UNIVERSITY OF LAGOS

SCHOOL OF POST GRADUATE STUDIES

LLM PROGRAM

SEMINAR PAPER ON SECURED CREDIT TRANSACTION II (PPL 807)

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE

GRANT OF LLM DEGREE

TOPIC: GUARANTEE AND INDEMNITY AS SUBJECTS OF SECURITY.

ALE-DANIEL OLAOLUWA  -900601020JONATHAN JULIUS IYIEKE - 109061060UDEOGU CHIJIOKE -109061152

LECTURER: DR. DAYO AMOKAYE

1

GUARANTEE AND INDEMNITY AS SUBJECTS OF SECURITY

INTRODUCTION:

The word security in legal terms goes beyond the ordinary meaning of security in

public parlance the only similarity which can be deduced is that as in common

usage, the word security means protection. In legal terms however, it is deeper as it

includes how an exposure granted to a debtor is secured by another means of

getting the facility repaid outside the primarily debtor/borrower.

This seminar paper is therefore meant to look at whether or not there exist a means

of securing a facility granted to a borrower under an arrangement providing for

guarantee or indemnity and if there is, to what existent this is realizable; the

shortcoming of either and the preferred remedies inclusive of the security

incidence.

DEFINITION OF TERMS

SECURITY

The word security is capable of many meanings but as it relates to the subject at

hand, it can be defined as an interest vested in a person called “The Creditor” in

certain property own by another called “The Debtor” whereby certain rights are

made available to the creditor over such property in other to certify an obligation

personally owed or recognized as being owed to the creditor by the debtor or some

other persons. The definition is said to be wide enough to comprehend the case of a

security by a guarantor.1

_______________________________________________________________1. Definition provided per Prof. I.O. Smith in his book Nigerian Law of Secure Credit page

4 paragraph 3 relying on SYKES AND WALKER: THE LAW OF SECURITIES 5TH ED

(1993)

2

INDEMNITY: The word indemnity according to Lectric Law library lexicon2

defines indemnity as an arrangement whereby one party agreed to secure another

against an anticipated loss or damage for example, someone may agreed to turn a

business over to another person for a reduced price if they pay the debts and other

obligations of the business in a broad sense, insurance policies are indemnity

contract. A provision in a lease that requires a tenant to pay (indemnity) a landlord

for damages can also be termed an indemnity.

It is an obligation of one party to reimburse another party for losses which have

occurred or which may occur. It is also defined as payment for damage, a

guarantee against loss, a bond protecting the insured against losses caused by

others failing to fulfill their obligation.

A compensation to make a person whole from a loss already sustained, a contract

or assurance by which one anticipated loss 3

As it is usual in most indemnity cases, it is in a form of agreement and indemnity

agreement is defined as a policy provision designed to restore an insured to his or

her original financial position after a loss. The insured should neither profit nor be

put at a monetary disadvantage by incurring the loss. In other words, indemnity

simply defined is a legal exception from liability for damages4

_________________________________________________________________

2. http://www.lectlaw.com/def/1027htm

3. teach me finance.com http://www.teachmefinance/.co/financial_termii

4. Advanced English Dictionary the ultimate reference

http://jDictionary.mobile .com

3

The word indemnity according to Black’s Law Dictionary is a duty to make good

any loss, damage or liability incurred by another or the right of the injured party to

claim reimbursement for its loss damage or liability from a person who has such a

duty.

There is also the contract of indemnity against liability which is a right to

indemnify that arises on the indemnitor default, regardless of whether the

indemnitee has suffered a loss thus, where the indemnity is against liability, the

cause of action is complete and the indemnitee may recover on the contract as soon

his liability become fixed or established even though he has sustained no actual

loss or damage at the time he seeks to recover.

Under such a contract, a cause of action accrues to the indemnitee on the recovery

of a Judgement against him and he may recover from the indemnitor without proof

of actual payment of the Judgement sum4a

GUARANTEE: It is a collateral agreement to answer for the debt of another in

case that person default. 5 On the other hand, the word guarantee or surety-ship is

one by which one person called the guarantor or surety agreed to be answerable for

the liability of the debtor either personally or by way of a charge on the guarantors’

property or both. 6

4a. Black’s Law dictionary by Bryan A Gardner Eight Edition page 784

5. Advanced English Dictionary the ultimate reference

http://jDictionary.mobile .com

6. Smith v. Wood 1929)1Chap 12 as quoted in the Nigerian Law Secured

Credit by professor. I.O. Smith page 353 paragraph 1

4

The Supreme Court in the case of R.E.A.V Aswani Textile Ltd 7 defined a

guarantee as a written undertaking made by one person to a second person to be

responsible if a third party fails to perform a certain duty, for example pay a debt.

