The Contract of Guarantee By Kingsley Ezenwa Izimah, Esq.

Introduction: Contract of guarantee is part of the law of contract. See Treitel 10^th Edition by G.H Treitel, Sweet & Maxwell, 1999. A guarantee is an accessory contract (i.e. a suretyship arising out of contract), by which the guarantor undertakes to be answerable to the promise for the debt, default or miscarriage of the principal. See the case of Moschi v. Lep Air Services Ltd (1973) AC 331 at 349; 2 All E.R 393 at 400 HL per Lord Diplock. Thus, obligations created by a contract are not all of equal importance. But, one term may be of major importance, whose breach could lead to a discharge of the contract; while another term may be a relatively minor one whose breach could result only in damages. See the case of Beta Glass Plc. v. EPACO Holdings Ltd (2011) 4 NWLR (Pt.1237) 223. The cardinal principle of construction of a document of contract is for the terms of the agreement to be binding between the parties by the contract they freely entered into. See the case of Bakare v. N.R.C (2007) 17 NWLR (Pt.1064) 606. An acceptance can only be effective when there is a complete agreement on all material terms. See Cheshire, Fifoot & Furmton’s, Law of Contract 13^th Edition, Butterworths, 1996. Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such a breach of contract should be such as may fairly and reasonably be considered as either arising naturally; that is, according to the natural course of things from such breach of contract itself; or such as may reasonably be supposed to have been in contemplation of both parties at the time they made the contract as the probable result of the breach of it. See the case of U.B.N Plc. v. Sparkling Breweries Ltd (1997) 5 NWLR (Pt. 505) 344. The governing principle of damages is to put the party whose rights have been violated in same position so far as money can do as if the rights have been observed. In cases of breach of contract, the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to resulting from the breach^. See the case of G. Chitex Industries Ltd. V. O.B.I Nigeria Ltd (2005) 14 NWLR (Pt. 945) 392. A party wishing to enforce a contract must show that he has performed all the terms which ought to be performed by him. A party who fails to perform his own obligation under a binding contract to the detriment of the other party is in breach of the contract. See the case of Lagos State Government v. Toluwase (2013) 1 NWLR (Pt. 1336) 555-561 per Ogunwumiju J.C.A. Generally, a contract of guarantee is said to be independent of the main contract so that a creditor could proceed against the guarantor without joining the debtor as a party to the suit. However, everything depends on the actual contract entered into by the parties. See the case of Chami v. UBA Plc (2010) 6 NWLR (Pt. 1191) 474, South Trust Bank & Ors v. Pheranzy Gas Ltd & Ors. (2014) LPELR-22340CA. Meaning of Contract of Guarantee: According to Black’s Law Dictionary, 8^th Edition, a guarantee means the following: a).      To assume a suretyship obligations; to agree to answer for a debt or default; b).      To promise that a contract or legal act will be duly carried out; c).      To give security to. Furthermore, the Supreme Court has defined “Guarantee” in the case of Chami v. U.B.A Plc. (2013) 4 BFLR Pgs. 20-25; as: “A written undertaking made by one person to another to be responsible to that other if a third person fails to perform a certain duty, e.g. payment of debt. Thus, where a borrower (i.e. the third party) fails to pay an outstanding debt, the guarantor (as surety as he is sometimes called) becomes liable for the said debt”. See the case of Dala L.G.A v. Access Bank Plc & Anor. (2016) LPELR-40200CA; Trade Bank Plc. v. Chami (2004) All FWLR (Pt.235) 118; where the court held that: “A guarantor is technically a debtor because where the principal debtor fails to pay the loan, the guarantor will be called upon to pay”. In essence, the term guarantee maybe defined as an undertaking by one person to pay the amount due from another person. A contract of guarantee is a contract to perform the promise or discharge the liability of a third party in case of his default. See the cases of Wema Bank Plc & Anor v. Alaran Frozen Foods Agency Nig. Ltd & Anor. (2015) LPELR-25980CA and Gupara SEC & FIJN Ltd. v. T.I.C Ltd. (1999) 2 NWLR (Pt. 589) 29 at 46-47. It must always be borne in mind that contract of guarantee involves three parties; i.e., the creditor, the surety and the principal debtor. The person who gives the guarantee is called the surety, the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. See the case of Jay Jay v. Skye Bank Plc (2016) LPELR-40185CA. It is also imperative to point out that a contract of guarantee may also create a “see to” obligation to ensure or procure performance or payment by the debtor or else, the guarantor or surety may be held responsible for the completion of the act or found liable for damage caused by the failure to perform. Thus, contract of guarantee therefore creates a liability on a third party to the extent of the liability of a party to a transaction. See the case of Goldlink Insurance Co. Ltd. v. Petroleum (Special) Trust Fund (2008) LPELR-4211CA. Definition of a Guarantee: According to Black’s Law Dictionary, 6^th Edition, Page 705; a guaranty or guarantee is defined as: ‘a collateral agreement for performance of another’s undertaking or an agreement in which the guarantor agrees to satisfy the debt of another (the debtor) only if and when the debtor fails to repay.’ In other words, it is an undertaking or promise that is collateral to the primary or principal obligation which binds the guarantor to perform in the event of non-performance by the principal obligator. Furthermore, a guaranty or guarantee is defined as a collateral agreement for the performance of another’s undertaking or an agreement in which the guarantor agrees to satisfy the debt of another the debtor) only if and when the debtor fails to repay. In other words, it is an undertaking or promise that is collateral to the primary of principal obligation which binds the guarantor toper form in the event of non-performance by the principal obligor; the most obvious of which is the contract of guarantee in which a person promises to repay a debt to a lender of money; if the borrower fails to pay. Hence, a contract of guarantee is a contract “strictissimi juris” and to make the guarantor liable, the terms thereby must be strictly complied with. See the case of African Continental Bank Ltd. v. Wogu (1965) 9 E.N.L.R 102. A guarantee is a written undertaking made by one person to a second person to be responsible if a third person fails toper form a certain duty; e.g. pay a debt. See the case of Royal Exchange Assurance Nigeria Ltd. v. Aswani Textile Industries Ltd (1992) 3 NWLR (Pt. 227). Essentials Factors of a Contract of Guarantee: The ingredients or common features of a contract of guarantee are as follows:

