! /9,\'5! IJCLC 5:'.
'! !9-5! !JB J:'li

21
It is important to note that a stranger guarantor would only be able to escape liability if material
factors had been misrepresented to him by the bank either in the course of negotiations directly
or possibly by the bank acquiescing silently to something said or written which clearly showed
that the guarantor was under a misunderstanding. The misrepresentation might be innocent or
t!·audulent.

Mackenzie v Royal Bank o{ Canadc/5concerned an appeal tl·om the decision of the PrirJ'
Council. Mrs Mackenzie succeeded in avoiding liability on a guarantee given to the bank
because when she had executed the guarantee document at the bank it had in advertently been
misrepresented that the transaction was away in which she would obtain the return of certain
,hares "hich she had lodged as security. Lord f11kin commented "A contract of guarantee like
an) other contract is liable to be m·oided if induced by material misrepresentation of an existing
fact even if made innocently ...

A guarantee may also be rendered voidable by undue influence or duress. Undue in1luence exists
where the party taking an obligation is unable to exercise his or her own free will. This may arise
because of the relationship in which he stands with the other parties particularly the principal
debtor 76

Undue influence is presumed to exist where there is a close association such as that between a
patient and his doctor or between a priest and a member of his church. It can be particularly
rcleYant where a wife is asked to guarantee a husband's account or that of a business in which he
is im·oln~d. although here much'' ill depend upon whether the wife is a business woman hcrsdi'.

lt would be risky for the bank to give the security document to the customer for him or her to
arrange for it to be executed by a guarantor with who he or she stood in a judiciary relationship.
A bank should always therefore deal directly with the party giving the guarantee or third party
charge or that party's own solicitor. 77

.• i/93~! AC ~68.
. , .J.L f...r.:/1.1. thul nM·; ut -I_1{J.
!hid

22
To ensure that guarantor can not later avoid liability if he or she is called upon to pays a bank
will insist upon intending guarantor taking independent advice from his or her own solicitor. and
usually an endorsement \\ill be made upon the guarantee document signed by the solicitor, to the
effect that he has explained the meaning of document and implications of the liability to the
guarantor, who has understood. 7H

It should be observed that the choice as to which solicitor to use lies entirely with the intending
guarantor, and while banks frequently have local firms of solicitors who act for them. if the
intending guarantor asks for solicitor to be chosen, dependant upon the circumstances. it might
not be wise to direct them to a firm which regularly acts for the bank. If the intending guarantor
has his or her own solicitor then they are the ones which bank would expect to use. 79

In addition. where there is active relationship between the borrower and guarantor it is possible
that in certain circumstances/ instances a special relationship could exist also or alternatively.
between the prospective guarantor and the banker. This can arise where the intending guarantor
is also a customer of the bank and relies entirely or mainly on the bank for advice in llnancial
matters. In such situations it is advisable to have independent advice.

0
In Lloyd1· Bank v Buncl/ court noted that there was relationship of trust and conlldence between
the guarantor and his bank manager and noted that while it was not wholly material to their
decisions, the fact that the father was in account as customer in his own right was not irrelc\ ant
to their decision.

It \\as held that there had been conllict oC interest on the part of bank and that in light or the
overall circumstances there had been undue inlluence, thus rendering the securities voidable at
the surety's option.

'!btd
-,Ibid
·"' i/9"5! QB 3:'6.

23
2.7 NATURE OF THE GUARANTORS RIGHTS

The rights of the guarantor in general are creatures of equity. Equity protects the guarantor by
providing him in certain circumstances with a defense in whole or part to the guarantee. Equity
c·nnlcrs upon the guarcmtor certain rights and imposes up on the creditor certain duties. 1-!owe\'er.
it does not prcn-ide the guarantor with an independent cause of action against the creditor for
damage for infringement of the rights or breach of the duties thereby conferred. Moreover. the
existence of these equitable rights and duties is inconsistent with the existence between the
creditor and guarantor of a general duty of care actionable in the cost of negligence .X 1

Nevertheless these equitable principles only supplement and do not replace the contractual rights
which the guarantor would in any event have at law. By virtue of having assumed liability under
the guarantee, the creditor has to respect the equitable rights conferred to the guarantor othem ise
the surety may be discharged 8 '

In Anson ,. An.m;l3 !'eurson J commented about the contractual nature of the rights of the
guarantors as foil ems. "The intention of the parties normally is that the principal debtor 11 ill
remain the principal debtor; it is his or her debt and his or her obligation and he or she is
expected to pay it. If the surety is called to upon to pay and does pay, that for the time being
defeats the intention of the parties that the principal debtor shall and remain the principal debtor.
In order to put that position right. and to restore it to the position intended by the two of them in
their original contractual intention. it is necessary that the right of reimbursement should be read
in the contract. The essence of the matter is that the principal debt is the primary obligation of
the principal debtor. while the liability of the surety is only secondary liability. and it is the
intention as between the surety and the principal debtor that the position of should be preserved.
I hat is the explanation on the contractual lines of the implied term which confers the right of
rei mbursemen l. ··

\I Horlsburvs, abm·e n51. Para305 .19-1-195.

\'' (JerohliJ;e Andre11'.~· & Richard k!illel, Law (l{Uuara/1lees, London S1rel!l & Aia.nre/1, 3rd ed {2000) 351.
'' (/953! I QB 636 ar 6-11-M2.

24
2.8 RIGHTS OF A GUARANTOR

A guarantor enjoys many rights if he does not expressly waive them. These rights will be
considered under three headings;-
( I) Those rights against the creditor.
(2) Those rights against the principle debtor. and
( 3 ). those rights against co-sureties. if any.
However the common practice is that the bank forms of guarantee strip a guarantor of virtually
84
all those rights which the law would otherwise confer upon him

2.8.1 Guarantor's rights as against the creditor

A guarantor is entitled at anytime during the currency of the guarantee to call upon the creditor
to inform him/ her of the amount for which he is liable under the terms of his guarantee. A
banker who is asked to supply this information has to exercise his care because the relationship
between himself and the customer is conlidential in nature.
35
In Tournier v Na!iona! Provincial Bank L!d court observed an implied term in contract bet\\een
the banker and his customer that the banker will not divulge to third persons without consent or
the customer information about the customer"s account except under the allowed circumstances
like the compulsion by the law.

An act of the bank supplying the guarantors with the customer's account would be a breach or
the duty of confidence and information is limited to customer's present liability.

2.8.1.2 The right to call upon the debtor to pay the amount
The guarantor has a right to have the debt paid by the principle debtor. Bei'ore the surety has
been called upon to perform the guaranteed obligation but after that obligation has accrued. it is
said that the surct\· has the right to compel the creditor him or herself to press the principal lor
the perlormance o!' the obligations" In the past. a demand by the creditor was precedent to the

·'-1 .J Milnes Holden ahove n36. 205.

'
5
(/9NJ I KB ~61.
M, Har/slnn)'s. ahove n5/, Para 21 I.

25
guarantor's liability; the guarantor would have no right against the principal debtor before a
87
demand was made

In Bradford v Gammon 88 it was observed that an ordinary covenant contained in the agreement
to indemnify the estate of the deceased partner did not entitle the plaintiff to insist upon the
immediate payment of debts for which no demand had been made. That the obligation to make
good the indemnity by payment \\as the right to enforce covenant arose vvhen the demand
pavment was made and not before.
89
lllmever in Ihoma.1 ,. :\"ouingham lncorpomted Football ( "/ub Ltd, Goff" ..! held that after the
guarantor had given notice to the creditor of the determination of the guarantee. he was entitled
to call up on the principal debtor to pay, even though the guarantor was only liable on demand
and no demand had been made. He further said that it would be strange if the guarantor couldn "t
seek to remove the cloud until it had started to rain.

2.8.1.3 Right to set off

Where the guarantor is sued by the creditor for payment of the debt guaranteed. he may av·ail
himself of any set oiT arising out of the same transaction as the debt guaranteed which the
principle debtor possess against the creditors.'' 0 In Bechervaise v Lewi/ 1 the surety who had
_joined in a promissory note given by the principal as the consideration for the assignment to him
of certain debts was permitted to setol"l" against a demand on the note certain of the debts which
had been collected by the creditor but not yet paid over to the principal.
92
Geraldine Andrews noted that the right of set off does not operate as a defense against the
guarantor's own liability but under the guarantee since there is no assignment of the benelit ol"
the principal's cross claim; the surety is not in the position of assignee. What in fact the surety
has is an equitable right to be exonerated from liability under the guarantee to the extent of that
the principal has a defense to the creditor's claim ansmg out of cross demands bet\\"ecn
themselves.

' J \/iln~-\ ,tl~ol'<' n3fi. ~fJ(, l\!1'<1 f.\'- I::

~' t/9:!5; Ch 13:!.
"r/(J-{iJ Ch 596
'm Bechcrruise \' Li!H'i.\ (I 8...,:!) LR . . , CP 3 -::. A/so Boc (}roup Pic 1· ('em eon ( 1999) I ALL ER (( 'omm) 53.
'J/ !hid

.,, Ibid nore 8 I ar p360.

26
2.8. 1.4 Right of subi'Ogation
A guarantor who has performed the obligations of the principal which are subject of the
guarantee is entitled to stand in the shoes of the creditor and to enjoy all rights that accrued to the
creditor against the debtor 93 The guarantor is entitled to the benefit of the creditor's remedies
the moment he pays the debt. Thus where he offers to pay debt on condition that those remedies
are made over to him, but the creditor refuses he is entitled to pay the money into court and bring
an action for an assignment of the remedies.

Sir Samuel Romi!ly in Craylhrone v Swinlmme 91 commented that a surety will be entitled to
every remedy, which the creditor has against the principal debtor; to enforce every security and
all means of payment: to stand in the same place of the creditor: not only through the medium of
the contract, but even by means of securities. entered into without the knowledge ol' the surety:
having a right to have those securities transferred to him; though there was no stipulation for
that, and avail him or herself of all those securities against the debtor. This right of a surety also
stands, not upon contract but upon natural justice; the same principle, upon which one surety 1s
entitled to contribution fi·om another."

This right is exercisable to the extent of the debt owed to the creditor; a surety for part of a
principal debt is subrogated to the same rights that the creditor has in respect of that part. and is
entitled. on payment ,,r that part. to share pm lunlo in any security \\"hich is gi\cn the creditor
l1<1lds 1\>r the entircty of the dcbt. 9 ;

2.8.1.5 Right to securities deposited with the creditor After paying off the debt, the guarantor
becomes entitled to the securities which have been given for the debt by the principal debtor to
the creditor. This right is based on the obligation imposed on the principal debtor of
indemnifying the guarantors. which makes it inequitable for the creditor to throw the whole
liability on the surety by electing not to avail him or her of the securities for the guaranteed
clebt. 96

.,, !hid (If 37-1.

1I ,\lr; U I e.1 I 1>11.
15
' Good11'i11 r Grr~l'( /8'7-f) J] fiR 31 J. See Geraldine. ihid n 81 at 3 7 9.
"Aldrich v Cooper ( /803; 8 l'e.~ 381. 5)ee Ali!ne.\. ahm·e n36. Para 18- 16. p206.

