– Francis Igho Erhiakporeh
“Do not be one who shakes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from under you.” Proverbs 22, Verses 26-27.
It is often the general rule, rather than the exception, that most people who hold themselves out as guarantors are ignorant of the implication of signing a guarantee form/contract. Most people’s perception of a guarantee is that it is merely a formality incidental to the consummation of a contractual agreement. While there may be few with actual knowledge of the implication of holding oneself out as a guarantor, such persons, however, do so with the belief that their liability will never crystallize.
People who hold themselves out as guarantors either in a loan agreement or for the performance of an obligation under a contract, see it as doing a favour for a friend or family member, without any idea of the consequences and the liabilities that could arise therefrom. Some obligees are equally ignorant as they, more often than not, go after the obligor without recourse to the guarantor who had committed to performing the obligation in the event of failure by the principal obligor, or undertook to compensate the obligee accordingly.
The outbreak of COVID-19 has made the performance of some contractual obligations impossible. Also, some contractual agreements which, but for the pandemic, would have enjoyed seamless performance, may be breached and thus trigger the liability of guarantors.
As the world cautiously attempts a return to some form of normalcy, legal hatchets hitherto buried are likely to be exhumed and contractual agreements excavated with a view to determining the likely exposures arising from the non-performance of obligations arising from such contracts.
This article discusses the liability of a guarantor who, though not a party to a contract, may nonetheless bear eventual liability for the breach of any obligation under such contract, the performance of which he guaranteed, and when the liability of such guarantor arises.
Liability of a Guarantor for Breach of a Guaranteed Contractual Obligation
A guarantor is a person who guarantees or gives assurance for the performance of an obligation. By guaranteeing the performance of a contractual obligation, a guarantor takes the position of the principal obligor where the principal obligor fails in the performance of his/her obligation under a contract. In effect, a guarantor becomes the secondary obligor whose liability to the obligee arises immediately the principal obligor fails in the performance of his obligation under the contract.
It is common practice in contractual agreements (especially where monies are to exchange hands) for the performance of an obligation, for the party advancing the money to require that monies advanced be secured by a guarantee issued, in most cases, by a financial institution . In the event of breach by the principal obligor of its obligation under such contract or failure to perform a duty as stipulated under the contract for which the monies were advanced, the financial institution, being the guarantor, will be liable to pay the obligee, subject to the terms of the guarantee, the amount so guaranteed by the financial institution.
It is also common practice in the grant of loans by financial institutions or money lenders (both individuals and corporate bodies) for the party advancing the loan to request that the repayment of such loan be secured either by the borrower’s property/chattel or guaranteed by a third party who, by such guarantee, undertakes to pay the total sum repayable where the borrower fails to repay by the due date.
Furthermore, it is also common to have inserted in a contract involving the provision of services, a clause that the party who guarantees the provision of certain services under the contract, shall be liable to the obligee for an agreed sum in the event of a breach by the party whose obligation under such contract was guaranteed.
In the above instances, the liability of the guarantor to the obligee in the event of failure by an obligor to perform his obligation under such contracts forms the basis of another contract distinct from the contract wherefrom the obligor’s obligation arose. In most cases, there is a different body of agreement between the guarantor and the obligee which may be written or parole; while in some other cases, the agreement is embodied in the contract from which the obligor’s obligation arose.
Therefore, where an obligor fails in the performance of his obligation under a contract after the due date stipulated under the contract, a breach of that contract has occurred, and the liability of the guarantor is triggered. When this happens, especially in cases involving payment of money or repayment of loan, the guarantor becomes the debtor while the obligor becomes the creditor by virtue of the guarantee.