1. There must be three parties involved in the contract viz:-
2. i) A creditor;
3. ii) A principal debtor

iii)     A promissor who undertakes to discharge the principal debtor’s liability should the latter fail to discharge it himself;

1. There must be an agreement between the parties;
2. The agreement must be in writing and if not under seal, there must be valuable consideration;

The contract or agreement must not be illegal as illegality generally renders any contract null and void ab initio and the party seeking to enforce it will have no remedy in a court of law. See the case of National Bank of Nigeria Ltd. v. Guthrie Nigeria Ltd & Anor. (1987) 2 NWLR (Pt.56)255. A contract of guarantee, which term implies an undertaking, must be in writing in order to be binding on the guarantor. If it is not in writing, it is not a contract of guarantee “strictu sensu”.See the case of Eboni Finance & Securities Ltd. v. Woleojo Technical Services Ltd. (1996) 7 NWLR (Pt. 461) at Pg. 476. An admission of liability by a principal debtor is not necessarily an admission by his guarantor. See the case of Nigeria LNG Ltd. v. African Development Insurance Co. Ltd. (1995) 8 NLWR (Pt. 416)677 at 694. A contract of guarantee is a contract strictissimi juris and to make the guarantor liable, the terms thereby must be strictly complied with. See the case of Umegu v. Oko (2001) 17 NWLR (Pt. 741) 1 at 142. Thus, where a person personally guarantees the liability of a third party into a contract of guarantee or suretyship, a distinct and separate contract from the principal debtor is thereby created between the guarantor and the creditor. See the case of R.E.A. v. Aswani Textile Limited (1992) 3 NWLR (Pt. 227)1 at 13. Based on the above, a contract of guarantee must contain the following essential factors for effective enforcement:

1. Consensus ad idem:

All three parties namely; the principal debtor, the creditor and the surety must agree to enter into such a contract;

2. Liability:

In contract of guarantee, liability of the surety is secondary in the sense that, the creditor must first proceed against the debtor and if the debtor does not fulfill his promise of repayment, then the creditor proceeds against the surety. In a contract of guarantee, the liability of the guarantor to the creditor arises on the principal debtor’s default, so that time begins to run in favour of both of them from that moment, unless otherwise agreed. If the surety undertakes to pay on demand, the creditor’s cause of action accrues when a demand is made and not complied with. See the case of Amede v. UBA (2008) 8 NWLR (Pt. 1090) 623 at 659, paras. E-H, CA, I.D.S Ltd. v. A.I.B Ltd (2002) 4 NWLR (Pt. 758) 660, Auto Import Export v. Adebayo (2005) 19 NWLR (Pt. 959) 44.