27
This Right extends to all securities which the creditor has received from the principal debtor
before or after the creation of the surety ship. Whether or not the guarantor knew of the securities
97
is irrelevant to the claim. In China & Soulh Sea Bank Lid v Tcm Lord Temple man observed
that "as a surety, on payment of the debt, is entitled to all securities of the creditor. Whether he/
she is aware of their existence or not, even though they were after the contract of suretyship. if
the creditor who has had or ought to have had them in his full possession or power loses them or
permits them into possession of the debtor or does not make them effectual by giving proper
notice, the surety to the extent of such security will be discharged.

2.8.1.6 The right to recover the securities deposited (by the guarantor) with creditor
When the debt has been settled by either the guarantor or debtor himself. the guarantor 1s
entitled to have his or her security returned by the creditors.

2.8.2 Guarantor's •·ights as against the principal debtor

Right to indemnity
Apart from any express contract between the principal debtor and the guarantor if the guarantor
gives the guarantee at the express or implied request of the principal debtor, there arises at the
time when the guarantee is given an applied undertaking by the principal debtor to indemnity the
guarantor in respect of any sums the latter pays under the guarantee. 98 In ReA Dehlor'1'1Green Lf
observed that in most circumstances an implied request by the principal debtor will be rcmlil)
assumed. In Pagel's !all' of' banking it is observed that upon payment of sums clue under the
guarantee. the guarantor is normally entitled to reimbursement on the alternatives basis that he
has been eompellcd b) Ia~\ to pa) or being so compellable to pay has paid money which the
. . I cl e b tor was pnman
prmc1pa . 'I y I'Ja bl e to pay. IOU

,,. (1989) 3 ALLER 839, sn.

ys Mark Hapgood. above n28, 706.

')'' (1937) I Ch /56 ot/63.

1 11
" /hid nl.)8

28
2.8.3 Guarantor's rights against co-guarantors
Where two or more persons guarantee the same debt whether jointly or severally or jointly and
severally, they are co sureties. The law of restitution permits co obliges such as co insurers, co
trustees. co conLructors to recover contributions from each other should one of them be required
by the creditor to pay more than their due share of s common obligation for which they are all
101
liable.
Where there is more than one surety for an obligation and one has paid more than his/ her share
of the common liability he/ she is entitled to recover the excess as contribution from his co-
guarantors since as between themselves the liabilities of the guarantors ought in equity to be
equal. 102 The rationale for the equitable right of contribution is that the creditor should not be
103
permitted to throw the whole burden of the debt on one of the guarantors.

However where there are limits on the liabilities of the guarantors under one or more of the
guarantees the due shares of the guarantors are proportional to their respective liabilities. if one
of the sureties is insolvent then the shares oi'the burden that the other sureties must bear increase
in proportion to their respective liabilities.

The right of contribution arises against other guarantors of the same obligation whether they are
liable under the same or separate instruments. In Commissioners ol The Slale Saving Bank of'
l'ic/oria v Palrick lnlermarine Acceplances Lid (in !iq/ 1N it was observed that sureties are not
only entitled to a contribution from each other for money paid in discharge of their point they are
also entitled to the benefit of any security taken by one of them from the debtors in respect or
such liability.

According to Gihhs ('./in Mahoney v MC Manu.\.1 115 ·'it should be remembered that the doctrine
or contribution is based on the principle of natural justice that if several persons hm·e a common
obligation, they should as between themselves contribute proportionately in satisfaction or thaL

1111
Geraldine Andreli'S & Richard J\:lillet, ibid n 81, at 391.
Jte Stimpson v Smith (I 999) 2 ALL ER 833; Payment must have been made by the guarani or claiming contribution
pursuant to same legal obligation.
103
Geraldine Andrell's & Richard A4iflet, ibid nl 00.
"" (1981) I NSWLR 175.
15
" (1981) 55 AL JR 673 al 676.

29
obligation. The operation of such a principle should not be defeated by too technical an approach
to the question whether a surety has paid the creditor. when he has supplied moneys to the
principle debtor for the purpose of making such payment."

2.9 CONCLUSION

Much as the guarantors or sureties are availed rights at equity and common law and by the
contract. the practice is that many bank guarantee forms are drafted in a way to elude many of
these rights leaving guarantors in somewhat a hopeless situation. The banks knowing that defects
of guarantees as security often centre around; legal complications of the guarantee form and the
rights of the guarantor and the guarantor"s financial ability to honor his or her as and when called
upon to do so, banks exercise utmost care to protect the bank while cutting down on the rights ol·
the guarantor. Even so, the tricky situations that may unexpectedly arise are handled carefully
and correctly by the bank by not suggesting. suitable guarantors. avoiding misrepresenting or
even waiving terms of the guarantee; knowing that any material variation may bring the
~udr<.ullcc lo an end.

30
 CHAPTER THREE

ANALYSIS OF THE LEGAL REGIME ON GUARANTEES

3.1 INTRODUCTION

In this chapter the research seeks to consider the legal regime governing guarantees. the liability
of the guarantors and any conditionalities connected there with. For the law presently applicable
does not precisely special conditions in fact it is silent on many issues that affect guarantorship
thus homage is paid to the Common law.

3.2 LEGAL REGIME OF GUARANTEES IN UGANDA

There is no concise law on guarantees however when dealing with a matter concerning the
guarantees, courts make reference to the following laws.

106
S 3 o/"lhe Con/rae/ Acr which provides a single requirement of guarantees. The section is to
the effect that no suit is maintainable on certain guarantees or representations unless they are in
writing and signed by that party chargeable. An important tribute of this Act is that it allo11s the
1117
application of the English Con/rae/ Ac/. This is somewhat good contribution in that Court can
look out to the progressive English law to till the loopholes in the Ugandan law.

1118
Surety is defined in the :\tor/gages ACI 2009 as a person who offers security in the form of
money or money's \\orth to ensure the payment of any monies secured by a mortgage and
includes a guarantor.

Who can be surety?

Private persons. body corporate. associations and the government can be sureties and guarantors.
The general principles that govern contracts do apply to guarantees. The Government to be a
109
guarantor, the Loans (Guarantee) Act applies. When Parliament has by resolution authorized
the Government to guarantee the payment out of the general revenues and other funds of
Uganda. or the Consolidated Fund. as the case may be. of the principal of. or of the principal of

/,,(, ( 'ap '3 /.all'S (~( l 'gundu

S.! oj!ht! co111nlt'f Act of (gam/a.
/0~ ,)'l.
11
N('ap ]73 Laws ilf'Uganda.

31
and interest on, any loan specified in the resolution: or. all or any loans made in pursuance of an
approved scheme specified in the resolution, the Minister responsible for finance may. in
accordance with the terms of, and subject to any conditions or limitations contained in the
resolution, guarantee the payment on behalf of the Government; but where any such resolution
relates to an approved scheme, the payments so guaranteed shall not in the aggregate exceed a
total to be specified in the resolution. 110

111
In Bank of Uganda v Banco Arabe Espano/ court found the appellant liable for the loan
extended to the government of Uganda as guarantor and the liability had not been extinguished
h1 frustration. The appellant attempted to a\oid liability to the guarantee claiming frustration b;

change in the ecnnomie policies or the principal debtor. further that its liability was limited to
complying payment by the debtor.

3.3 THE LIABILITY OF GUARANTORS

The liability of a guarantor is secondary to the principal contract entered into bet when the credit
or and the principal debtor. There are two kinds of guarantees: one is a promise by the guarantor
1
which becomes effective if the principal debtor fails to perform his obligation: " !.on! Reid in
113
.\lu.~c-!Ji ,. Lep /lir .1en·ice.1 obser1cd that 11·ith regard to making good to the creditor payments
of installments by the principal debtor there are at least two possible forms of agreement. A
person might undertake no more that if the principal debtor fails to pay any installment he will
pay it. That would be a conditional agreement. There would be no prcstable obligation unless
and until the debtor failed to pay. There would then on the debtor's failure arise an obligation to
pay. If for any reason the debtor ceased to have any obligation to pay the installment on the due
date then he could not fail to pay it on that date. The condition attached to the undertaking would
never be purified and the subsidiary obligation would never arise.

On the other hand. the guarantor's obligation might be of a different kind. He might undertake
that the principal debtor will carry out his contract then if at any time and for any reason the

1111
!hid,, I
· (/VV--cOI!/J UCL/i 31J.
'I' 1/ur/.,hl!n·/.alr, u(Fnp,/and l" ed \'ol :YO. Puru ISO urI 15.
"' i/V-3) .4(' 331 u/ 3~~- 3~5

32
principal debtor acts or fails to act as required by his contract. he not only breaks his o\\n
contract hut he also puts the guarantor in breach ol' his contract of guarantee. Then the creditor
can sue the guarantor. not lor the unpaid installment hut lor damages. His contract being that the
principal debtor would carry out the principal contract. the damages payable by the guarantor
must be the loss suffered by the creditor due to the principal debtor having failed to do what the
guarantor undertook that he would do; in both cases, the guarantor's liability is secondary; (the
liability is secondary whenever the promise to be answered for another does not exonerate that
other from liability but leaves him primarily liable as was stated in Maller v Bareman"·'

The guarantor is under no liability if the principal debtor's obligation is discharged by

performance or other wise. on or before date of performance: the conditional promise nc,·er
becomes etTective in the other there is no breach by the guarantor.

In (Jenera! Produce Co ,. Unired Bank Lrd. 11 j Lloyd.! observed that a prom1se to pay if the
principal debtor does not do so. irrespective ol' any obligation on the part debtor. is not a
guarantee for the guarantor's liability where the principal obligation is discharged by the
creditor's acceptance o the debtor's breach, or by insolvency.

The creditor cannot before any default has been committed, bring an action against a guarantor to
face him set a pair money to provide for the possibility of a debt becoming due fl·om the
principal debtor and the principal debtor making default. 116

Guarantor has a favored position in the legal jurisprudence: guarantor is a favored debtor. he or
she is entitled to insist upon a rigid adherence to the terms of his obligation by the creditor and
cannot be made liable for more than he has undertaken. 117

In Rehema Nakibuka v Bank of' Baroda 118 the plaintiff had personally guaranteed and also
mortgaged her land to help a company, Kumar Sports Ltd get an overdraft of 40.000.000/=
million from her account with the defendant bank. When the company defaulted the plaintiff was

'" (1865) LR I CP 163 a! 171.

"·' (/972) 2 Lloyd's Rr:p 255 at 158.
111
Hor/sburr. ibh/ n/1 J.
w !hid .
'" (!lilic-]00~) UC!.R 30~.

33
told to repay the amount, the plaintiff discovered that the defendant had overdrawn an excess
amount and to a different company and not Kumar Sports Ltd as stated in the agreement.
Plaintiff discovered that although she had guaranteed 40,000,000/=. the defendant had given an
overdraft of over 70000000/= and required her to pay back 93000000/=. Plaintiff also found that
Kumar Sports Ltd was not the beneficiary of the overdraft. The plaintiff sued for breach of
agreement and prayed for discharge in respect of the mortgage and guarantee.

Court held that the guarantee in question limited the plaintiffs liability for the overdraft to a sum
of 40000000/~. That the defendant prejudiced the plaintilrs rights under the contract by dealing
with a stranger to the contract. This was because although the plaintiff had fronted Kumar Sports
Ltd as the borrower the actual beneficiary was of the overdraft was Kumar sports which was a
totally different entity from Kumar Sports Ltd, this was a fundamental breach of which destroyed
the very basis of the contract. On the basis of the foregoing, the plaintiff was discharged from the
obligations created under the mortgage and the guarantee and was not bound to pay the overdraft
in question by reason of the defendant's conduct.

