Problems associated with guarantees under Kenya law.
Extent to which a guarantor remains bound under the guarantee even after the terms of the principal lending have been varied.
In the Donde Bill there was a proposal to get rid of guarantees,
What is a guarantee?
A guarantee is defined under Kenya law as a written promise by the guarantor to answer for the debt of another
and that other is the principal debtor made to a person namely the
lender to whom that other is already or is about to become liable.
Under
the Law of Contract Act Cap 23 the guarantee must be in writing or
there must be a Memorandum of it in writing signed by the guarantor.
The
banks will ordinarily or as part of their requirements for lending
purposes require that the principal borrower should furnish security by
providing a guarantor. This is a common method by which bankers seek to
protect themselves against loss on advances.
To
effectively protect itself the banks will usually frame the bank
guarantees so as to apply to all accounts of the principal debtor
whether such accounts are solely in the name of that principal debtor or
whether such accounts are joint accounts or partnership accounts so
that if the principal debtor has two accounts with outstanding
facilities at the bank, the bank will ensure that the language of the
guarantee covers both accounts for instance.
The
guarantees will also usually be framed in such broad terms so as to
extend to the liabilities of the principal debtor in the capacity of
that debtor in principal form or in the capacity of that debtor as a
surety or as a guarantor for lending to another party.
There
are situations where the guarantee is given by more than one person
i.e. where there is more than one guarantor to the guarantee. In that
event the guarantee should stipulate whether the obligation of the
guarantors is several or joint and several. If the obligation be joint
only, it means that if the lender sues one of the guarantors and obtains
judgment against that guarantor, he cannot subsequently bring an action
under the same guarantee against the other guarantor. But in the case
of the guarantee being several the remedy by the bank can be pursued
against both guarantors at different times. The caution is that when
one is dealing with a joint guarantee one has to sue all the guarantors.
The banks invariably provide in the language of the guarantee that the liability of the guarantors is joint and several.
The
other measure that a guarantor should take or the other factor that a
guarantor should be alive to is whether the guarantee is limited or
unlimited. If it is intended to be limited meaning that the liability
of the guarantor should not exceed a certain limit, then the guarantor
should ensure that the instrument of the guarantee so provides.
A
further distinction is also made between specific guarantees and
continuing guarantees. A specific guarantee is where provision is made
for the advance of a specified sum and the guarantee is only applicable
to that particular advance and it ceases on the repayment of that
amount. A continuing guarantee is designed to cover a fluctuating or
running account and it secures the debit balance at any time
irrespective of payments which clear past advances.
HOW DOES ONE BRING TO AN END THE INSTRUMENT OF GUARANTEE?
Most
guarantees will provide that a guarantor wishing to determine the
guarantee must give notice to the lender and pay into the bank the
amount that may be due. The guarantee may simply provide that the
liability of the guarantor will cease upon the expiry of a specified
notice to be given by the guarantor to the bank and upon payment of all
outstanding sums notified by the bank upon receipt of such notice.
The
bank has to be careful coz the effect of this is that the guarantor can
give notice to the bank should the bank receive notice that is responds
by stating the amount that is outstanding.
DEATH OF A GUARANTOR
Does
the death of a guarantor determine a guarantee? It does not
necessarily determine the guarantee unless provision to the contrary is
provided. The other way to bring the guarantee to an end under Kenya law is for the
principal debtor to discharge his liabilities with the bank and
therefore if the lender releases the principal debtor, it follows also
that the guarantor is discharged.
Mahand Singh v. Ubayi [1939] A.C. 601
This is authority for the proposition that where the creditor releases the principal debtor, the guarantee is discharged.
This follows the principles in Rees V. Barrington following a case bearing those names.
The
other way in which the guarantor may be released is where the creditor
agrees to vary the terms of the lending with the principal debtor to the
prejudice of the guarantor.
Holme v. Branskill [1878] 3 QBD 495
This has been followed by our courts in the case of
Harilal and Co. v. The Standard Bank Ltd. [1967] EA 512