This definition was also expressed in another form by Gerald Andrew and Richard

Millet in their book “Law of Guarantees” 8 as a contract whereby the surety (or

guarantor) promises the creditor to be responsible in addition to the principal, for

the due performance by the principal of his existing or future obligations.

In the case of WARDENS AND COMMONALTY OF THE MYSTERY V.

NEW HAMSPHERE INSURANCE CO 15 (1991 3 J.I B.F.L. 144) Phillips J.

cited with approval the following definition of a guarantee which is given in

Halbury Laws of England (4th Edition 1993 reissue) at paragraph 10) thus,

“A guarantee is an accessory contract by which the promissor undertakes to

be answerable to the promise for the debt, default or miscarriage of another

person whose primary liability to the promise must exist or be contemplated.”

The implication of the above is that a contract of guarantee presupposes the

existence of another prior contract in form of a loan undertaking which the

principal debtor is primarily liable. The obligation of a guarantor to the principal

creditor is however secondary which will only arise upon the default of the

principal debtor.

_________________________________________________________________

7. (1992) 3 NWLR pt 227 Pg 1 at Pages 3 paragraph G

8. 3rd Edition at page 3 paragraph 2

5

In the case of MOSHI V LEP AIR SERVICE LTD 15 (197 J.A.C 33) Lord

Diplock at page 348-349 referring to the other case of GENERAL PRODUCE

VO. V. UNITED BANK 16 (1997) 2 Lloyd’s Rep 255 refers to two classes of

guarantee which are a promise which will become effective if the debtor fails to

perform his obligations and a promise that the debtor will perform his obligations.

Guarantees, in the form envisage here is to assume a surety-ship obligation or to

agree to answer for a debt. In other words, the contracts of surety-ship fall into two

main categories; contract of guarantee and contracts of indemnity.

There can be corporate guarantee and personal guarantee; it arises where a

personal guarantee for a loan is required in many cases by the lender. A personal

guarantee may be secured by personal assets like the owner’s home equity or it

may be unsecured, based only on the good faith assurance of the borrower. The

guarantee requires the borrower to promise to make goods on the loan even if the

business cannot repay 9

SIMILARITIES BETWEEN GUARANTEE AND INDEMNITY

Guarantees and indemnities have many similar characteristics. In many cases also,

similar duties and rights arises between the parties. This will have effect especially

during the time of seeking to enforce the contract.

_____________________________________________________________

9. http://biz_taxlaw.about.com/od/glossaryp/personalgu

6

DISSIMILARITY BETWEEN GUARANTEE AND INDEMNITY

There are number of dissimilarity between contracts of guarantee and contract of

indemnity and this can be particularly made more feasible when seeking to enforce

the contract.

In the first place, contract of guarantee but not contract of indemnity is prima facie

unenforceable by the creditor if they do not comply with the provision of section 4

of the statute of fraud. In which case, if the agreement creating the guarantee is not

in writing whereas a contract of indemnity made orally can be enforceable if it can

be successfully proved as sufficient to grant a right of claim in favour of the

indemnitee10

In a contract of guarantee there is need for a tripartite agreement which will

include the principal debtor, the promisor and the promisee, that is the principal

creditor. However, in case of indemnity, it suffices to have agreement only

between the creditor/indemnitee and the person giving the indemnity. This much

was so decided in the case of APUGO & SONS CO. LTD V AFRICAN

CONTINENTAL BANK LTD 11

In that case, the appellant was guaranteed an overdraft by the 1st Respondent and

the Federal Ministry of Agriculture undertook to pay to the Bank the proceeds of a

contract with liability for repayment of the entire contract sum in the event of

variation or non compliance arising from the action of the Ministry of Agriculture

without the prior approval of the bank.