In Hole Urban lJislricl council 1' Fidelily unci Deposil lo company of' Mwyland I ,~/Jenca
11
0<'f'OI'il Co o(' \lun1und " ~l contractor entered into a contract with the plaintiffs for the

c·xccution b) him of certain works. The contract did not contain any agreement by the contactor
that. in the event of litigation a rising between him and the plaintiffs in connection with the
performance of the contract and of his failing in that litigation and being ordered to pay the cost
s. he would pay them. The defendants, as sureties for the contractor, gave a bond to the plain tilTs
conditioned for hi s contract.

Litigation having arisen between the plaintiffs and the contact was to the performance ol' the
contract, judgment was given against the contractor and he was ordered to pay the costs. The
plaintiffs sued the dependant on their bond for the amount of costs. Court held that. as the
liability of the contractor to pay the costs arose not under the contract but under the judgment.
the dci'cndants 11cre lllltliablc:

'" (1916) I KB 25.

34
The extent of the liability undertaken by the guarantor w ill depend upon the terms of the
contract of guarantee. The liability does not need to be co-extensive with that of the principal
debtor; but in so far as it exceeds it, it is not a guarantee liability.

Re lvfoss ex parle Ha/le! 110Darling J observed that with regard to the appellant's liability to pay
interest that he had to prove in bankruptcy. to decide that question must look at the language of
the deed. The covenant of the appellant was to pay interest on the principal sum "so long alier
the day fixed for payment as any principal money remains due under these presents ... It is clenr
that therefore that if no principal money remains due the appellant is under no liability to pay
interest.

To ascertain the extent of the guarantor's liability, if any to the creditor. it is necessary to
determine the amount and nature of the principal debtor's debt to the creditor and the
circumstances in which it arose. Upon ascertainment of the extent of liability, the guarantees are
construed strictly to see whether it covers the nature, extent and circumstances of the principal
debt sought to be recovered from the guarantor as stated in lvfoschi v Lep Air service Lid SliJJra.

Guaral1/or no/ liable beyond lerms olcon/rac/

A promissory note given by a principal debtor and guarantor for a delinite to be gm~n 111

eonsidt'ration of' an advance at the date of the note. and not in payment of the balance of an
:~ccount current bet\\Ccn the principal debt or and the credit or. and unless the is presumption is
disproved the advance must have been made if the guarantor is to be liable.

A guarantor who guarantees the payment of bill of exchange to be drawn for specilic sum is not
liable. even if to the extent of that sum. on a bill even for a large sum.

For instance in Rehema Nakibuka v Bank ol Barodam Court found the plaintiff ll·ee from
liability as the bank had varied the guarantee without the guarantor's consent. The court held that
the guarantee in question limited the plaintiffs liability for the overdraft to a sum of 40000000/=.
That the defendant prejudiced the plaintiiTs rights under the contract b) dealing \\ith a stranger
to the contract. This was because although the plaintiff had fronted Kumar Sports Ltd as the

·:·• IV05 2 KB J!r, 31~.

'-'' (2002-20!N) UCI.R J!U

35
borrow~r the actual beneficiary was of the overdraft was Kumar sports v;hich was a totall;
different entity ti·om Kumar Sports Ltd, this was a fundamental breach of which destroyed the
very basis of the contract. On the basis of the foregoing, the plaintiff was discharged from the
obligations created under the mortgage and the guarantee and was not bound to pay the overdraft
in question by reason of the defendant's conduct.

However, a guarantee given to a bank requiring the payment of a given sum will not be
discharged by the creditor's subsequently agreeing to require lesser sum tl·om the debtor: nor \\ill
a limited guarantee for money lent to a specialized amount be invalidated by the !~tel of mone;
being lent in excess of that amount. although the guarantor cannot be made liable beyond the
122
amount prescribed by the guarantee.

A guarantee limited to the loan of a fixed sum will not extend the guarantor's liability lor
continuing payments made after part of that sum has been reimbursed. A guarantor lor payment
by join purchasers of the purchase money of an estate will not be liable if it appears that one of
the purported purchasers is not bound by the transaction.

Whoever the consideration for the guarantor's promise is forbearance to sue. or to continue legal
proceedings against. the principal debtor. all stipulations which constitute part of that
consideration must be strictly complied with or the guarantor will not be bond.

The guarantor's liability can not unduly be extended: the guarantor's liability is united. He will
not be liable for the costs of a ll·uit less action by the creditor against the principal debtor il' the
credit or has not given hi m I her no not ice of his intention to sue the principal debt or. When his
liability is limited to II xed sum will not liable for interest on a large sum. " 3

J_'_' rtar!shurr. iNd n II:! Para /80.

· lhu/l'~""<'f,\'i'J.

36
.:U WHEN LIABILITY ARISES

rhe guarantor's liability arises when the principal debtor has made default. thus until then
liability can not arises I be borne to the guarantor.

In Moschi v Lep Air service 1J./ court held that since the creditor's acceptance of the debtor's
wrongful repudiation of the contract was a right given to the creditors by the law of Contract. the
exercise of that right clicl not discharge the guarantor from liability under the guarantee nor was it
a material variation of the contract which extinguished the guarantor's liability. Further the court
noted that when creditors accepted the debtor's fundamental breach of the terms of the contract.
including those guaranteed as repudiation of the contract, they were entitled to sue the guarantor
in damages for the total sum guaranteed except in so far as already settled by payment made by
the co, and the measure o !'damages was that net sum.

To render the guarantor liable the default relied upon must not be clue to the creditor's
misconduct or connivance consiclerecl in Bank of india v Trans continental commodity merchants
Ltd & Pate/ 125

It is not always easy to determine whether in a particular case a default has been committed and
1
on this, precedent can only be suggestive In f-!un·elll' Foster c6 it was held that the !'unction of
the administrator as such did not cease merely because there had been delivered into his hands
the net residue of the estate after payment of all duty, debts, costs, and expenses and on the
l~tilure by the plaintifi' !'or the testator's estate and to pay her full amount due, the administrator
had !'ailed well and truly to adminiskr according to lm1· within the true meaning ol' the bond and
therefore the defendants were liable as his sureties

A mere error in book keeping by a clerk is not however a default rendering guarantor liable
unless of course the guarantee stipulates that it is to be so considered, Jephson v Hml'kin.\Jc';.,. the
authority on this mol/er.

'" (1973) AC 33t.

,:.' (I !J82J I Llo_rs 's l?t'J7 506 at 5 I 3 per Bingha111.!.
1
-''· (t95-/J 108 367. rt95-1! J .·IllER 7 36 C..l.
!.'. f /S-1/ J:! ~fan & ( I.Mfi

37
On the default of principal debtor causing loss the creditor the guarantor is. apart from speci<d
stipulation. immediately liable to the full extent of his obligation. without being entitled to
require either notice of the default or previous recourse against the principal or simultaneous
recourse against co- guarantors. 12 s The rational for this rule was explained in Moschi v Lep Air
I ~y
senice - that it is duty of guarantor to see that the principal pays or performs his duty as the
case may be:

Unless a demand upon the principal debtor is necessary in order to establish the principal
debtor"s own liability to the creditor it is not necessary for the creditor before proceeding against
. . I de btor to pay. llO
guarantor to request t I1e pnnc1pa ·

It is not even necessary for the creditor to sue the principal debtor though solvent or to wkc
arbitration proceeding against him I her even though the principal contract contains an arbitration
clause. unless this is expressly stipulated for in the guarantee.

Modern forms usually require the guarantor to pay on demand: in such a case. a valid demand is
a necessary ingredient of the creditor"s cause of action against the guarantor. The demand must
comply with any requirements imposed by the contract of guarantee as to the form and manner
of the demand. Whenever there is no express or implied requirement in the guarantee for a
demand and no circumstances rendering a demand upon him a legal obi igation. the guarantor is
liable without being requested to pay as was stated in Thomas v Nollingham incorporu!ed
.fiJo!ball club Lid 131

132
In Allied Bank fnlernalional Limiled v Winfi-ed K Na/usimba & anolher The plaintiff flied a
>uit against the ucl"cndants to reco\·er shs 9417.280/=. The debt arose from a loan "hich the
plainti IT adYanced to the defendants. The llrst defendant executed a mortgage to secure the loan.
''hile the second clefenclant undertook to guarantee the payment for the loan. Following
nonpa; ment of the loan by the defendant. the plaintiff II led a suit to recoYer the sum. The first
defendant did not file a defense and an interlocutory judgment was entered against her. ·rhc
second defendant denied the claim and alleged that he did not execute the guarantee.

"" Hurlsbur)' ibid n 122. Para 19-1.

{'\/ .3 -o
· supra a/ ) 1: -108.
1
·'" Re lockr I 18-15; Ph 51W
1 1
' (!9/1JC'h 596, (1972!. AllER II 76
13
' !2002-201UJ UCLR 31.

38
Court held that the second defendant's signature on the guarantee was sufficient evidence to
prove to show that plaintiffs lawyers made a formal demand to the defendants for payment.
court found the plainti!T to have proved the case on the balance of probabilities and judgment
was entered in their Cavor against the defendants jointly and generally.

3.5 CONDITIONS NECESSARY FOR GUARANTOR'S LIABILITY

Any conditions either express or implied precedent to the guarantor's liability must be fultilled
before recourse can be had to him I her.

In Associated Japanese Bank (lnrernalional) Lrd v Credir du Nord SA 133 it was obsen·ed that on
the true construction. the guarantee was subject to an express condition precedent that there \\as
a lease in respect of four existing machines. Alternatively. it was reasonable to conclude that the
guarantee contained an implied condition precedent that the lease related to existing machines. It
liJlklllcd. thcrcl(>rc that since the machines did not exist the plaintiff bank's claim failed.

In .'>ronhic Bonk l 'gone/({ limired ,. Almh({ Agencies /imired 13'the issue in this case. the
respondent had tiled and won High cow·r Civil Sui! No I 197 <!!' 1999 against UCB. UCB lodged a
notice of appeal and applied to the High Court for a stay of execution of judgment pending the
determination of the appeal. The appellant then signed a guarantee in favor of the respondent
undertaking to pay the decretal amount on behalf of UCB if appeal was decided in favor or the
respondent. The appellant tiled a memorandum of appeal in the Courl o/Appeol Ci1·il Sui! Xo69
o/'2003 in its own name on behalf of UCB Limited based on alleged merger. The appeal was
dismissed on grounds that the appellant had no locus standi since the merger had not yet been
legalized.

The respondent demanded for payment under the guarantee but was nor paid by the appellant.
The respondent tiled an application in the High Court seeking orders to compel the appellant to
pay the decretal amount under the guarantee. which application was granted. The appellant
therefore filed this appeal to oppose the execution order made against it. Counsel Cor the
appellant argued that the learned judge erred in holding that the dismissed appeal was by UCB

133
(/988) 3 AllER 902, (!989) IWLR 255.
w (2002-200~! UCLR I 0.

39
Limited hence declaring it liable under the guarantee. The appellant also argued that the
necessary conditions of the guarantee had not yet arisen, and therefore the appellant was not
liable under the guarantee. The issues for consideration by the Cout1 were whether UCB Limited
filed an appeal against High Court civil suit No 1197 oj7 999 within the meaning of the guarantee
and whether the appeal was determined in favor of the respondent so as to meet the conditions oi'
the guarantee.

