|
Risks of being a guarantor
18/04/2006 The Star Articles
of Law: By BHAG SINGH
WHILST many people are careful, a guarantee is sometimes signed without
really checking out all the implications that can arise.
Perhaps the commonly-held perception that it is only an obligation to pay
when the actual borrower fails and the assumption that the borrower will not
let the guarantor down usually leads to the belief that problems will not
arise.
However, when the borrower defaults then the obligation to pay becomes real.
And in the case of commercial transactions the amount guaranteed can be very
large and beyond the ability of the guarantor to pay.
But whether the amount is large or small is really quite irrelevant .
And so it was in the case of a study loan taken by a student. A reader was
the student’s father’s friend and was asked to help by becoming a guarantor
for the loan. The problem arose when the loan was not repaid and the reader
was compelled to pay the entire sum.
Earlier on, the reader had agreed to be the guarantor because he had been
assured by the student’s father that in the event that anything went wrong
he would shoulder the responsibility. He was approached to be the guarantor
because two guarantors were required to obtain the study loan.
Of course, a guarantor is sometimes comforted by the fact that there is
another guarantor. In fact, in this case the the student’s father was the
other guarantor. So the assurance appeared real.
Whilst there may have been this understanding between the reader and the
student’s father, it is unlikely that the agreement signed to guarantee the
loan would have included this. At most this is likely to have been conveyed
verbally between the reader and student’s father.
In so far as the Contracts Act 1950 is concerned, our reader is likely to be
in the position of a co-surety. And though he is a co-surety with the
student’s father it is also likely that the guarantee would be a joint
guarantee where the guarantors are jointly liable.
This would mean that though our reader is a co-surety he would actually be
liable for the full amount. In fact, Section 81 of the Contracts Act 1950
provides that “the liability of the surety is co-extensive with that of the
principal debtor, unless it is otherwise provided by the contract.”
What then of the father’s promise that he would be responsible? This is an
aspect which does not involve the lender of the loan. It is an arrangement
between the reader and the student’s father.
It relates to the aspect of one co-surety seeking contribution from his
other co-surety. Of course, even if there is such an arrangement which is
not denied, the right to seek payment from the father will no doubt exist.
On the other hand, if the father does not voluntarily take responsibility,
the legal principle governing the relationship and responsibilities of
co-sureties will apply. In this connection the Contracts Act 1950 Section 99
reads: “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.”
Thus, it will be seen that co-sureties are equally liable as between
themselves once the obligation for making payment arises or where one of
them has singularly settled the debt.
In the light of what has been stated above what can a surety in a position
such as the reader do in order to safeguard himself from having to pay the
entire amount in the end?
It may be said that there are two parts in the answer. One is in relation to
liability to the lender and the other is with regards to the co-surety and
the beneficiary of the loan.
In so far as the lender is concerned, it is unlikely that the lender will
want to have anything less then full repayment of the loan from each and
every surety.
When therefore the reader is sued on the guarantee and the borrower and
co-surety do not come forward to pay or are unable to pay, the reader will
be liable to pay the full sum.
However, having paid the amount the law gives him a right of indemnity
against the borrower and if he is unable to recover against the student, who
is the borrower in this case, to seek contribution from the father, the
co-surety. This will be on the basis of sharing the responsibility equally.
However, if it is sought to recover the entire sum from the co-surety but
this is refused, then this will have to be proved. It is not necessary that
such proof be in writing so long as it can be proved to the satisfaction to
the court.
It would be prudent to set out such an arrangement in writing so that if the
need arises the promise can be enforced with a greater degree of success.
These are all possibilities on the basis of the borrower and other co-surety
being around or able to pay when the eventuality arises. However, if they
are not the reader who signed the guarantee in the belief that it was a mere
formality, may find that it was not a formality after all.
|
