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Rights of guarantors
29/11/2005 The Star Articles of
Law with Bhag Singh
Last week the liabilities of a guarantor were discussed. And it will have
been noted that the liabilities are very extensive. It is almost as if it is
the guarantor who obtained the loan.
This is even more so when those who are the beneficiaries of the guarantee
ensure that it is converted into an indemnity. This is achieved through
including a clause to say that the guarantor will also indemnify the
creditor thus placing him in the position of a principal debtor.
All this may come about even as the title and the cover only reflect it to
be a guarantee. Of course many guarantors may not even appreciate the
difference between a guarantee and indemnity much to their detriment in
certain circumstances.
Of course, when the time comes to decide what the effect of the document
signed is, the court will look at the document as a whole and not on the
heading, title or cover alone.
In some ways this may be unfair to the ordinary guarantor who cannot
appreciate the distinction between a guarantee and indemnity and or may not
even realise the implications of the guarantee itself.
However, the laws assume that a person who signs a document has read it and
when he does not understand to seek advice so that he is in a position to
understand the rights and obligations he is assuming.
Once a person signs a document without reading it, he agrees to what is in
the document. It is in some ways like giving someone a blank cheque or
signing a cheque without looking at the amount or to whom it is payable.
Where a guarantor has paid up, what are the remedies available to the
guarantor? What can he do?
Whilst a guarantor has few grounds on which he can resist payment to the
principal debtor, the guarantor certainly has rights against the person
whose debts he has guaranteed.
Of course, it would be ideal if a person who gives a guarantee gets the
debtor to pay him back including any interest or costs.
But even if there is no written undertaking by the debtor the obligation on
his/her part still exists by reason of Section 98 of the Contracts Act 1950
which states: “In every contract of guarantee there is an implied promise by
the principal debtor to indemnify the surety; and the surety is entitled to
recover from the principal debtor whatever sum he has rightfully paid under
the guarantee, but not sums which he has paid wrongfully.”
It has to be noted, however, that a right to an indemnity only exists if the
guarantor pays to the creditor what is rightfully due to him/her from the
principal debtor. Therefore whilst an obligation on the part of the
guarantor exists he should not rush to pay up unless he has ascertained the
liability of the principal debtor.
If it is a situation where the principal debtor is disputing the debt on
valid grounds, the guarantor (if he is only a guarantor) should await the
outcome of the action against the principal debtor. This is because the
guarantor’s liability depends on the liability of the principal debtor.
Where the guarantor can recover the amount from the principal debtor the
matter will end there. However, if the principal debtor has become
insolvent, then it may be a rather shallow one.
In such event the guarantor may find relief if there are co-guarantors. The
creditor may only have proceeded against one of the guarantors and not the
others.
In such a case the guarantor could seek to recover part of what he is liable
for from the co-guarantors. The guarantors will need to shoulder equally the
responsibility and this is provided for in Section 99 of the Contracts Act
1950 which states: “Where two or more persons are co-sureties for the same
debt or duty, either jointly or severally, and whether under the same or
different contracts, and whether with or without the knowledge of each
other, the co-sureties, in the absence of any contract to the contrary, are
liable, as between themselves, to pay each an equal share of the whole debt,
or of that part of it which remains unpaid by the principal debtor.”
It is open to such guarantors to agree at the outset as to the proportion
that they will bear.
Where a guarantor seeks to get payment from the principal debtor he is said
to be seeking indemnity. Where he proceeds to recover the share as
contractually agreed or provided by law from his co-guarantor he is said to
seek a contribution.
A guarantor who has paid up the debt to the creditor would also have a right
to the benefit of any security held by the creditor. Thus, a creditor who
holds a security cannot, once he has received the amount owed, return the
security to the principal debtor.
If he should do so then he becomes liable for its value to the guarantor who
has paid off the debt. This is specifically provided for in the Contracts
Act 1950.
A surety is entitled to the benefit of every security which the creditor has
against the principal debtor at the time when the contract of suretyship is
entered into.
There are other situations in which a guarantor may be released from his
obligationsuch as where a guarantee is obtained by misrepresentation. Such
misrepresentation must of necessity emanate from the creditor or his agent
in order to invalidate the guarantee.
On the other hand, the discharge of the principal debtor by the creditor or
indulgence given by the creditor to the principal debtor such as time or
increase in facilities may not necessarily always allow the guarantor to
avoid his obligations.
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