('our! of' .-lppeu! dismissed the appeal holding that the trial judge rightly held thm all the

conditions under the guarantee were met. UCB lodged an appeal against the High Court decision.
which appeal failed and brought to an end. The failure worked against UCB and worked in favor
or the respondent Atyaba Agencies Limited. That the appellant was liable to pay the amount as
surety under the guarantee since all the conditions of the guarantee were met.

Where a guarantee recited that the loan to the principal debtor was secured by the charge upon
shares which was also mentioned in the operative part or the guarantee. the existence of the
security was held to constitute a condition precedent to the guarantor's liability and the guarantor
was held not estopped by the recital fi·om asserting the non existence of the shares since the
recital \las intended as a statement by the creditor and not by him. 135

Where a guarantee stipulated that the principal debtor is to execute a particular instrument. this
will be regarded as a condition precedent requiring fulfillment. However, the guarantor will not
be discharged from liability if the principal debtor, although he has or executed the guarantee
bond. has executed an instrument on which the guarantor may sue him and become his specialty
.
ere dttor statecI .tn C'ooper v Evans u· 6

The mere fact that the taking of other security is intended or contemplated by the creditor IYill
not make the taking of that security a condition precedent to the guarantor's liability. unless the
guarantor makes the Ltct that his guarantee is so conditional clear to the creditor before he gives
it or there are other exceptional circumstances.

135
Re Parenl Trusl and Finance Co Lid (1936) 3 AllER .J43.CA
IH· (/867) LR 4Eq45.

40
The guarantor would not be relieved from liability simply because persons he/she merely thought
or assumed would also sign the guarantee have-not done so or further security that he merely
thought or assumed would be taken has not been taken reviewed Ward v National Bank of' Nell'
37
Zea/and'

Duration ofguaranlar 's liability depends upon the terms of' guarantee.

Some guarantees are intended to cover a single credit or transaction only. while other are li·amed
so as to apply to a series of creditor or transactions.

In the cases of a -;ingle credit or transaction the guarantor's liability extends only to the one
credit or transaction agreed upon. while in the case of continuing guarantee the liability cnclun:s
till the credits or transactions contemplated by the parties and covered by the guarantee have
been exhausted or until the guarantee its self has been revoked. 138

3.6 VITIATING FACTORS

A guarantee procured by duress by the creditor is liable to be set aside.IJ'I Duress may take the
form or physical coercion or or any other conduct or threat which the law regards as illegitimate
and so vitiates his or her consent to the guarantee. 140 In Mutual Finance Ltd \'John Wet/on &
Sons 1.!<1' 41 it \\'<\S observed that IYhere a guarantee is obtained from a family company by threat
tu prosecute a famil) member v,as voidable. This case was argued and decided as a case of
undue influence. on the basis that the Common Law Doctrine of duress has been superseded by
the equitable doctrine of undue influence. 142

1 /883! 8 App Cos "55.

1
'· 1/ar/shlll:i'.\ ihid 11 I:;_) tJara /I.JS.
· · I furf,hun·s ih;d n/_,_, Paru /_C.
··" Norlh ()~·ean .)'hipping ( 'o Ltd l' Hyundai ('onslruction Ltd ( /9 7 9) QB 7()j, also /hum/ a/ ( 19'8) 3 ALLER I 1-0.
·" (/Y37) 1 KB 38Y. (!Yr; 1.·111 £/? 65 7 .
,,_./hid ar 394.

41
Undue influence

A guarantee procured by undue influence on the part of the creditor may be set aside. I<J Undue
influence can be actual or presumed; in cases of actual undue influence, it is necessary for the
claimant to prove affirmatively that the wrong doer exerted undue influence on the complainant
to enter into the transaction. 144 In cases of presumed undue influence, the complainant only has
to show in the first instance that there was a relationship of trust and confidence between and the
complainant and the wrong doer of such nature that the wrong doer abused that relationship in
procuring the complainant to enter into the impugned transaction; the burden then shifis to the
"rong doer to prm c that complainant entered into the impugned transaction freely. 1<;

In /Jurcluys /Junk f'!c ,. () '/Jrie;/"'it was held that where a cohabitee entered an obligation to
stand as surety for the debts of the other cohabitee, including the debts of a company in '' hich
the other cohabitee but not surety had a direct financial interest and the creditor was aware of
that they were cohabitees. the surety obligation was valid and enforceable by the creditor unless
the suretyship was procured by duress undue influence misrepresentation or other legal wrong of
the principal debtor. If there had been undue influence misrepresentation or other legal wrong by
the principal debtor, then unless the creditor had taken reasonable steps to satisfy him or herself
that the surety entered into the obligations J1·eely and in knowledge of the true facts. the creditor
would be unable to enforce the surety obligation because he or she would be fixed with
..:unstructi\c Jlllticc ui' the surety ·s right to set aside the transaction. llowever. unless there were
special exceptional circumstances. a creditor would be held to have reasonable steps to m·oid
being fixed with constructive notice if he or she had warned the surety at a meeting not anencled
by the principal debtor, of the amount of potential liability and of the risks involved and ach ised
the surety to take independent legal advice.

On the facts in this case, court commented that the bank knew that the parties were husband and
wife and should therefore have been put on inquiry as to the circumstances in which the wife had
agreed to stand surety for the debts of her husband. The failure by the bank to mtrn the \liCe
when she signed the security documents of the risk that she and the matrimonial home were

11
' /-/orf,·hurn ihid nl _.,} fluru 13 3
i /;!hid
. ,. !hid
111
' (/993) ../ .4.// ER -II~. ../31 jJerl.nrd !3roll'lll.!- ll'i/kinsnn

42
potentially liable for the debts of the company or to recommend that she take legal advice fixed
the bank with constructiYe notice of the wrongful misrepresentation made by the husband to her
and she was therefore entitled as against the bank to set aside the legal charge on the matrimonial
home securing the husband's liability to the bank.

Similarly in Ottoman Bank v [( S Mawani & Others, !.J? S a third defendant signed a guarantee in
favor of the plaintiff bank as further security tor advances made by the bank to a flrm of
merchants of which F (S' father) and M (S' mother) were proprietors. S lived and worked with F
and M. was entirely dependant on them. and although of age, was found by the judge to be
subject to F's authority and immature. S had no property of his own and had no independent
advice before signing. S denied liability when sued by the bank on his guarantee claiming that he
signed it under the unci influence of F.

Court held that on the evidence of S. he signed the guarantee under the influence of his 1t1ther
and the defense of undue influence succeeded. Rudel. J commented that the defiance or undue
influence required more consideration. That although the third defendant is now. and at the time
he signed the guarantee was, considerably over the age of majority. he was still very much
subject to his father's authority and he did not impress me as a very mature person. He had no
property or income of his own. He lived with his father. had no salary. worked in his f(Hhcr's
business and we entirely dependant on his fl1ther and mother. In fact 1 think he was \"Cl"\" much
subject to his father's influence.

3.7 DETERMINATI0'\1 OF GUARANTEES

. f b y:- I·IX
A guarantee .ts ci etenmnec

a) Repayment by the principal debtor. A distinction is made between a specillc guarantee and the
continuing guarantee which is the kind the banks take often. A specific guarantee is an
undertaking to be responsible if the principal debtor does not repay for an advance of a speciflecl
sum or for advances up to an agreed limit. These guarantees are terminated by repayment.

U' (/{}()5J F.·/-/{i-1.

'"' F.E Pen~r: Ltlll' and Pruc!it·e. Reloth1g to Banking: .\let/men, Co Lid, l
11
edition, ( /Y83) ut pg]Y3.

43
With a continuing guarantee covering a running account, the guarantee remains in force not with
standing that the account may fluctuate between debit and credit. And the debt has been repaid,
and then alter a period or credit a further borrowing is contemplated. it is as well to conlirm with
the guarantor that the guarantee is still available.'<"

A fraudulent preference will have the effect of keeping the guarantor liable although the debt
appears to have been repaid. The bankruptcy or liquidation of the principal debtor may leave
150
have the banker with rights against the guarantor.

b) Repayment of the debt by the guarantor. Either the banker will demand repayment from the
principal debtor and then call on the guarantor, or the guarantor will give notice of this wish to
terminate his !iability. 151 In this case the bank will diarize for the last day of the period or notice
(informing the principal debtor) and wait lor day to arrive. During this time is th.: banker to
c·wrci'L' supen·ision m·cr the account on behalf of the guarantor. seeing that only outstanding
cnmmitments and essential payments are made'? Or is no business of his iC the principal debtor.
knowing of the guarantor's decision intends to take advantage of the limit. 152

There have been conl1icting views on the duty of the banker, but the better opinion seems to be
that the guarantor must abide by his avoid. He has promised to be responsible for the ultimate
balance, whatever that is, the conduct of the account from the time of giving notice to the expiry
of the period of notice, is a matter between the principal debtor and his guarantor; the banker is
only concerned to see that the top limit is not exceeded.m

c) Notice of the guarantor's death

The guarantee is not determined when the guarantor dies but when notice of this event reaches
the bank, or should have reached the bank. ·rhe usual lorm of bank guarantee will. however.
include an agreement that determination is to be postponed until given by the person

IN Ibid.
1511
Ibid.
151
Ibid
15
' Ibid
153
Ibid.

44
representatives. This avoids a sudden break in the account which wo uld probably cause
inconvenience to the principal debtor and gives time for some alternative security to be found . 15-l

d) Noti ce of mental incapacity o f the guarantor. The position here seems to be on all fours with

the notice of death. The guarantor can not continue to be responsible for advances made after hi s
death. The only difference appears to be that. curi ously enough the banks have inserted no clause
delaying determination until a receiver gives notice. This may reflect the small num ber of
guarantors becoming mentall y incapable, or it may reflect some uncertainty as to what views the
co urt of protection hold. It is therefore when notice of the mental incapab ility reaches the bank
that determination takes place. 155

156
In Brac(ford Old Bank v Sutcliffe it was held that a clause requiring notice of determinati on by
the personal representatives on the death of the guarantor do not apply in the event of lunac).
However as soon as the bank receives notice of the mental incapacity of the guarantor. the bank
can longer make advances fo r which the insane guarantor will be liable.

c) Bank ruptcy of guarantor. In the bankruptcy sequence of events. the banker may receive notice
of an act of bankruptcy, or his/her first intimation may be a receiving order. Where it is the
guarantor of one of hi s/her customers who has committed an act of bankruptcy. the banker will
rule off the account of the debtor on the assumption that the act of bankruptcy wi ll in fact lead to
bankruptcy. If may not; but S 33(3) 157 of proving for any outgoings al lowed on the principal
debtors account after notices of act of bankruptcy. Whatever happens thereafter. the banker·s
faith in hi s country will have been shattered. and he is not likely to al low the existing secu rit ) to
continue on the basis even if the guarantor survives the act of bankruptcy.