__________________________________________________________________

10.contract of 10 guarantee supra at page 2 paragraph 10

11.(1969) 1 CLRQ page 87

7

As to whether this undertaking was a guarantee or an indemnity, the court held that

the Ministry of Agriculture did not assume the secondary liability to answer for

the debt default or miscarriage of the appellant (which will be tantamount to a

guarantee) but rather gave to the Bank the right to look for satisfaction of the total

overdraft sum by the Ministry of Agriculture in the event of Appellant’s default, an

arrangement which is tantamount to an indemnity 12

Both the contract of guarantee and the contract of indemnity as described is

primarily a contractual agreement but which bothers on surety-ship to a third party.

This then means that the creation of both agreements will follow the normal

requirements necessary for the creation of valid contract. These will include offer,

acceptance and consideration. However, with regard to guarantee, it must be in

writing to be enforceable. Under the contract of indemnity, it need not be in

writing but it is better to be in written form than otherwise so that parties can be

easily bound by it and creation of terms of agreement can be better defined and

expressed.

______________________________________________________________

12.Nigerian law of Secure Credit by Professor I.O Smith at page 354

paragraph 2

8

TYPES OF GUARANTEE

There is a variety in the type of guarantees to which parties may contract. There is

the specific guarantee relating to a particular defined obligation of the principal

and to no other obligation. There is the widely drawn guarantee agreement

covering any present and future obligations of the principal debtor to the creditor

whatsoever and howsoever arising. The later one is too wide for comfort. It is our

humble opinion that this can lead to all manners of claim including but not limited

to frivolous ones 13

BIPARTITE AND TRIPARTITE GUARANTEES

The most common form of guarantee agreement is the tripartite one in which the

creditor, the principal debtor and the surety/ guarantor are all parties to the contract

and it also means that all the three parties must have agreed to the creation of the

contract of guarantee, in this case, the guarantor’s liability is secondary. Although,

the creditor is an essential party to a contract of guarantee, it is by no means

unusual for a contract to be made between the guarantor and the creditor alone.

This was the position held in the Supreme Court case of

_______________________________________________________________

13.Contracts of guarantee supra pg 8 paragraph 1:09

9

CHAMI V U.B.A PLC 20 (2010 Vol. 2 MJSC page 11 9 at pages 142-143

paragraphs D-G where ONNOGHEN J.S.C held inter-alia that

“It is settled law that where a person personally guarantor the liability of a

third party by entering into a contract of guarantee or surety-ship a distinct

and separate contract from the principal debtors is hereby created between

the guarantor and the creditor. The contract of guarantees so created can be

enforced against the guarantor directly and independently without the

necessity of joining the principal debtor in the proceeding to enforce”

CONTINUING AND LIMITED GUARANTEE:- The usual form of a

guarantee is that which has a limited period of application but there are some

which may be for an indefinite time and which will be made to apply to series of

transaction. This can be in form of guarantee for an overdraft facilities afforded by

a Bank to a trading company. However, it is common in the contract of guarantee

to include a provision enabling the guarantor to give a specific period of notice to

the creditor to determine his future liability. Where there is no provision in the

contract of guarantee agreement providing for a limit of liability and at the same

time, did not express the guarantee to be unlimited, the construction of the limit of

time such a guarantee will be implied to carry will be subject to the terms

contained in the agreement.

Also a guarantee may refer to an obligation arising under an identified contract or

to a specific obligation. An example of such a case is an obligation to pay the

purchase price under a particular contract of sale or it may cover liability in respect

of any loss, damage, claims, loss, charges and expenses or any other liability

whatsoever and howsoever arising which the principal may incur to the creditor 14

_________________________________________________________________

14.Law of guarantee--- pg 9 paragraphs 1:1

10

DEMAND GUARANTEE

Specie of guarantee agreement that exist is that in which the liability of the

guarantor /surety does not arise until the creditor makes a demand for same. This

may not however be as simple as it looks because the fact that a creditor can be

paid on demand may not grant express obligation on the guarantor, there may be

instances where the default of the principal debtor must be first shown before the

liability of the guarantor can be said to have arisen. This was the position held in

the case of BACHE & CO (LONDON LTD V. BANQUE VERNESET

COMMERCIALE DEPARIS.15

CONTRACT OF INDEMNITY

Another species of surety-ship agreement commonly entered into as a form of

security for facility is indemnity contract. In its widest sense, it may comprise of an