3. Existence of a debt:

A contract of guarantee pre-supposes the existence of a liability which is enforceable in law. If no such liability exists, there can be no contract of guarantee. Thus, where the debt which is sought to be guaranteed is already time barred or void, the surety is not liable.

4. Consideration:

There must be consideration between the creditor and the surety so as to make the contract enforceable. The consideration must also be lawful as no one can enforce an illegal contract. In a contract of guarantee, the consideration received by the principal debtor is taken to be the sufficient consideration for the surety. Thus, any benefit received by the debtor is adequate consideration to bind the surety. But past consideration is no consideration for a contract of guarantee to bind a surety, there must be a fresh consideration moving from the creditor.

5. Writing is necessary:

A contract of guarantee may either be oral or written. It may be express or implied from the conduct of parties. But most preferable, written contracts are advised to avoid denials. See the case of FCMB Ltd. v. SAIC Ltd (2007) All FWLR (Pt. 363) 133 at 146, paras G-H, where the court held that: “For a contract of guarantee to be binding, it has to be in writing, evidencing an agreement between the parties.’’ See also the case of Obikoya v. Wema Bank Ltd. (1991) 7 NWLR (Pt. 201) 119. It is settled law that the parties are bound by contents of any written agreement duly executed by them, therefore, a post denial of an already executed agreement or lack of understanding of the content of wordings of the agreement, especially in the circumstance that the debtor will be absolved of any liability will not be excused to do so. See the case of Alhaji Jimoh Ajagbe v. Layiwole Idowu (2011) LPELR-279SC and Benjamin Ukelere v. First Bank of Nigeria (2011) LPELR-3869CA.

6. Must contain all the elements of a valid contract:

It must have all the essentials of a valid contract such as offer and acceptance, intention to create a legal relationship, capacity to contract, genuine and free consent, lawful object, lawful consideration, certainty and possibility of performance and legal formalities. See the case of J.E Oshevire Ltd. v. Tripoli Motors (1997) 5 NWLR (Pt. 503) 1.

7. No concealment of facts:

The creditor should disclose to the surety the facts that are likely to affect the surety’s liability. The guarantee obtained by the concealment of such facts is invalid. Thus, the guarantee is invalid if the creditor obtained it by the concealment of material facts. See the case of Olujitan v. Oshatoba (1992) 5 NWLR (Pt. 241) 326.

8. No misrepresentation:

The guarantee should not be obtained by misrepresenting facts to the surety. Though, the contract of guarantee is not a contract of ‘uberimae fidei’ i.e. of absolute good faith and thus does not require complete disclosure of all material facts by the principal debtor or creditor to the surety before he enters a contract. But the facts that are likely to affect the extent of surety’s responsibility must be truly represented. See the case of Ekerebe v. Efeizomor II (1993) 7 NWLR (Pt. 307) 588.

9. Contract must be enforceable:

In contract of guarantee, parties are bound by their agreement. However, an illegal contract or guarantee secured through an illegal means cannot be enforced and parties cannot be held liable for non-performance or breach of such contract of guarantee. Thus, a contract of guarantee must be entered for a legal purpose without which it becomes void and unenforceable. See the case of Ekerebe vs. Efeizormor II (1993) 7 NWLR (Pt. 588) 601.

10. Contract of guarantee can be enforced against the guarantor without the necessity of joining the principal debtor:

When the principal debtor fails to pay his debt his debt, the liability of the guarantor under the contract of guarantee crystallizes. The right of the creditor is therefore not conditional as he is entitled to proceed against the guarantor without or independent of the incident of the default of the principal debtor. See the case of F.I.B.C Pic. v. Pegasus Trade Office (2004) 4 NWLR (Pt. 863) 369, African Insurance Development Corporation v. Nigerian Liquefied Natural Gas Ltd. (2000) 4 NWLR (Pt. 653) 494. However, it has been stated that the surety may be proceeded against without demand against him and without first proceeding against the principal debtor by the creditor. See Chitty on Contract, 24^th Edition, Volume 2, paragraph 4831, Moschi v. Lep Air Services Ltd. (1973) A.C. 331 at 348, Esso Petroleum Company Ltd. v. Alaston Bridge Properties (1975)NWLR 1474. It should be noted that a contract of guarantee can be enforced against the guarantor directly or independently without the necessity of joining the principal debtor in the proceedings to enforce the guarantee. Thus, a surety may be proceeded against without demand from him and without first proceedings against the principal debtor. Thus, a contract of guarantee can therefore be described as collateral to some other contract, debt or obligation. See the case of Flour Mills Ltd. v. Olokun (2007) LPELR-8534CA, where the court held that: “In contract of guarantee, a creditor can proceed against the guarantor without default of the principal debtor”. See also the case of Fortune International Bank Ltd. v. Pegasus Trading Office (GMBH) & 2 Ors. (2004) 1 SCNJ 292; (2004) 4 NWLR (Pt. 863) 369, per Uwaifo JSC. Discharge: Liability of the guarantor or surety exists concurrently with that of the principal debtor. This means that where a guarantor is successfully discharged of his obligation or debt, the guarantor’s liability is equally extinguished. See the case of Goulston Discount Co. Ltd v. Clark (1964) 2 QB, p. 493. A contract generally may be discharged through any of the following ways:

1. By Performance-if both parties have done all that is required of them; or
2. By agreement-if both parties mutually agree to put an end to their contractual relationship; or
3. By frustration-if some event outside the control of the parties take place, making performance impossible; or

By breach-what the innocent party is relieved and the party in default may be liable for damages. See the case of Tsokwa Oil Marketing Co. v. BON Ltd (2000) 11 NWLR (Pt. 777) 103. After the parties have made their agreements, unforeseen contingencies may occur which prevent the attainment prevent the attainment of the purpose that they had in mind. See the case of SBN Plc. v. Opawubi (2004) 15 NWLR (Pt. 896) 437. In Pardine v. Jane (1647) Aleyn 26; Simpson 91 LQR 247 at 269-273., the judges laid down what is sometimes called the rule as to absolute contracts. It amounts to this: when the law casts a duty upon a man which, through no fault of his, he is unable to perform, he is excused for non-performance; but if he binds himself by “contract” absolutely to do a thing, he cannot escape liability for damages for proof that a s events turned out performance if futile or even impossible. For instance, if a ship owner agrees that he will load his ship with oil palm at a certain place in Nigeria; he is liable in damages notwithstanding that no oil palm is obtainable. See the case of Hills v. Sughrue (1848) 15 M & W 253. A man who with his eyes open and without the other party community any fraud against him enters into an agreement with another should be prepared to abide by the terms of the agreement. See the case of Chidoka v. F.C.F.C Ltd (2013) 5 NWLR (Pt. 1346) at 149 SC per Aloma Murktar, JSC. The Statute of Fraud provides that: “No action shall be brought whereby to charge any executor or administrator upon any special promise to answer damages out of his own estate; or whereby to charge the defendant upon any special promise to answer for debt, default or miscarriage of another person; or to charge any person upon any agreement made upon consideration of marriage; or upon any contract or sale of lands, tenements or hereditaments; or any interest in or concerning them; or upon any agreement that is not to be performed within the space of one year from the making thereof, unless the agreement upon which such action shall be brought, or some memorandum or note thereof, shall be in writing and signed by the party to be charged therewith or some other person thereunto by him lawfully authorized”. The above provisions of the statute of fraud, applies where liability guaranteed is contractual or tortuous, but not to an indemnity of a promise to indemnify the creditor against loss arising out of the principal contract. See the case of Kirkam v. Marter (1819) 2 B & Ald. 613; Eastwood v. Kenyon (1840) 11 A & E 438. Actions arising from breach of contract shall be commend and determined in the judicial division in which the contract was entered into or ought to have been performed or in which the defendant resides or carries on business. See the case of Theobros Auto-Link Ltd. v. B.I.A.E Co. Ltd (2013) 2 NWLR Pt. 1338 at 341 per Mohammed Lawal Garba, J.C.A. As in the case of law of guarantee, a valid guarantee requires an agreement made between parties intending to create legal relations and having the capacity to contract, supported by consideration, actual or implied. Additional statutory requirements, is that the contract must either be in writing or be a written note or memorandum signed by or on behalf of the party to be charged. See the case of Pan Bisbilder Nigeria Ltd. v. First Bank of Nigeria Plc. (2000) 1 NWLR (Pt. 642)684; Ahmed v. CBN (2013) 2 NWLR (Pt. 1339) at 524 S.C per F. F Tabai JSC. A valid guarantee requires a sufficient agreement. This is usually by the process of offer and acceptance and where this is so, the law requires that there be an offer on ascertainable terms which receives an unqualified acceptance from the person to whom it is made. See the case of M’Iver v. Richardson (1813) 1 M & S 557; Sorby v. Gordon (1874) 30 LT 528. Guarantee vs. Indemnity: On the other hand, a contract of indemnity is a contract by which one party agrees to make good a loss suffered by another. In law, it is normally used to denote a contract by which the promissor undertakes an original and independent obligation