A receiving order wi ll terminate the guarantee abrupt ly leaving the bank with the right to prove
in the hankrupt"s estate for the debt. A contingent liability such as a fore ign draft negotiated tor
the principal. Debtor with recourse. in the process of co llection may be proved for (ahvays
provided that the total amount for which the guarantor or is responsible is not exceeded . 15 x
\_~\'lr , I I 0 \//(

154
Ibid. see also Bradford v Slllcfi{fe (19 18) 2 KB 833.
;~. 1::~l
1( v':;,~
155 Ibid. ( ~---., ~
' ·'" (19 18) 2 KB 833. - L 't y ~
I ,- ~ ~~
. Bankruptcy Acl o.f Uganda Cap 6 7. SeeS. 20 (2) BankruplG:r Act of I 9 I -!(England). L :;
15 \ •.?- P' t: ... .. .. . .. ...... •
' F. E Peny, ibid n f./8 a! 29-1. \* . .... /
' ',_:r;
/•
,,. '/
. ,~t>
<'001) () \( ~ / .

45
f) Death of the principal debtor. The guarantee will cover cheques drawn by the principal debtor
and paid at the bank after his death but before notice of death has reached the bank. Thereafter
no more cheques will be paid, any further cheques being returned with the answer '"Drawer
deceased." The bank will usually wait to see whether the estate can pay ofT the debt. and then
150
claim on the guarantor for any short fa1J.

In Simson v Cooke. lt,u the surety was under a bond to meet sums as should have been advanced
to meet bills of two partners in a partnership or by either of them, it was held that this obligation
did not extend to bills drawn by one partner after the death of the other partner

g) Mental incapacity of the principal debtor. The account of the principal debtor must be stopped
on notice being received of his mental illness, and the guarantor must be advised. Essential
cheques for the welfare of the patient which would normally be paid out of a credit balance in
reliance on the approval of the receiver when appointed, should be agreed by the guarantor. 1'"
Consequently it will be prudent to arrange with him before and how far, within the guaranteed
amount, the bank ma) go.

h) Bankruptcy o!'the principal debtor. The usual case will be that the bank will stop the principal
debtor's account at the date of the receiving order, prove on the bankruptcy estate for the debt
and call on the guarantor for any short fall. Atier receipt of notice of an act of bankruptcy a
banker might in the case of a credit account continue to pay cheques to the debtor himself under
s. -19 161 but where the account is overdrawn it must be stopped on notice of the act of bankruptcy
because of the effect ofS. 45 of the same Act. 163

64
Thus in Re Manson, exp Shar/ where a guarantee had been g1ven to a bank which had
knowledge of the principal's act of bankruptcy and then the surety in ignorance of" the act or
bankruptcy paid the bank to the full extent of his liability under the guarantee "ithout an)
specific appropriation, it was held that the bank had to apply the payment to the portion or the
guaranteed debt which "as provable and not to that portion which was not provable.

15
" Ibid.
(181~) I Bing ~51.
11
""
11 1
'F.£ Peny, ibid nl~8 u/ 29~.
w- c)lfpra
c 17 I )·7.
1 3
' Ibid.
w ( 1844) 3 Mom D& De G ~90,

46
i) Misrepresentation to the guarantor. The effect of a misrepresentation is to make the contract
avoidable at the option of the (innocent) party deceived. The cases show that misrepresentation
occurs where the bank has brought an action against the guarantor for payment and the
guarantor has then successfully pleaded that he was deceived as to a material fact at the time he
signed the guarantee. In Mackenzie v Royal Bank of Canada. 165 Lord Atkin observed that a
contract of guarantee like any other contract is to be avoided if induced by material
misrepresentation of an existing fact even if made innocent.

It is equally possible. if perhaps more likely. that the guarantor may discover during the currency
of the contract that he was so deceived and may inform the bank he considers the contract
rescinded. It will then be open to the bank to consider his grounds and to challenge them in
courts 1.f.It becomes necessary. 166

j) Variation in the composition of the parties. Where the principal debtor is a firm. any change in
the composition of the firm determines the guarantee 167 unless the guarantee form covers the
point. This section also provides for the same effect if the variation is in the banking lirm. In
Dance \' Girdler 16 xa guarantor who had given a guarantee in l~lVOr of named individuals as
governors of a society and their successors was discharged when the creditors as the society
became incorpor::Jted

Nowadays the variation is likely to be the amalgamation of one joint stock banking company
with another rather than the absorption of a banking firm and such a clause, however. the
guarantee could be good up to the date of the change but not for any amounts paid after it. 16 Y
Where the guarantor is a firm. any change in the composition of the firm will determine the
guarantee; and if it is desired to continue the commitment a fresh form of a guarantee should be
taken.

k) Agreement by the banker to give time to principal debtor. A binding agreement of this nature
will discharge the guarantor if it is made without his consent. on the equitable ground that the

1 5
'' !193~) AC ~68.
Jf,(, F.£ Perrp, ibid nl./8 at 295.
Jr,- Par1nersf1ip .A c/, S. 18{England).
1
'" (180./) I Bas & PNR 3./.

tM F.£ Pen:v, ibid n/48 at 295.

47
guarantor's subsequent right to claim against the principal debtor has been altered. The passage
of time may have made the debtor less able to pay the guarantor. The agreement must be binding
one and not mere exercise of discretion on the part of the banker as to when to demand
repayment. Usually a clause in the guarantee authorizes the bank to grant time to the principal
debtor, so that the guarantor's permission and consent are obtained in advance. 170

The rationale for the discharge of the guarantor was discussed by Cockburn C.J in Sll'ire ,.
Redman 171 "that the relation of the principal and surety gives to the surety certain rights amongst
others surety has at any time the right to apply to the creditor and pay him otT and then to sue the
principal in the creditor's name. We are not aware of any instance in which a surety has in
practice exercised this right: certainly the cases in which the surety uses it must be very rare.
Still the right has this right, and if the creditor binds him or herself not to sue the principal
debtor. for however short a time, he does interfere with the theoretical right to sue in his or her
name during such period. It has been settled by decisions that there is an equity to say such
interference with the rights of the surety must operate to deprive the creditor of the right to
recourse against the surety."

I) Release of the debt by the creditor. Unless a clause of indemnity is included in the guarantee
form. a release of the principal debtor will like wise release the guarantor. A partial release ma)
some times occur where the bank. obtaining the best terms which it can. compounds with the
principal debtor. but there is certain to he a clause in the guarantee to cover such an eventuality.
leaving the guarantor liable lor the remainder or the debt. Nevertheless. it is as well to keep him
intonned of the progress or the negotiations and to obtain his consent, ir possible. 172

Thus Cozens Hardy J'vJR in Peny v National Provincial Bank oj'Eng/und 73 commented that it is
elementary law that if a creditor releases the principal debtor, of course the surety is released too.

m) Release of security to the principal debtor. lfthe guarantor pays the debt he is entitled to any
security held by the banker belonging to the principal debtor. Normally the banker \\oulcl realize

n' F. E Pern'. ihid n/./9 at 296.

n f/86/1 QBD 531i u/5~1.

- FE'I\:rrr, 1hid 11/.fS ,,, ~<J6.

ni/Y/0) I C'h ~6-U7J

48
the security and claim on the guarantee lor any remainder: but where the security is difficult of
rea I.Izauon . I1t pre ,.·er tI1e guarantor to ta k e .11 over. 17·1
. I1e mig

It is difficult to visualize any circumstances in which the banker would yield up security to the
principal debtor except in return for repayment in full, but if he did he would release the
guarantor to the extent of the security. A clause may be insetied in the guarantee to provide
against this unlikely contingency. 175 A guarantor may have grounds tor complaint: however
where the value of security held has depreciated very considerably through negligence of the
banker. perhaps where shares are retained against professional advice on a failing market. Where
security is released or falls in value in this way. the guarantor may have his or her liability
176
reduced accordingly.

In Wulf/l' .!ay.r- it \\'aS held that the guarantor was discharged ll·om the liability lor the creditor
having failed to register the deed and to take possession of the mortgaged property since they had
deprived themselves of the power to assign the mortgaged property to the guarantor.

n) Notice by all joint and several guarantors. Notice to determine by one of a number of joint and
several guarantors will determine the guarantee as far as that guarantor is concerned. as will
notice of death of one such guarantor. The remaining or surviving guarantors will continue to be
liable; but the banker should mark the occasion by breaking the principal debtor's account and
passing future entries through new account. so as to maintain his recourse against the retiring
1n
guarantor or the ~state.

The guarantee may include a stipulation that notice is to be gtven by each joint and several
guarantor. including the person representatives fa deceased co- guarantor only then will the
guarantee be determined all must join in giving notice and it is not open lor any single guarantor
. tI1e guarantee to an enc.I 179
to bnng

,-, F.E Pert)', ibid n/48 at 296.

n Ibid
!hid
! ·r,
·--~ Js-lr LR- a !l -5n
1
F.£ Perrv, thid n 1.:/8 af 297.
-,
r•; !hid .

49
 180
In Egherl v Nalional Crown Bank the guarantee provided that it should be a continuing
guarantee until the undersigned or the executor or administrator of the undersigned shall have
gi\'Cn notice too make !'urther ad,ances on the security, The Privy Council held the guarantee to
have remained in force against the guarantors until each and all of them or their respective
executors gave notice to determine it

3.8 CONCLUSION
The contractual liability of the guarantor is strictly limited to what the parties agreed, There can
rarely be instances in which the guarantor's obligation is overly stretched. Any attempt do so
would allow the guarantor to be discharged from liability. It is because of this fact that even in
the tricky situations that may unexpectedly arise are handled carefully and correctly by the bank
by not suggt.:sting. suitable guarantors. avoiding misrepresenting or even waiving terms or the
guarantee; knowing that any material variation may bring the guarantee to an end. The banks
make all necessary efforts to minimize the chances of the guarantors avoiding the liability on the
guarante

1811
(1918) AC 90I

50
 CHAPTER FOUR

ENFORCEMENT OF GUARANTEES IN UGANDA

4.1 .I INTRODUCTION

i\ creditor who wishes to enforce a contrnct of guarnntee or indemnity against surety will need to

take into account a number of legal and practical considerations before commencing the
proceedings. First hel she has to ensure that hisl her cause of action has accrued which involves
ensuring that all conditions precedent to the surety's liability have been fulfilled. A related
matter will be whether the action is not time barred. Further the creditor must address the matter
of jurisdiction, this may be some thing which is predetermined in the contract but if not will he
need to consider which available forum is the most appropriate for is requirements. Thirdly he 1

she must ensure that he I she has title to sue and all 5the necessary parties to the action are joined.
Finally there may be a number of miscellaneous matters to take into consideration in choosing
,,·hat type of proceedings he I she should take. These considerations may include the sol\'cncy or
the surety and the availability assets against which he 1 she can execute any judgment which he 1

she ma,, obtain. 181

These general considerations arise in any case in which a party to a contract wishes to enforce
the obligations of another contracting party. In this chapter the aspects of these matters which
have special relevance to contracts of suretyship I guarantorship are discussed, together with some
of the problems which may arise and a few practical solutions are suggested.

4. I .2 When the credi!or can sue !he guamnlor

When the contract upon which the creditor proposes to sue the guarantor is a contract of
guarantee. the liability of the guarantor accrues at the earliest when the principal del~ulits in his
obligation. 182 Thus in Ex par/e Gardom. 183 it was held that the creditor was unable to sue the
'urety on the guarnntee lor the period oi' payment of the price of the goods supplied to the
principal before the period of credit allo\vecl to the principal had expired. But the terms of the

181
Geraldine Andrews & Richard J\1illet, Lall' of Guarantees, London SH·eet & J\ilaxtFell, 3rd ed (1000) JJP. ]] (
Js~ Detailed discussion (~('the liability oft he guarantor or surely li'OS done in chapler 3oft his research.
13
'' (1808) 15 Ves ]86.