obligation imposed by operation of law or by contract on one person to make good

a loss suffered by another. This can be so in cases of contract of insurance or

contract of guarantee which are within this broad view. However, the expression

“contract of indemnity” is more often used to denote a contract where the person

giving the indemnity does so by way of security for the performance of an

obligation by another.16

________________________________________________________________

15.1973 2 Lloyds report 437

16.Law of guarantees Pg 10 paragraph 1:13

11

CHARACTERISTIC OF CONTRACT OF INDEMNITY

As stated earlier in a contract of indemnity, the primary liability falls on the surety

and that liability is wholly independent of the liability that may arise as between

the principal and the creditor unless the indemnifier undertakes a joint liability

with the principal. Implicit in such an arrangement is that as between the principal

and the surety, the principal debtor is to be primarily liable. This is necessary in

case the surety has to pay first when he will have a right of recourse against the

principal debtor.

The facts that obligation to indemnify is primary and independent has the effect

that the principle of co-extensiveness and the requirement of section 4 of statute of

fraud 1677 do not apply to contracts of indemnity. Thus an indemnity not only

effectively shift the burden of the principal insolvency onto the surety but also

potentially safe guards the creditor against the possibility that his underlying

transaction with the principal is void or otherwise unenforceable. The cases of

YEOMAN CREDIT V. CATTER 20 (1961) 1 NWLR Pg 828) and

GOULSTON DISCOUNT CO LTD V. CLARK 21 (1967) 2 QB page 493) goes

to confirm this position.

Furthermore, the discharge of the principal or any variation or compromise of the

creditor’s claims against him will not necessarily affect the liability of the surety

under a contract of indemnity; otherwise, the rights and duties of the parties to a

contract of indemnity are generally the same as those of the parties to a contract of

guarantee.

12

PERFORMANCE BONDS

A related term to the above specie of surety-ship is performance guarantee Bond.

Bonds are simple covenants by one person to pay another, either conditionally or

unconditionally. A performance bond also commonly called a performance

guarantee bond is a binding contractual undertaking giving by a person, usually a

Bank, to pay a specified amount of money to unnamed beneficiary on the

occurrence of a certain event, which is usually the non fulfillment of a contractual

obligation undertaken by the principal to the beneficiary.

Performance bonds are not guarantees in the true sense but are a particularly

stringent form of contract of indemnity. They are often drafted in such a way that

the liability to pay will arise on a mere demand by the beneficiary, even if there is

reason to doubt that the primary obligation has been broken. The rights and duties

of the parties to a performance bond will depend on the terms of the contract which

has been agreed between them, and are not subject to the usual equities which

apply to ordinary contracts of guarantee or indemnity.

INVALIDITY OF GUARANTEED DEBT AND THE OBLIGATIONS OF

THE GUARANTOR

A guarantee is generally suppose to be in respect of payment of a certain sum by

the guarantor to the creditor but where the creditor is incapable of receiving the

sum so guaranteed, it may grant the guarantor the right to escape his liability under

the contract of guarantee. However, the contract may be created in such a way that

parties will agreed in favour of the creditor that nothing will vitiate the right of the

creditor from benefiting the sum guaranteed.

13

ADDITIONAL SECURITY

It is possible that a creditor aside from the contract of guarantee may give

additional form of security in place, separate from the contract of guarantee. In this

wise, it is not impossible that a creditor may also secure his exposure to the

principal debtor by way of a mortgage arrangement of the properties of either the

principal debtor or in case of a private company, the properties of its Executive

Director. Where these exist, the usual term of such an agreement will provide

clearly that the existence of such additional security will not operate as a waiver to

the enforcement of the contract of guarantee.

JOINT AND SEVERAL GUARANTORS

In a situation where the contract of guarantee is made between the creditor and

more than one guarantor, then the implication will be read in a different form as

against where it is between guarantors.

In the first place, where there is more than one guarantor and the agreement

provides that the guarantee will survive the death of one of the guarantors then the

guarantee shall be expressed to be joint and several.

A separate agreement by a guarantor to a joint guarantee, wherein his liability is

vitiated or negotiated will automatically vitiate the entire joint guarantee17,

17.Ellesmere Brewery Coy v. Cooper (1986) 1 QB Pg 75

14

where a guarantee agreement envisage that all will sign the guarantee contract and

one refuses to sign, then the guarantee will be held ineffectual against all the other

guarantor. This was the case in the Supreme Court case of ARAB BANK (NIG)

LTD V. DANTATA18 where the court held that failure of one of the guarantors

under a contract of guarantee to sign the contract actually discharged any other.

