Personal guarantees: a snippet on rights, responsibilities and risk mitigation in the Tanzanian context

A personal guarantee is a promise or covenant given to a creditor (usually a bank) by a guarantor or surety, which undertakes to be personally liable to pay the creditor for the outstanding amount for which the guarantee is issued. A more concise definition of a personal guarantee was provided by Sir William Blackburne in the celebrated case of Vossloh AG v. Alpha Trains (UK) Ltd when he stated that: “A contract of guarantee, in the true sense, is a contract whereby the surety (the guarantor) promises the creditor to be responsible for the due performance by the principal of his existing and future obligations to the creditor if the principal fails to perform any of them.” A personal guarantee may be issued to secure the full amount owing to the bank by a borrower, or limited to a specific amount. By executing a personal guarantee, the guarantor provides an undertaking and commitment to be personally liable in the event that the principal debtor or borrower fails to meet its obligations. Judicial precedents from other jurisdictions go as far as holding that the liability of the guarantor is not only to perform if the principal debtor fails to perform, but to also see to it that the principal debtor performs his obligations. Whilst the latter position is quite strenuous and may be unrealistic in many circumstances, what remains clear is that the promise made by a guarantor is to discharge the liability of the principal debtor where the principal debtor does not discharge its obligation.

By its nature, a personal guarantee is a unilateral contract since the promise to pay is by one party (the surety). The creditor does not usually undertake to the surety that it will grant a loan to the principal debtor. Notwithstanding this, it is essential that a creditor must be a party to the contract of guarantee, being the party to whom the promise given by the guarantor is made. Where the creditor is not a party to a suretyship contract, such contract is a contract of indemnity. This article focuses on the latter.

In Tanzania, personal guarantees are governed by the Law of Contract Act [Cap 345 R.E 2019] (the Contract Act). Section 78 of the Contract Act defines a contract of guarantee as a “contract to perform the promise, to discharge the liability, of a third person in case of his default and 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’.” A contract of personal guarantee is therefore an obligation by the personal guarantor to perform the obligations of the principal debtor where the principal debtor fails to discharge its obligations to the creditor. A personal guarantee compels the guarantor to honour the promise or legal obligation of the principal debtor in the event of default. Accordingly, once the principal debtor defaults to repay the loan, the personal guarantor steps into the shoes of the principal debtor and is required to discharge the obligations of the principal debtor against the creditor.

Notably, section 78 of the Contract Act provides that a personal guarantee may be oral or written. This is strikingly different from the requirement in other jurisdictions that make it mandatory for personal guarantees to be in writing and signed by the guarantor . In many jurisdictions, personal guarantees are not enforceable unless evidenced in writing and signed by or on behalf of the surety. As such, a contract of guarantee is enforceable under Tanzanian law the moment it becomes a binding contract. The Contract Act places a mandatory requirement on parties to a contract to perform their respective promises unless such performance is dispensed with or excused under the provisions of the law. As such, any person who undertakes to guarantee the payment of another by way of a personal guarantee is obliged to fulfil their obligation to pay where the principal debtor defaults in its obligation. In fact, in terms of section 80 of the Contract Act, the liability of a guarantor or a surety is co-extensive with that of the principal debtor, unless provided otherwise. This means that a creditor can pursue its rights against a guarantor in the same manner that it would pursue the principal debtor and, more importantly, a creditor is not required to exhaust its remedies against the principal debtor before pursuing a guarantor, unless provided in the guarantee. Put differently, the liability of the guarantor is the same as that of the principal debtor and a creditor may pursue a surety immediately without waiting to exhaust its remedies against the principal debtor, unless the contract of guarantee provides otherwise. This position was elucidated by the Court of Appeal in the decision of Exim Bank Tanzania Limited v. Dascar Limited & Another (Civil Appeal No. 92 of 2009 [2016] TZCA 564 where the Court of Appeal explained that, once a principal debtor defaults in the payment of a loan, the surety steps into equal footing with the principal debtor and becomes equally liable to the creditor to the same extent as the principal debtor. In equal measure, the obligations of a surety are co-terminus with those of the principal debtor. This means that the liability of the guarantor does not arise until the principal debtor has defaulted, and anything that nullifies, reduces or extinguishes the liability of the principal debtor has the same effect on the liability of the surety or guarantor, subject of course to the terms and conditions of the guarantee.