51
agreement may have the effect that the liability of the surety is to accrue at a later time than
default by the principal for example on the creditor demanding payment from the surety.

If a contract of guarantee expressly requires a demand to be made on the surety. the creditor
cannot sue the surety until hel she has made such a demand even if the underlying obligation
d oes not regUJre . . l 184 Re Broll'n 's Eos/ale. B1'011'11
. a d eman d to b e ma d e tot l1e pnnc1pa. ,. ormrn
D IS<·

Similarly if. after the principal first defaults. the creditor gives him I her time to pay with the
kmm ledge of the suret) and acquiescence. time will not begin to run against the surety lor
limitation purposes and the creditor cannot sue him until the extended time for payment has
. d . 186
exp1re

On the other hand, if the contract is for indemnity, the obligation of the surety is a primary
obligation which is independent of that of the principal and it will depend on the terms of the
contract whether it arises simultaneously with the obligation of the principal afterwards or even
before. Thus it may not be open to the surety to say that because there has been no default by the
principal the cause of action has not accrued or will never accrue. 187 In Genem! Produce ( 'o ,.
1
Uni!ed Bank. '"

.f../.3 Time ofsuil

There is no obligation on the creditor to take proceedings against the guarantor promptly or
within a reasonable time after the default of the principal in the absence of an express contractual
provision to that effect. The surety has to bear the risk that the principal will become insolvent
during the period of the delay. making his principal of indemnity worthless. 189 The right of the
surety to claim quia lime/ relief against the creditor before demand is made on him 1 her is
190
therefore a valuable safeguard. Thus in Thomas v Nollingham Incorpomted Fool hall C'fuh,"'
court held, that where the account was closed and there was an accrued fixed liability a
guarantor had a right in equity to require the principal debtor to exonerate him lhlm his liabilit)

1
'; Geraldine Andrell's & Richurd J\lillel. ihid n/8/. 131.
''·' /1893!2 Ch 31111.
. '' flo//,. Hadler I /835! J Ad & E1 c58.
f,- 0t!ruldine A;ulti!\1'.\ & Richard ,\fillet, ihid n/81.

''' ( 19-:'9) 1 Lloyd's Rep 155.

tw Geraldine Andrews & Richard A1illet, ibid n/8/, 1-10.
!'ill I bid.

''" (1972) Ch 596.

52
by paying off the creditor; that there was no distinction between cases, on the one hand, where
under the suretyship contract it was unnecessary to make a demand or where a demand bad been
made and those, on the other hand, where a demand was required and was not made; and that
accordingly, the guarantor was entitled to be discharged and exonerated from all liability under
the guarantee by the company paying off the debt

-1.2 ENFORCEMENT OF GUARANTOR'S LIABILITY

\lnder the Civil Procure Acr 19J the liability of a surety is personal once written notice IS

expressed to the affected surety. According to s 93 193 where any person has become liable as
surety shall be personally liable on the decree and shall be deemed a party within s 34 if notice in
writing as the court in each case thinks sufficient has been given to the surety. The remedy
against a solvent guarantor on his guarantee is by action in the court The Civil Procedure Act I
Civil Procedure Rules provide the procedure in which the creditor may in a proper case recover
linaljudgment against the guarantor in a summary manner.

.Jurisdicrion in Uganda disputes arising from guarantees are heard by the High Court
Commercial Division and equally the parties are fi·ee to include ADR 1n their
agreement. 194 However this depends on the quantum of the subject matter.

In Srunbic Bunk L~~<ando limired ,, Aryuhu Agencies limired 1v5the issue 111 this case. the
respondent had tiled and won High courr Ch•i/ Suir No 1197 oj"J 999 against UCB. UCB lodged a
notice of appeal and applied to the High Court for a stay of execution of judgment pending the
determination of the appeal. The appellant then signed a guarantee in favor of the respondent
undertaking to pay the decretal amount on behalf of UCB if appeal was decided in favor or the
respondent. The appellant filed a memorandum of appeal in the Courr ojAppea/ ( 'iril Sui! No69
of" 2003 in its own name on behalf of UCB Limited based on alleged merger. The appeal was
dismissed on grounds that the appellant had no locus standi since the merger had not yet been
legalized.

1
''-' ( 'ap -, lAili'S n( l igamlo.
i'/.1 !b;d
01
Pecunim)J jurisdiction must hejiJIIoH·ed hy !he cuttrl handli;1g the muller, Section 207 Magistrates ( 'ourts Act
5
" (2002-2004) UCLR I 0.

53
The respondent demanded for payment under the guurantee but was nor paid by the appellant.
The respondent filed an application in the High Court seeking orders to compel the appellant to
pay the decretal amount under the guarantee, which application was granted. The appellant
therefore filed this appeal to oppose the execution order made against it. Counsel for the
appellant argued that the learned judge erred in holding that the dismissed appeal was by UCB
Limited hence declaring it liable under the guarantee. The appellant also argued that the
necessary conditions of the guarantee had not yet arisen, and therefore the appellant was not
liable under the guarantee. The issues for consideration by the Court were whether UCB Limited
iiled an appeal against High C'ourl cil'il sui/ .No I 19 7 o(/999 within the meaning of the guarantee
and whether the appeal was determined in favor of the respondent so as to meet the conditions of
the guarantee.

('our/ of' Appeal dismissed the appeal holding that the trial judge rightly held that all the
conditions under the guarantee were met. UCB lodged an appeal against the High Court decision.
which appeal failed and brought to an end. The failure worked against UCB and worked in favor
of the respondent Atyaba Agencies Limited. That the appellant was liable to pay the amount as
surety under the guarantee since all the conditions of the guarantee were met.

-1.3 ENFORCEMENT OF GUARANTOR'S RIGHTS

There can he an ucrion(i!!· indemni(icalion

A guarantor who wishes to enforce his/ her right to indemnity from the principal debtor may
bring an action for indemnification in the courts of Judicature. Where the principal debtor
expressly agreed to indemnify the guarantor, the guarantor has to sue based on that agreement to
enforce the right. 196 Where there is no express agreement by the principal to indemnify the
guarantor, the guarantor may enforce his or her right by bringing an action in his or her own
name against the principal debtor for the money paid to the debtor. 197

f')(, Harlsbw:r Laws (?/England. vo/20, Ptwu 153.

"""Morris v Ford Motor Co Ltd (1973) QB 791 at800. a/sojimnd at (1973) 2 All Ell 1084 at /089 per Lord
Denning.

54
 If the guarantor and the principal debtor are sued in the same action by the creditor. the
guarantor may claim indemnification from the principal by issuing a notice against him ot· her. If
the principal debtor has not been made a party to the creditor's action against the guarantor. the
guarantor may join the debtor into by issuing a third party notice against him or her. ~
19

In the same spirit, a guarantor who wishes to enforce his right to contribution from co guarantors
may bring an action claiming contribution in the courts. 199 To sustain such an action the plaintiff
guarantor has to prove that he or she actually paid money or its equivalent and the court will
ascertain the proportion of the contribution recoverable. Where one of the co guarantors is lett
out of the action. still a notice is issued to that co guarantor, 200

In the actions of cnCorccmcnt of guarantor's rights. questions of counter claim and set o!T may
arise and cou11s weigh them so as to mitigate the liability to be borne to the defendant principal
debtor or co guarantors.

In Re Fenton, exp, Fenton, 101 F having guaranteed advances by certain banks toT association in
which he was interested, subsequently executed two deeds of arrangement in favor of his
creditors. The association having gone into liquidation, the liquidator lodged a proof against F's
estate in respect of sums due by F to the association. The trustee ofF's estate rejected the proof
and claimed to set off the various sums which had been advanced by the banks to the association
for which F had given his personal guarantee. The banks had proved against F's estate under the
guarantees but nothing had been paid to them.

The court held that in as much as none of those sums had in fact been paid by F or his trustee to
the banks the trustee was not entitled to set ofT F's contingent liability under the guarantees
against the sums clue b) him to the association

t'Js Th;rd party notice issued under 0 I r I.f Civil Procedure Rules Sf 7/-/, Laws (4' Uganda.
I'N Ibid
_'I}{J Ibid
1
'" II '13 I J I Ch 85.

55
4.4 PROBLEMS OF ENFORCEMENT

In many cases where the creditor seek to recover money from the surety. he I she will not wish to
pursue the principaL For example the principal may be insolvent or outside the jurisdiction and it
may be cheaper to and convenient to pursue the guarantor and leave him or her to seek remedy
Ji·om the principal if he can. 202 In straightforward cases say where it is obvious that the principal
203
defaulted on the repayment of a loan. there are few draw backs to taking this course.

However in some cases there may arise a substantial dispute as to whether the principal was in
breach of the relevant contractual obligations so as to give to a claim under the guarantee. The
creditor may well consider in terms of tactics, it is preferable to pursue the guarantor alone and
leave the guarantor either to try and get the principal to help him by providing evidence to prove
that he was not in default or to join him as third party to suit in court to determine the matters
?04
connecte d tot I1e guarantee.-

The problems which creditor may face is that the judgment or arbitral award against the
principal in Cavor oC the creditor in respect of the relevant debt. default or miscarriage for which
the surety is liable is not binding on the surety unless he was a party to those proceedings.
05
Jl1ercantile Invesrments & General Trust Co v River Plare Trust, Loan & Agency Coc

-1.-1.1 Problems ofguarantors

a) Guarantors typically give little thought to the implications of signing guaranties, assuming that
the loan will be repaid by the primary borrower or through foreclosure of any collateral pledged
by the borrower. But the obligation of a guarantor can create a serious risk exposure. so thorough
analysis is necessary both before undertaking the obligation and at the lirst hint oC possible
default by the borrower.

h) Misunderstandings and misinjiJmwlion

The litigated cases and results of surveys point to an alarming level of guarantor
misunderstanding about many elements of the transaction. In many cases there appeared to be a

'"'Geraldine Andrews & Richard Mille!. ibid nl81. 246.

.'us I hid.
!hid.
.'l!.l

'" 1189~) I Ch 578 a/ 598 per Romer.!.

5

56
fundamental misunderstanding about the way a mortgage, guarantee operates 206 In consultations
with consumer advocates expressed the view that there is low level of understanding about basic
concepts such as liability (joint, several or secondary) in the general community and that some
people do not understand what a guarantee is at all. It appears there is also a general
misunderstanding about the obligations for contribution of co-guarantors. 207

Mrs A. a sole parent with 8 children. with limited English. was approached by her brother-in-law
to be a guarantor for loan of $10,000 to purchase stock for his business. The brother-in-law
defaulted and the lender pursued Mrs A, attending her home and threatening to evict her and her
children unless she made payments. Upon obtaining legal advice, Mrs A discovered for the first
time that: She was in fact a co-borrower and not a guarantor, the loan was for $30.000. and not
$1 0,000, the debt was secured over her home 208

The reasons for the many varieties of misunderstanding are complex: it could be that deceit or
fraud is involved, or a guarantor"s lack of knowledge is not remedied. or that other social or
cultural litctors impinged on the ability of the guarantor to make an informed decision abclut
. . 209
stgnmg.