The decision of the Court must have been informed by the reasoning that the

resolve to become a joint and several guarantor under the contract of guarantee

might have been affected by the identity of the other guarantors, their relationship

to him and their ability to pay any incurred debts so that permitting one of the

guarantors to sign without informing the others would amount to alteration of the

terms of the contract 19

CONTRACTUAL REQUIREMENTS

A contract of guarantee of indemnity govern by the Nigerian law , being a follow

up of the English Law must be formed like any other contract by offer and

acceptance with the intention of creating legal relations and must be supported by

consideration if it is not given under seal. Its terms must also be sufficiently certain

and complete to enable the court give effect to them if not, the guarantee may be

held to be too vague to be enforceable as was decided in the case of WESTHEAD

V. SPROSON 24 (1861) 6 H&N 728 MORRELL V COWAN20

____________________________________________________________

18.1977 NCLR PG 71

19.Nigerian Law of Secured Credit by Professor I. O Smith at page 360

paragraph 2

20.1877 6CTI.D 166

15

OFFFER AND ACCEPTANCE

The determination as to whether there has been an offer and acceptance with

regard to guarantee or indemnity will rely mainly on the construction of the

agreement between the creditor and surety (guarantor/indemnitor).

In the case of M.IVER V RICHARDSON, 21 the defendant gave a letter to the

debtor, A& Co which said

“I understand A & Co have given you an order ------ I can assure you from what

I know of A’S honour and probity, you will be perfectly safe in crediting them to

that amount; indeed I have no objection to guarantee you against any loss from

giving them credit”

The letter was delivered to the Plaintiff creditor by A & Co. Upon default by A &

Co, the Plaintiff now sought to sue the Defendant as guarantor to the transaction

given rise to the claim. The Court held that the wording of the letter did not evince

a clear consent by the Defendant that it should be treated as a guarantee, rather

than as a mere indication that he would be willing to give a guarantee if application

were made to him in future and that there is no notice given to the Defendant by

the Plaintiffs that they were treating the letter as guarantee. To that extent, the

court held that there was neither an offer nor communicated acceptance hence, the

Plaintiffs failed in their claim.

_____________________________________________________________

21.(1813) I.M & S.557

16

However, if upon the words or letter of a surety (guarantee or indemnity), the

creditor acted and which is to his detriment to the knowledge of the surety of

such a detriment, this may be held to be a sufficient communication of the

acceptance of such an offer by the surety. In the case of JAYS V.SALA22 where

the supply of goods by the creditors to the principal in the presence of the surety

was held sufficient to constitute acceptance of a written offer to guarantee payment

for the principal/personal orders. Such reliance on the surety’s promise might also

give rise to the operation of the doctrine of promissory estoppels in an appropriate

situation. 23

Where an offer stipulates express notification of acceptance of an offer or any

other specific mode, failure to comply with that mode of expressing acceptance

will be termed to mean that there is no guarantee. 24It is necessary that the

agreement creating the indemnity or guarantee specifically states that the mode

specified under the agreement shall be the only mode of acceptance and no more 25

Where there is no express stipulation of the mode of acceptance, conduct

consistent with acceptance may suffice to bind the parties. In this wise, where a

surety in addition to his undertaking to pay made a request to the creditor to adopt

a particular pattern of behavior such as extending credit to the principal, supplying

of goods, or employing someone, his offer may be accepted by the creditor doing

what surety asked him to do 26

___________________________________________________________

22.(1898) 14 T.L.R, pg 461

23.Law of guarantees(supra) page 14-15, paragraphs 2:02.

24.GUNT V. HILL (1815) 1 STARK PG 10

25.GAUNT V. HILL (SUPRA)

26.JAY LTD V SALA (SUPRA) AT PG 46.

17

In other cases acceptance may be inferred from silence and inactivity on the part of

the creditor. This was the situation in the case POPE V. ANDREW. 27 In that case,

the guarantors asked the creditor’s agent to make a proposal to the creditors that

they should accept a guarantee of the payment of the price of goods delivered to

the debtor by installments. The agent agreed and forwarded the signed guarantee to

the creditors, who kept it for three weeks before returning it. It was held that the

creditors had accepted the guarantor’s offer and were bound by the guarantee. Cole

Bridge J. gave the following instruction to the jury.