The liability of a guarantor and when same arises were well-captured by the Supreme Court of Nigeria in the case of C.B.N. v. Interstella Comm. Ltd. wherein the Apex Court held thus:
“A guarantor is technically a debtor because where the principal debtor fails to pay his debt, the guarantor will be called upon to pay the money owed. However, the fact that the obligations of the guarantor arises only when the principal debtor has defaulted in his obligations to the creditor does not mean that the creditor has to demand payment from the principal debtor or from the guarantor or give notice to the guarantor before the creditor can proceed against the guarantor; nor does the creditor have to commence proceedings, whether criminal or civil, against the principal debtor unless there is an express term in the contract requiring him to do so.”
From the forgoing, an obligee can, without recourse to the obligor and/or without a demand issued to the guarantor , proceed to file a law suit against the guarantor for the fulfillment of his obligation under the guarantee agreement. As a matter of law, the obligee need not commence legal proceedings against the obligor for failing to perform his obligation under the contract before proceeding against the guarantor for the fulfillment of his obligation as guaranteed.
The implication of the foregoing is that an obligee is ordinarily expected to proceed against the guarantor, who, by the guarantee agreement, has held himself out as a person of better means than the obligor.
Thus, where there exists a contractual agreement between two or more parties before the advent of COVID-19 and the duration of the execution of such contract or the performance of any obligation under such contract crystallizes during the ensuing lockdown period without the contract being executed or the obligation performed, a breach of the contractual agreement has occurred. Consequently, and subject to the terms of the guarantee, the obligee may choose to proceed against the guarantor for the performance of his obligation under the guarantee agreement.
However, and without prejudice to the foregoing, where an action is brought against a guarantor to enforce a guarantee, the guarantor can invoke the defences available to the principal obligor under the principal contract. For instance, where the non-performance of a guaranteed contract was due to the outbreak of the pandemic, the obligor may plead force majeure or the common law doctrine of frustration as the reason for the non-performance. Thus, the guarantor can invoke the defences referenced above, even where same is not inserted in the contract, as the guarantor is not by law, restricted only to the defences available to the principal obligor, since a contract of guarantee is distinct from the principal contract.
Furthermore, where an obligee proceeds against the guarantor and succeeds, the guarantor may exercise his right of subrogation against the obligor, by instituting an action to recover the monies expended in satisfaction of his obligation to the obligee.
The non-performance of a contractual obligation is a foreseeable event in every contractual agreement, hence the requirement of a guarantor to shoulder the associated liability that may arise therefrom.
A guarantee is therefore not a mere formality. It is a commitment by the guarantor to the obligee, that he, the guarantor, is willing to perform the guaranteed obligation in the event of failure by the obligor to fulfill the obligation owed the obligee under the contract on or before the due date. Where the obligor fails to perform the guaranteed obligation, the obligee can immediately proceed against the guarantor without recourse to the obligor under the principal contract, for the performance of the guaranteed obligation.
Where the obligee proceeds against the guarantor, the guarantor can invoke all the defences available to the principal obligor under the contract. The guarantor may also exercise his right of subrogation by proceeding against the principal obligor to recover what was paid the obligee, where the obligee succeeds in enforcing the guarantee against the guarantor.
So, when next you are called to act as a guarantor to any party in a contract/agreement, don’t just put pen to paper. Read the document and be sure you can bear the liability that might arise therefrom in the event that the obligor fails in the performance of his obligation under the contract.
1 As defined by the Merriam-Webster Dictionary.
2 The person originally responsible for the performance of an obligation under a contract.
3 One to whom another is obligated under a contract.
4 After the due date for the performance of such obligation
5 Usually between two corporate entities
6 Advanced Payment Guarantees.
7 Be it the provision of services, performance of an act, repayment of loan or even payment of a judgment debt.
8 (2018) 7 NWLR (Pt. 1618) 294 @ 338, para. B
9 Once the due date for the performance of the obligation has lapsed
10 The obligor may however not proceed against both the obligor and guarantor simultaneously
11 if inserted in the contract
12 By taking the position of the obligee under the principal agreement.
13 or whatever was forfeited in satisfaction of the guarantee
14 including those not so contemplated under the contract