The range of confusion or misunderstanding is evidenced in the cases and study responses: ··]
thought I was a character reference only for my son: thought I was a guarantor for m) daughter
and I had no idea it was a co-loan." '"I thought that because the business was in both namesjust
thought signature required: didn't know severally liable ... I wouldn't have signed if I knew my
liability under the partnership." "Actually I thought I was a co-borrower and not a guarantor. I
asked several times for a copy of the contract to see whose name appeared on same. I \\as not
sent one." "I didn't understand any of it. no legal or business mind. all legal stuff that I dicln"t
21 0
understand. "

Many guarantors were under the mistaken apprehension that they were only signing a guarantee
!"or a limited period or time. Others thought that signing was a mere formality and did not
understand that this meant they were putting their homes at risk. Some thought they were merely

:or. H'lFiil. hoc:sar.nsH·.goF. aullaw/inlcj;rcl I I irc:.nsfloal!esllrc index last checked on 2211" Jzme 20 I0.
'"-Ibid.
f[J;d.
_'II''
_'/!'}Ibid
""Ibid.

57
signing a personal overdraft. 211 In review of litigated cases from other jurisdictions indicate that
guarantors commonly claimed they were misled by the borrower about the transaction 212

If in developed economies like Australia misinformation of such a kind exists, in Uganda, the
situation is pathetic, a fact of concern is that many guarantors can not even afford paying for
legal advice prior signing guarantees. To one's dismay those who can afford the legal sen·tcc
encounter legal ad\ isers with defective knowledge about the guarantee operation.

This situation can precisely be seen in the case of Stanbic Bank Uganda limited v Atyaba
Agencies limitec( 13 the issue in this case, the respondent had tiled and won High court Civil Suit
No 1197 of 1999 against UCB. UCB lodged a notice of appeal and applied to the High Court for
a stay of execution of judgment pending the determination of the appeal. The appellant then
signed a guarantee in favor of the respondent uncletiaking to pay the decretal amount on behalf of
UCB if appeal was decided in favor of the respondent. The appellant tiled a memorandum of
appeal in the Court of Appeal Civil Suit No69 of 2003 in its own name on behalf of UCB
Limited based on alleged merger. The appeal was dismissed on grounds that the appellant had no
locus standi since the merger had not yet been legalized.

The respondent demanded for payment under the guarantee but was nor paid by the appellant.
The respondent liled an application in the High Court seeking orders to compel the appellant to
pay the decretal amount under the guarantee. which application was granted. The appellant
therefore liled this appeal to oppose the execution order made against it. Counsel fix the
appellant argued that the learned judge erred in holding that the dismissed appeal was by UCB
Limited hence declaring it liable under the guarantee. The appellant also argued that the
necessary conditions of the guarantee had not yet arisen, and therefore the appellant was not
liable under the guarantee. The issues for consideration by the Court were whether UCB Limited
tiled an appeal against High Court civil suit No 1197 ofl999 within the meaning of the guarantee
and whether the appeal was determined in favor of the respondent so as to meet the conditions or
the guarantee.

_':! Commonl1'eallh Bank qf'.-/us!ro/ia r Khou,.; f/998}l'SC 118.

rrwtee (I YI.JI.}j -5 S'A5il? I: Froser \' PcHI'i!r (1{}0 I) A liS! Comract R 90-12- ...Vational
' ' ,\1/CW'O!l!! \' fll.!l'fJI!IIIUI
·lu.l·fralia Bank r Siarhron=e l'l1· Lid [2001} ANZ ComR Jr: Lang,. Licciardello [ 1999} NSIVSC 93: 1/"eslpac
Banking Cmporaliun r /Jagshmr [2000] Nsws·c 650: Siale Bank o/NeH• Sou!h Wales r 1-/ihher/ (201111! .. Ius/
Comrac/ R 90- I I 9.
213
(2002-200~) UCLR I 0.

58
Court of Appeal dismissed the appeal holding that the trial judge rightly held that all the
conditions under the guarantee were met. UCB lodged an appeal against the High Court decision.
which appeal failed and brought to an end. The failure worked against UCB and worked in favor
of the respondent Atyaba Agencies Limited. That the appellant was liable to pay the amount as
surety under the guarantee since all the conditions of the guarantee were met.

The loss sustained by the guaranteeing bank has to be blamed on the lawyer who \\aS paid to
represent the guarantor. how would he have sought of instituting an appeal in the name or the
guarantor merely based on a merger being negotiated. Some times as seen indeed lawyers cost
their clients a fortune in representation on top of the legal fee charged on the client.

Lack of information about liability or a misunderstanding about the nature of the transaction
must be distinguished from cases where the signature was procured in fraudulent circumstances
such as forgery. The research found that there was not a simple line that could be drawn between
understanding and misunderstanding the transaction; rather there was a wide range or
misunderstandings. assumptions, deceptions and half-mistakes that formed a continuum of error.
Such errors cover a range of issues including: the period of liability: the amount lor which the)
could be liable: what their role in the transaction actually was (that is. were they are guarantor or
'14
a borrO\\er) and whether the loan was secured over property.-

Reports on third party guarantees and family relationships highlight the potential dangers lor
guarantors that arise out of misunderstanding the documents or the transaction 215 Research
confirms that many guarantors sign without an understanding of the nature of the transaction.
Guarantors experience both factual and legal misunderstandings about the transaction as a result
of misrepresentations. failure to read or understand the documents, lack of competent legal and
financial advice, lack of business experience and different cultural expectations.

Guarantors in Uganda; mainly the illiterate and those that can't afford to hire legal service did
not comprehend their responsibility to the contract of guarantee. Yet the female guarantors

:u Ibid n 206.
-'''Australian Lmr Re!.form Commission, .Hul!iculturalism and the Lmr (Report 57, /99]) Of para 11.-1. ,)'ee also Ihi!
Report C?(the Erperl Group on Fami('v' Financia/l'ulnerahility. Good Relations. High Risks- Financial
Transactions Within Families and Betll'een Friends Report, ( !996) a/ I 0.

59
expressed instances of compulsion form their husbands. It is common phenomena for a husband
to come home and inform his wife; ''honey we shall go to the bank and you will sign some
papers." the wife does not get a detailed account from the husband about the documents. Taking
it in mind that the banks don't have as duty of care to the intending guarantor, this becomes
prejudicial to the guarantors.

In Bare lays Bank Pic v 0 'Brien" 16 it was held that where a cohabitee entered an obligation to
stand as surety for the debts of the other cohabitee. including the debts of a company in which
the other cohabitee but not surety had a direct financial interest and the creditor was aware of
that they were cohabitees. the surety obligation was valid and enforceable by the creditor unless
the suretyship was procured by duress undue influence misrepresentation or other legal wrong of
the principal debtor. If there had been undue intluence misrepresentation or other legal wrong by
the principal debtor. then unless the creditor had taken reasonable steps to satisfy him or herself
that the surety entered into the obligations freely and in knowledge of the true facts. the creditor
would be unable to enforce the surety obligation because he or she would be fixed with
constructive notice of the surety's right to set aside the transaction. However. unless there were
special exceptional circumstances, a creditor would be held to have reasonable steps to avoid
being fixed with constructive notice if he or she had warned the surety at a meeting not attended
by the principal debtor. of the amount of potential liability and of the risks involved and mh iscd
the surety to take independent legal advice.

On the facts in this case. court commented that the bank knew that the parties were husband and
wife and should therefore have been put on inquiry as to the circumstances in which the wife had
agreed to stand surety for the debts of her husband. The failure by the bank to warn the wiCe
when she signed the security documents of the risk that she and the matrimonial home were
potentially liable for the debts of the company or to recommend that she take legal advice fixed
the bank with constructive notice of the wrongful misrepresentation made by the husband to her
and she was therefore entitled as against the bank to set aside the legal charge on the matrimonial
home securing the husband's liability to the bank .

.'tr. f f<JiJ3; ./ -If/ F.R -II-. .f_?:} jll'r /.on/ Hro\\'llt'- 1/'i/liinson

60
This case proves in fact that many guarantors are persuaded to sign without being told the extent
and e!Tect of the documents to them. especially women and in any case if told is only required to
. 217
sign.

Even those guarantors who have counsel seemed not to have appreciated the extent of
guarantor's liability. Most times the assumption is the principal will pay the money /loan so no
reason to worry about , so guarantor goes ahead to assure the creditor, without reasonable belief
in personally being called to meet the liability to the creditor following the default of the
. . I de btor. zts
pnnc1pa

This problem is illustrated by the case of Bunk of L'gunda \'Bunco Arahe E.1}hii10t'''' court found
the appellant liable for the loan extended to the government of Uganda as guarantor and the
liability had not been extinguished by frustration. The appellant attempted to avoid liability to
the guarantee claiming Ji'Ltstration by change in the economic policies of the principal debtor.
further that its liability was limited to complying payment by the debtor.

Because of such misguided perception; by the guarantors, when called upon to meet their
obligation, attempts are made to dodge about the creditor and often matters are settled by court.
At the end of the day, relations become bitter; the guarantor ''is left cursing the bankers/ creditor.
In the same spirit the guarantors determine their ties with principals alleging to ha\'e been
"robbed".

110
In Allied Bank lnremalional Lim ired v Winfi·ed !( Nalusimba & anolher, the point in contention
above is illustrated. The plaintiff filed a suit against the defendants to recover shs 9417280/=.
The debt arose fi·om a loan which the plaintiff advanced to the defendants. The first defendant
executed a mortgage to secure the loan, while the second defendant undertook to guarantee the
payment for the loan. Following nonpayment of the loan by the defendant, the plaintiff liled a
suit to recover the sum. The lirst defendant did not file a defense and an interlocutory judgment
was entered against her. The second defendant denied the claim and alleged that he did not
execute the guarantee.

::,- Cm?lessions gatheredfi·om the .field.

'I' /hid
10
-' !1997-2001) UCLR 30.
''" !1002-200~) UCLR 31.

61
Court held that the second defendant's signature on the guarantee was sufficient evidence to
prove to show that plaintiffs lawyers made a formal demand to the defendants for payment.
court found the plaintifT to have proved the case on the balance of probabilities and judgment
was entered in their favor against the defendants jointly and generally.

It should be remembered that principal debtors of often prefer to choose out close relatives.
friends to stand in for their indebtedness; it is right to say that most of the guarantees are
guarantees of based on trust. This is done mainly because the debtors feel secure to borrow from
those that make them most secured, the debtor in his or her sheer belief never expects the family
. I.
mem ber to tal<e recourse agamst 11m or I1er. "-- 1

Once the guarantors have settled the creditor, there is; little or no assistance rendered to the
guarantor in pursuing the principal debtor to indemnify I refund the guarantor. Many bank
respondents have testified this fact, that what the creditor money debt. "is a mere verbal blessing
to the guarantor and the securities possessed it any. This should account for the fact that many
guarantors actually never get their indemnification f1·om the principal debtors.

Banks for safety reasons prefer in house customer clients to be guarantors. It is advisable to
principal debtor to choose a guarantor who is already a client known to the bank rather than
strangers: The rationale for this action is found in the established relationship and trust that exist
a between the bank and the intending guarantor. With this kind of operation. the guarantors
222
admitted are less risky to the bank in terms of repayment of loans

f'rom the field findings most guarantors have failed to recoup their money !'rom the ckbtms.
Many wives who have stood for their husband, have shown how hectic if is to recover their
money from the husbands. later on the expectation of the money being the bread winner in the
home. such guarantors prefer to let go of the many rather torso out in courts of lo'A· which they
even lind more costly; '"better to pay and remain with the peace of mind and harmony in the
home"

--"I Persona I empI wsts.