“If a person offers a guarantee and more still if he signs a guarantee by which

he makes himself liable and that be sent to the other party, such other party if he

means not to accept the guarantee is bound expressly to dissent within a

reasonable time and if he keeps the guarantee for an unreasonable time, he is

bound to accept it just the same as if he had accented to it by words and if he has

ever accepted it either by word or by act, he cannot afterwards retract.”

In the case of MOZLEY V. TINKLER 28Where on its true construction, the

guarantee contemplated communication of acceptance by the creditor although the

conduct that will be held tantamount to an acceptance must be in consonance with

the offer made failing which acceptance by conduct may be refused. In the case of

___________________________________________________________

27.(1840) 9 c& p Pg 546

28.(1835) 1 CR.M & R 692

18

GLYN V. HERTEL 29 where “S” offered to guarantee a loan of £5,000 to be

made by C to D who was already indebted to C for a considerable sum for which C

held a promissory note and other security “C” subsequently cancelled the

promissory note and delivered up the security to “D” who then delivered the same

security back again with a fresh promissory note. It was held that this transaction

did not constitute a future loan within the terms of the offer of guarantee and “S”

was not bound. 30

In usual cases the offer to contract on a contract of guarantee or indemnity is

initiated by the surety. Nothing will however, debar the creditor from initiating the

contract but it then means where the contract of indemnity or guarantee originated

from the creditor then there will be no need for the requirement of an acceptance as

will be the case if otherwise.

REVOCATION OF SURETY-SHIP AGREEMENT

It is rare for a surety to want to change his mind as a guarantor or indemnitor to a

transaction but this is not impossible. The right of revocation by a surety will

depend on whether the change of mind is immediately after making the offer and

before same was either accepted or relied upon in which case, as in a normal

contract, an offer can be revoked anytime by the offeror before acceptance or

before the other party has acted on the promise to his detriment.

__________________________________________________________________

29.(1818) 8 TAUNT PG 208 OR 2 MOORE C.P PG 134

30.Law of guarantees pg 16 paragraphs 2:02.

19

Where however, the offeror or surety as the case may be seek to revoke the offer

after it has been accepted, it will be possible if the agreement creating the

guarantee provides for revocation of the guarantee. This can be in form of a

specific mode of revocation or upon the occurrence of a specified event in which

case, the contract will be revoked if it complies with the mode so specified. The

agreement of parties will largely determine what happen in this case. If the contract

of guarantee is a continuing guarantee and if it is divisible then, the contract can be

revoked by the guarantor upon the end of a division of the subject matter of

guarantee. Where the requisite notice for the revocation was not complied with,

then the court has not hesitated to reject the purported revocation by the surety or

guarantor. This was decided in the case of MAINTIENDRAIPTY LTD V. ANZ

BANKING GROUP LTD. 31

The next thing to look at is where a notice of revocation has been validity given

and during the period of notice whether the guarantee will still be running. It is

usual that a bank guarantee for example will still be running within the period of

the specified notice of revocation and whether the obligation to pay by the

guarantor mature during or after the notice of revocation 32

_________________________________________________________________

31.(1985) 38 SASR PG 70

32.Law of guarantee pay 268 paragraph 8:09

20

There appears to be no direct authority concerning the revocation of the contract of

indemnity. Although, the obligation of the surety under such a contract is a primary

obligation there seems to be no reason in principle why a continuing indemnity

should not be subject to the same rules as a continuing guarantee. A person may

make a standing offer to indemnify a bank in respect of advances made from time

to time to a customer in the same way as he may make a standing offer to act as

guarantor for such advances. It is likely therefore, that the rules considered above

in relation to guarantees will apply equally to contracts of indemnity.

THE SECURITY INCIDENCE OF GUARANTEE AND INDEMNITY As stated earlier in this paper, it is implicit in the agreement of guarantee and

indemnity which is better referred to as an agreement of surety-ship that it is a

contract agreement between a creditor, the principal debtor and the guarantor or

indemnitor. It is however, a separate contract that exist between the creditor and

the guarantor or indemnitor this much was so held in the cases of NWANKWO V.