This position holds even in cases where the collateral held by the creditor is not sufficient to liquidate the outstanding loan. In such a situation, the guarantor is equally responsible for settling the guaranteed facilities subject to the terms and conditions of the guarantee. This position is supported in the decision of the Court of Appeal in CRDB Bank Limited v. Issack B. Mwamasika (Civil Appeal No. 139 of 2017), [2018] TZCA 36 in which the Court of Appeal stated that “…if a person executes a personal guarantee to support the principal debtor’s application for loan, the guarantor concerned puts all his property at risk if the principal debtor defaults...” This position of the law should not be taken lightly as it could have dire consequences for anyone who has issued a personal guarantee to secure a loan, especially where the loan is issued to a third party. The Court of Appeal goes further to caution personal guarantors to be aware of the legal consequences when the principal debtor is in default of its repayment obligations. A personal guarantee gives the bank a right to lien against the personal assets of the guarantor, so much so that if the principal debtor defaults to repay the loan, the guarantor is legally bound to repay the loan on behalf of the borrower. It therefore becomes critical for any creditor to ensure that the personal guarantee issued to guarantee a loan is legally binding and enforceable.

The considerations discussed above also apply to continuing guarantees. It is quite common for personal guarantees to be issued as continuing guarantees i.e. to cover all of the principal debtor’s obligations from time to time, even where there is additional financing. The effect of this is that the guarantee is intended to cover the ultimate balance owed by the principal debtor. Where a guarantee is not issued as a continuing guarantee, it will be construed to cover only a specific transaction where the liability of the principal debtor may be reduced. The guarantor’s liability in such a case comes to an end when the debtor has paid all the instalments due. Where a continuing guarantee is issued, the surety gives an undertaking to guarantee the liabilities of the principal debtor each time an advance is made to the principal debtor, so that the surety becomes committed to all the advances made to the principal debtor. Section 82 of the Contract Act defines a continuing guarantee as “a guarantee which extends to a series of transactions.” Even though the Court of Appeal did not dwell on it, the legal principle on the effect of a continuing guarantee forms the bedrock of the decision of the Court of Appeal in the case of CRDB Bank Limited v. Issack B. Mwamasika cited above. However, it is noteworthy that a surety can revoke a continuing guarantee at any time, such that the guarantee issued does not cover future advances. In terms of section 82 of the Contract Act, a continuing guarantee may be revoked at any time by notice to the creditor. It is noteworthy that a continuing guarantee ceases to be enforceable against future transactions upon the death of the surety, unless the contract of guarantee specifically provides otherwise. This position was discussed in great length in the English case of Coulthart v. Clementson & Another [1879] 5 Q.B.D 42 which is in line with section 83 of the Contract Act. In this case, it was categorically held that a continuing guarantee comes to an end as soon as the creditor has notice of the surety’s death, unless the whole of the consideration moving from the creditor has been performed before such notice has been given, or unless a contrary intention appears from the term of the contract of guarantee.

Even with the above position, it is important to note that the law is generally very protective of guarantors or sureties. Where a creditor varies any of the terms of the contract between itself and the principal debtor, the guarantor is discharged on transactions made after the variation of the terms between the creditor and the principal debtor. As such, any variations made without the surety’s consent discharge the surety from the transaction after the variation. Effectively, creditors should always exercise caution not to vary the terms of the principal contract without the surety’s consent as this alters the basis of the surety’s undertaking which, in effect, discharges the surety from the guarantee.

Should you have any queries regarding this article or if you would like to get in touch with its author, please contact Stella Ndikimi of Dentons EALC East African Law Chambers.