.
'" Field.findings

62
4.5 CONSQUENCES OF THE PROBLEMS
Because of the way the banks treat their guarantor clients. with the strict rule of secrecy to\\arcls
the divulgence of information and the minimal support rendered to the guarantor atier meeting
his I her obligation to the banker. guarantee as form of security in falling considerably. In fact in
this study it has been discovered that some banks cion 't offer the guarantee facility completely
while some prefer other alternatives than guarantee. It was found that some banks had admitted
guarantors only I 0 or less times in financial yearn 3

Such institutions expressed their reasons that guarantors are not easy to come by because of the
implications and nature of some unreliable Ugandans. I would beg to differ slightly, though upon
entirely for this trend. in my interaction with different responding principal debtor who desired
his own brother to guarantee a loan from a micro finance institution. to the dismay or this man.
the earmarked brother turned down the request: I don't also have enough money guarantee a
loan. This can indeed explain that there is some consciousness growing in the public which
. tI1e unpopu Ianty
exp Imns . o f guarantees.--
"4

The operation or guarantees in Uganda is governed by law sketched from other statutes like the
Civil Procedures Act, contract Act; these do not clearly demarcate the corners of guarantees. the
absence of a clear law on guarantees presents a grave problem in operation. Little wonder that
guarantors make uninformed decisions; they have no proper guidance: Other wise if the proper
law were put in place. guarantors could easily predict the consequences and implications of asset
to guarantee a debt, weigh his or her rights and obligations. This could harmonize the guarantee
law in Uganda as it would indicate the channels and roots to be pursued by a guarantor incase
there has been default on the part of principal debtor.

_·::;The author chooses to reserve revealing the names of the particular banks as he entered into an oath of
coJ?fidentiality with his respondents.
~-'J Awhor 's considered opinion about the problem

63
4.6 CONCLUSION

The reasons why people enter such risky transactions are not clear cut and cover a range of often
intermingled factors including: relationships of trust feeling a lack of choice. pressure.
misunderstanding or optimism. Many such factors are clearly heightened in situations in which
the guarantor is economically dependent upon the borrower. The reasons given by guarantors as
to why they signed suggest that third party guarantee transactions are being regularly undertaken
in situations of power imbalance. These factors suggest that many guarantors could not be
regarded as making a free choice to enter into the transaction.

It is important to consult an experienced attorney before signing a substantial obligation.

particularly a guaranty of another party's loan. It is absolutely critical to have legal
representation by counsel knowledgeable about creditors' rights issues at the first indication that
a guaranteed loan may be heading for default.

64
 CHAPTER FIVE

5.1 INTRODUCTION

In this chapter the research sought to explore the possible recommendations. suggestions way
forward and make conclusions.

5.2 RECOMMENDATIONS

Suggestions to impron' the operation (~{guarantees

5.2.1 Data centre

There should be a data centre to know about the guarantors. This data centre should particularly
be relevant in helping coordinate services of guarantors in Uganda. It is the considered opinion
of the researcher that this centre when put in place would increase the bargaining power of the
guarantors; this can be stemming from advocacy and sensitization which this research has
discovered that are at the core of the successful operation system of guarantees in an)
jurisdiction.

The credit Reference Bureau recently introduced in Uganda to liaise the credit facilities should
be able to assist in this area. I understand it is not easy to achieve this recommendation now since
heavy financing will be required. however attempts have been made in other areas: the credit
Reference Bureau though recent has shown that it is and will be a success and if streamlined for
now to cater for such service to guarantors would help reduce the problems discovered by the
research. Moreover there is a close link between the work of the Credit reference Bureau and the
guarantees. A coordinated information system among banks should be particularly able to
eliminate defaulting clients from the eligible beneficiaries from the facility. But importantly the
coordinated information can be the basis for debt insurance as there would be an organized
network of beneficiaries.

5.2.2 Relax the requirement of secrecy

Banks conduct a very strict policy on the diligence of information which may be much needed to
guarantors so as to make informed decisions. This should be blamed for the unfair treatment

65
accorded to the guarantors; moreover these financial institutions owe no duty of care to these
guarantors.

The law pertaining the secrecy I confidence should be relaxed to assist the guarantors obtain
necessary information so as to be able to make informed decisions as to whether to take on the
obligation to stand in for the principal debtor. This, if done will be effective in enforcing the
rights of the parties to the guarantee in that minimal friction may be involved.

5.2.3 Grant more assistance

The bank should grant more assistance to guarantors in recovering their money. This could be in
ltlrl11 of availing legal aid to the guarantors since most banks often admit intending guarantors
who are already known clients with a good banking history; one reading this recommendation
may imagine am dreaming as 1 write, amidst the capitalistic cloud which bestows on profit
maximization to the banks as laboring under such requirement would increase the burden on the
banks. However if this is attempted could be in position to develop a cordial relationship and
familiarity to the bank guarantee facility as the clients would be expectant of a warm gesture of
appreciation from the bank.

5.2.4 Reknown personalities

Guarantee facilities should be availed only to reknown personalities with good moral linancial
backgrounds. It is suggested that such persons are informed of their obligation to the contract of
guarantee. This is important as it would limit instance of bad relations between the creditors and
guarantors if the guarantors are called upon to meet obligation to the bank.

Such personalities should the trustworthy and honest ones of the society, we should not l~dl for
titles as the yardstick for instance giving preference to politicians, religious leaders alone; time
has tested some of these persons. This can best be achieved with the presence of data centre to
screen the clients.

66
5.2.5 Sensitization

Sensitization to the general public about the credit facilities available in the banking sector
should be undertaken so as to increase awareness to the people. The sensitization could be done
through conducting training and seminars with the guarantors so as to enlighten them of the
implication. obligations of guarantees and such exercise could assist in screening client"s
guarantors that are worthy for the facility. This should be able to eliminate the misconception
held by the public (guarantors) of not expecting to be called on to pay in default of the principal
debtor. This will be even relevant in expanding the banking services in Uganda taking into
account that much of the population does not own accounts; will improve on the saving culture
among the people.

5.2.6 Role of Central Bank

The Bank or Uganda should interact more with the public and provide civic education about the
banking sector. Notable to mention is that the Central Bank merely conducts civic education i!'
there is a proposed currency reform or some thing to that effect. However a powered economy
can be achieved if the Central Bank plays a more vital role in the public by updating them of the
latest developments in the sector.

Commercial institutions may be much hesitant to take on roles that will hurt them financially; for
the commercial banks to venture into this will increase the expenses on these financial
institutions. However the Central Bank may be able to undertake such a project l\1r the public
good. When done will stimulate the demand of banking services not only guarantees per se.

5.3 WAY FORWARD

Legal responses to the problem of third party guarantee transactions have tended to focus upon
the provision of information, usually in the form of legal advice prior to signing.
Recommendations have also on occasion focused upon the provision of financial advice or
information about the borrower's financial position. While the researcher did not explicitly ask
guarantors whether they would have signed regardless of inf01mation. warnings or advice. the

67
following are some of the comments made by guarantors which indicate that for some the
execution of the guarantee was, in effect, a forgone conclusion: ''being [guarantor] for my
daughter, I was not worried one as I was helping her." "sick at the time. didn't want to worry
about things so I just signed." "It was for my daughter and I would do anything for my children."

It appears that. for some guarantors at least. they would enter the transaction no matter what they
knew about it in advance. In numerous Australian decisions judges have held that. although the
guarantor was deceived or misinformed, if they would have signed under any circumstances.
then relief should be refused because the misconduct was not the cause of the guarantor's
decision to enter into the transaction. 225 Other cases have similarly held that the absence or
inadequacy of legal advice would not permit relief if the guarantor would have consented to the
transaction regardless 226 Such an approach has been doubted in decisions in the UK concerning
situations where the guarantor was. in addition to such failures. misled. UC B Corpomle Serl'!·ces
Ltd v Wi!liams 227

However, many respondents to the guarantor survey suggested that more information would
have made a difference to their choice: had they been properly or better informed. they may not
have proceeded with the transaction. The lollowing are some of the comments from guarantors:
"I should have had independent legal advice. I should have had time to discuss the issue with
financial/relationship counselors." "More information should be given to people like me ... the
lender should make it a rule that someone like me has to go to the bank and be fully aware of
their legal rights and what could happen to them." "should explain things more. especially if
husband and wife, should have been sat down. should have explained liability clearly."

115
See Commonwealth Bank qfAustralia v Stavrianos (Unreported, NSW Supreme Court, No 1222-119-1, Graham
AJ, 17 Oc10ber 1997); National Australia Bank v Mitolo [2002} SASC 102.
'"See Farrow Mortgage Services Ply Ltd (In Liq) v Toi}Jey [1998] NSWSC II~; Sopuppo v Ribchenkov {JOIJI]
FCA 1428.
,- {2002} AllER 28.

68
5.4 CONCLUSION

Having weighed the operation of guarantees much attention of the law is captured by the
creditors who possess the information required in the attainment of their goals. What is expected
is that the guarantee should be in writing signed by the guarantor. without undue intluence or
misrepresentation. These are not enough rather there is need for the conclusive law to govern the
rights and obligations of the parties to the contract of guarantee. This will do great service to the
guarantors particularly as it would inspire empowerment of informed decision making among the
parties

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 REFERENCES

Cox, David, Success in Elemenls qf Banking, Pillman, 6rh Ed (1990)

Curram, William, Banking and Global sysrem, Woodhead Faulkner limired 8 marker passage
Cambridge CB2 3PF (1979)

Doyle, EP& Gerrard. P. Pracrice of Banking!. Securilies fi!r Advances: Personal ( 'ourse for
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Geraldine Mary Andrews & Richard Millet Lmt' of Guaranrees, London Sweel & i\1/axwell. 3""
ed (2000)

Hanson. DG. Service Bonking. rhe all purpose h1mk. Rankers Books lrd puNished Jrd ed ( 198-J

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Kyamanywa, Med, The Easr Afi'iccm Diploma in banking, lending work book, dislance learning;
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Lipscombe, Geoffrey. Banking, !he Business, Elemenlary Lending and Securily jiJr Lending.
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Mukub\\a. Grace. Essays in Afi-ican Bonking Lull'. Uganda L1nt· vVarch (1998)

Perry. FE, The Elemenrs of Banking, Mell1l!en& Co Lid wilh Jnslilllle of Bankers London.Isr Ed
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\\ \YW. Iwcsar.nsw.goy,au II aw I .Ill II'

urc Ill ·trc.nspagcs
tl II J'C uH
' Iex last cl1ecl<ed 011 ~~nd
~~ .lttl1e·
20 I 0.

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 APPENDIX

QUESTIONNAIRE FOR BANK RESPONDENTS

I. Do you think guarantors are given sufficient protection? Give reasons.

2. How often does your bank admit guarantees?

3. Do the guarantors understand the nature of their obligations to towards the bank?

4. What relationship do the guarantors share with the bank before the guarantee is executed?

5. How does a client secure the guarantee facility from your institution?

6. How effective is the current law on guarantees? How acceptable is it to your institution?

7. Does the law give the bank sufficient cover for the money or loan guaranteed?

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