ECONOMICAL DEVELOPMENT CO. SOCIETY 2002 1 NWLR Pt 749 Pg

513 at page 535, paragraphs E-G where the Court of Appeal held inter-alia that

“The appellant who promised to answer for the debt and to do so alone, cannot

be heard to complain that any other person was not joined with them. No claim

was made in the writ against any other person. The claim was founded only on

redemption of contract of guarantee freely entered by the Appellants. As the debt

has been duly established and the appellants did not deny the guarantee. I

cannot see how the Amike – Ezzamgbo farms ltd is a necessary party. To the

Appellant’s the company may be a desirable party but in law, it is not a necessary

party whose presence is essential for a due determination of the claim before the

court.”

21

This was also so held in the recent Supreme Court case of KHALED BARAKAT

CHAMI AND UNITED BANK FOR AFRICA PLC 33

The implication of the above is that a contract of indemnity or guarantee is a

separate agreement between the creditor and the guarantor /indemnitor and as

such, it gives security to the creditor to realize his exposure. Where the surety

(guarantor or indemnitor) has fulfilled his obligation under the contract of surety-

ship to the creditor, he assumes the position of creditor and can enforce his right to

recover whatever he has paid to the main creditor based on his surety to which the

principal debtor is liable.

The surety can also be at liberty to create a separate agreement between himself

and the debtor inform of a separate guarantee or indemnity which will make the

principal debtor liable to the surety arising from whatever claim that may have

been adjudged due to the creditor.

Upon the payment of the sum assured in the guarantee or indemnity fully to the

creditor, the surety is automatically discharge from the obligation arising from the

agreement binding the surety to pay the creditor. Where the principal debtor in line

with the agreement primarily entered into between himself and the creditor has

fully repay the outstanding due to the creditor, it then means to all intent and

purposes, the surety’s obligation to pay the creditor has been discharged.

______________________________________________________________

33.(SUPRA)

22

Where part of the exposure by the creditor to the principal debtor was repaid by the

principal debtor then, it is the balance shown to be outstanding that the surety will

be obligated to pay to the creditor. As to the part repayment made by the principal

debtor to the creditor, the usual stance is that, the surety has been discharge

therefrom.

The topic, guarantee and indemnity as subjects of security posses a lot of issue.

Unarguably, a contract of guarantee properly created is a separate contract and thus

provide a form of security for the realization of the exposure of a creditor aside

from that of the principal debtor liability. A guarantee is usually provided by a

third party who is a direct beneficiary of the loan the subject of the contract of

guarantee.

However, in some cases, a contract of personal guarantee by a Director of a

Company can be created which will make the Director or Directors of a company

that benefited from a loan facility to be personally liable for the repayment of the

indebtedness of the principal where the principal debtors, the company, a separate

entity from the individuals that formed the company, has failed to pay upon due

demand by the creditor.

There are however, some limitations to the usefulness of the contract of guarantee

as a form of security for the realization of a creditor’s exposure to the principal

creditor. In the first place, a contract of guarantee is a normal contract that has to

follow the normal procedure of offer, acceptance and consideration. The failure of

the ingredient for creating a valid contract will vitiate the guarantee. The other

important thing is that, a contract of guarantee must be in writing so as not to

offend the provision of section 4 of the statute of fraud 1677 which specifically

23

stipulated that a contract of guarantee must be in writing without which it may be

held invalid.

Where in the case of a personal guarantee, the guarantor dies before the due date of

satisfaction of the guarantee, the possibility of enforcement of same against the

estate of the deceased guarantor is very much in doubt. However, a contract of

guarantee can be duly assigned to another person for realization. Thus where a

creditor who has a guarantee issued by another person in his favour is in need of

facility from another source upon fulfillment of the necessary ingredient of

assignment of choses in action or contract the creditor can assign the realization of

his benefit from the guarantee to another person as security for his intended future

loan from another source.

There is however, the need that such assignment follows the required mode. This

was the case in the recent decision of the court of Appeal in the case of JULIUS

BERGER NIG LTD V.T.R.C LTD.34 In that case, the 1st Appellant’s had issued

two local purchase orders (LPOS) in favour of the PIT A PAT

INTERNATIONAL NIGERIA LTD (The 2nd Defendant at the High Court) for

the supply of certain products. To enable it meet and satisfy the LPOS. PIT A

PAT COY sought and obtained a loan facility from the Respondent to which

payment for the LPOs due to the company from the 1st Appellant were said to be

assigned. The Respondent then sued on the facility to realize the payment.