to indemnify as distinct from collateral contract in the nature of a guarantee by which the promissor undertakes to ensure for the default of another person who is to be primarily liable to the promissee. The extent of a person’s liability under an indemnity depends on the nature and terms of the contract and each case must be governed in general, by its own facts and circumstances. See the case of Gillespie Brothers Co. Ltd. v. Roy Bowles Transport Ltd. (1973) 1 Q.B 400; (1973) All E.R 193 CA. An indemnity is an undertaking whereby one agrees to indemnify another upon the occurrence of an anticipated loss. And the extent of a person’s liability under an indemnity depends on the nature and terms of the contract and each case must be governed in general, by its own facts and circumstances. See Mobil Producing Nigeria Unlimited v. Asuah (2001) 16 NWLR (Pt. 740) 510 at 723.   Limitation Period: Limitation periods dictate a period of time within which a party must bring a claim against a party to court. When an action first accrues is generally from when the circumstances giving rise to the claim first occurred (i.e. when the party breached the contract). The qualification to this is that, where the loss is solely economic, the cause of action accrues when the loss first becomes apparent or can be discovered through reasonable diligence. See the case of Melisavan Pty. Ltd. v. Springfield Development Pty. Ltd (2014) QCA 233. It is imperative to note that under section 5 of the Limitation Act, 1980, any right of action founded on a simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued. However, section 29(5) of the Limitation Act provides that a debtor’s written acknowledgment of its debt or other liquidated pecuniary claim starts time running afresh. In other words, where the defendant liable or accountable for the claim acknowledges or makes any payment against the claim, the right is treated as having accrued on the date of the acknowledgment or payment. A guarantor cannot determine his liability under a guarantee agreement by a mere writing of letter without more. See the case of FBN Plc v. Songonuga (2005) LPELR-7495CA; where the court stated that: “A guarantor remains answerable for the principal sum granted as overdraft plus accrued interest at the rate agreed to or prescribed upon his guarantee and before notice to determine is given.” See also Llyod’s v. Harper (1881) 16 Ch. D 290, 320; Ikomi v. BWA Ltd. (1965) NSCC 29, 35; Sweet & Maxwell’s Laws on Loan & Borrowing by Robert Burges, July 1993 Edition, p. 4075, para. 477; Obikoya v. Wema Bank Ltd (1991) 7 NWLR (Pt. 201) 119. Limitation as a defence: Limitation periods are a defence. In other words, it is up to the defendant to bring forward its defence insofar that the time limit has expired to an action that has been brought after the relevant limitation period has passed. Conclusion: It is important that individuals involved in transactions acquire a good understanding of the nature, implications and benefits of contract of guarantee as it has an important part to play in the preparation, agreement and negotiation of commercial transactions. See the case of Yemole Nig. Ltd. & Anor. v. Access Bank Plc (2017) LPELR- 4260-CA, the court held that: “Where a person personally guarantees the liability of a third party by entering into a contract of guarantee or suretyship, a distinct and separate contract from the principal debtors is thereby created between the guarantor and the creditor. The contract of guarantee created can be enforced against the guarantor directly or independently without the necessity of joining the principal debtor.” See also the case of Khaled Barakat Chami v. UBA (2010) 2-3 SC (Pt. 11) 92, Ministry of Agriculture, Katsina State v. GTB & Anor. (2018) LPELR-44372CA, Chami v. UBA Plc (2010) 6 NWLR (Pt. 1191) pg. 474 at 501, para B-C, per Onnoghen JSC, Skye Bank Nig, Plc v. Seph Investment Ltd. (2017) 13 NWLR (Pt. 1581) pg. 82 at 96, para. D-E, Olujitan v. Oshatoba (1992) 5 NWLR (Pt. 241) 324 at 329, Ekerebe v. Efeizorma II (1993) 7 NWLR (Pt. 307) 588 at 606, Moschi v. Lep Air Services (1973) AC 331, Esso Petrochemical Ltd. v. Alastonbridge Properties (1975) WLR 1474. For more information, please contact: Kingsley Ezenwa Izimah, Esq., +234 (0) 806 809 5282; 0805 101 9362 Kingsley.izimah@gmail.com  ,kingzles@gmail.com]]>