________________________________________________________________

34.(2010) 9NWLR PT 1198 PAGE 80 AT PAGES 105-106 paragraphs F-G

24

The issue of assignment became the subject of determination by the court and it

was held that upon satisfying the requirement of assignment a debt can be validly

assigned by the creditor to another in satisfaction of his liability to the assignee.

As good as the contract of guarantee may be to serve as security to a facility

granted by a creditor, it has its inherent defects and unattractiveness.

In the first place, the right of the creditor under the doctrine of priority may be

precarious since it is an equitable right that can only be enforced by an action in

Court. The first hurdle is proving the existence of the priority in the Court of law

properly constituted to handle such matters.

The second hurdle is the time within which Judgement can be obtained in view of

the usual delay in hearing court matters in Nigeria today. The third hurdle is that

where the Judgement has been obtained there is the right of Appeal which the

guarantor may exercise and which may delay the creditor from realizing his claim

based on the guarantee.

Most importantly, where the guarantor is liable to another person whose security is

superior to the contract of guarantee like a legal mortgage, the right of the creditor

is subject to the legal mortgage.

If there is any problem within the contract of guarantee that makes it unenforceable

as stated earlier, then the creditor may have lost his right to the realization of his

exposure on the contract of guarantee leaving him at the mercy of the principal

debtor.

25

On the contract of indemnity, the position appears to be the same mutatis mutadis

except that a contract of indemnity need not be in writing and that in the case of

Indemnity, the surety is primarily liable to pay the indebtedness without first

ascertaining the inability of the principal debtor to pay on demand.

PROBLEMS AND SOLUTION

The first problem that arises here is that there is no provision for registration of a

contract of guarantee and indemnity. The implication is that, a creditor may not be

aware of the existence of a guaranty or indemnity created earlier from the one he is

seeking to rely on.

The second problem is that, where certain information are not brought to the

knowledge of which would have informed his decision on an exposure which

information which if known later is capable of rendering the guarantee or

indemnity invalid, the creditor is likely to loss his right to claim under such a

contract without any fault of his.

This can be in the form of execution of the contract or any other issue. It is

suggested that as in the case of clearance of cheques by a central body, the Central

Bank, the registration of mortgage for property with proper record at the land’s

registry, guarantees and indemnity should be a subject of collation and registration

to avert the attendant fraud and provide for proper application of the doctrine of

priority

26

CONCLUSION

A guarantee is not the same as indemnity. A contract of guarantee is an

undertaking by the promisor to be answerable to the promisee for the debt or

default by another person (the principal debtor) whose primary liability to the

promisee must exist or be contemplated 1 See Hydro-Quest (Nig) Ltd v. B.O.N

(1994) 1 NWLR (Pt 318) 41 at 53. Ejiogu v. N.D.I.C (2001) 3 NWLR Pt 699 at

1. It is an undertaking by the guarantor to the creditor that he will ensure that the

principal debtor perform the principal obligation, in other word, if the debtor fails

to fulfill the principal obligation, the creditor can recover from the guarantor as

damages for breach of guarantee whatever sum the creditor could have received

from the debtor himself. See MOSHI V. LEP Air Services Ltd (1973) AC 331

From the above, it is very clear that guarantee is an accessory, or secondary

obligation which in principle is coterminous with the obligation of the principal

debtor and is enforceable only in the circumstances in which the guaranteed

obligations is enforceable and requires the default of the principal debtor in order

to render the guarantor liable to action.

An indemnity is a contractual agreement in which the indemnitor is primarily

under obligation to the creditor by ensuring that the creditor is paid. The incident

of indemnity in the case of guarantee is that it ensures that the creditor in addition

to personal promise of the debtor secure to his money as agreed particularly in the

event that, the debtor is unable to pay as agreed or promised.

The Contract of indemnity and guarantee are part of the means by which a creditor

can secure his exposure aside from the security provided by the primary debtor.

This however is subject to the fulfillment of the necessary requirement of the law

27

and can be determined by the construction of the contract giving rise to the

guarantee/indemnity and whereas this is at the exclusive preserve of judicial

decision as may be decided by the court of law properly constituted to decide the

right of parties under the contract so created.

28