Introduction

It has been long-standing common practice for employers to provide guarantees on behalf of their employees to enable them to obtain financial assistance in the form of loans from financial institutions. This is recognised as a fair labour practice, reflecting the employer's commitment to the social and economic wellbeing and development of employees. In doing so, employers enter into guarantee contracts with financial institutions of their choice under which they undertake the role of guarantor for and on behalf of the employee.

Depending on the contractual agreement, employers often undertake to ensure that the loans advanced to the employees are repaid in full and without default. This undertaking typically targets the employee's monthly salary, with repayment facilitated through regular minimal monthly deductions. The employer is then obligated to remit the deducted sums to the respective financial institution in accordance with the terms of the guarantee contract. To give effect to this arrangement, employers usually execute a separate agreement with their employee, authorising the deductions from the employee's salary for the purposes of the loan repayment. This type of arrangement is legally permissible under section 29(1)(b) of the Employment and Labour Relations Act, CAP 366 R.E. 2023, which allows for deductions from an employee's remuneration where such deductions are authorised in writing by the employee and are made in accordance with the law. It is therefore as between employers and employees or employers and respective financial institutions are at liberty to vary their contractual arrangements at times where they find it impracticable to honour their contractual arrangements. This is based on the principle that contracts belong to the parties who are free to negotiate and even vary the terms as and when they choose, which has been extensively deliberated by the Court of Appeal of Tanzania in Civil Appeal No. 60 of 2021 between Precision Air Services PLC v. Masoko Agencies T. Limited [2024] TZCA 266.

Despite this legally recognised arrangement, some employers have failed to honour their commitments under guarantee contracts with financial institutions, resulting in the institution of law suits for recovery of the unpaid amounts. Consistently, courts have upheld the enforceability of such guarantee contracts, finding employers liable for breach of their contractual obligations and ordering them to repay the outstanding sums as contracted. This position has been sanctioned by the Court of Appeal of Tanzania in Civil Appeal No. 407 of 2023 between Rex Investment Limited v. Mkombozi Commercial Bank PLC 2025 TZCA 708.

Background of the case

Rex Investment Limited (the Appellant) executed a collective guarantee agreement over salary loans in favour of Mkombozi Commercial Bank PLC (the Respondent) in July 2012 for the purposes of securing loans advanced to its staff. The Respondent then disbursed loans to the Appellant's employees between 2012 and 2014. In terms of the guarantee signed by the Appellant, the Appellant was required to remit the employees' monthly salaries through the employee bank accounts held with the Respondent until full repayment of all employee loans.

Subsequently, the employees defaulted on servicing the loans and, by July 2021, the collective outstanding debt had accrued to TZS 392,182,509.80. The Respondent issued various demand notices to both the employees and the Appellant, who failed to remedy the default.

Following the default, the Respondent instituted the case at the Commercial Division of the High Court (High Court) for breach of the Appellant's obligations to repay the outstanding loans and repayment of the outstanding amounts. The Appellant objected to the claims on the ground that the Respondent was supposed to first sue the employees before suing the Appellant. The High Court ruled the matter in favour of the Respondent.

The Appellant, being dissatisfied with the decision of the High Court, lodged an appeal before the Court of Appeal of Tanzania (CAT) contending that it was merely a collecting guarantor and that the guarantee did not extend to the repayment of the employee obligations. The Appellant further argued that the Respondent ought to have pursued legal action against the employees first before seeking redress from the Appellant.

Deliberations and decision of the CAT

At the CAT, the Appellant reiterated its contention that it was only a collecting guarantor and that the Respondent should have first pursued the employees. The Appellant argued that its obligation under the collective guarantee agreement did not extend to repayment of the employee loan obligations.

The Respondent, on the other hand, submitted that the Appellant had entered into a legally binding guarantee agreement, which expressly required it to ensure repayment of the employee loans. The Respondent argued that the guarantee was not conditional upon first suing the employees and the Appellant's failure to remit the agreed instalments constituted a clear breach of the guarantee.

After considering the submissions, the CAT held that the Appellant's obligations under the collective guarantee agreement were absolute and independent of any action against the employees. The CAT stated as follows: "A contract of guarantee presupposes an act of default on the part of the principal obligor to perform a guaranteed duty or obligation. That was not the arrangement in this case. That is to say, performance of the appellant's obligation to remit the monthly salaries or instalments in clause 4 of the guarantee was not dependent on any default by any employee to repay the loan, rather it was an agreed modality to repay the loans. That is notwithstanding the fact that the appropriate clause is contained in the document called a guarantee and clause 4 creates a direct obligation dependent on no default of the borrower for it to be performed."

The CAT further explained the obligations of a guarantor, noting that under such a contract a guarantor guarantees the performance of a specific duty by a third party and, in the event of default, undertakes to make good the default. The CAT emphasised that where a person agrees to perform an obligation, this is completely different from guaranteeing that a third party perform it. The court went on to elaborate that clause 4 of the collective guarantee agreement did not make reference to any default by the employees as a prerequisite for the Appellant's ability to repay the loans to the Respondent. The court noted that the absence of such a condition was a critical factor in determining the Appellant's liability under the guarantee.

The CAT further held that clause 4 of the collective guarantee agreement sets out the modality of repayment of the Appellant's employee loans as monthly instalments become due, and it expressly names the Appellant as the party responsible to repay the loans. Accordingly, the CAT concluded that the clause unambiguously imposes on the Appellant the direct responsibility to repay the loans in the manner specified.

Ultimately, the CAT ruled that the Appellant was in direct breach of its obligations to pay the employee loan instalments. The CAT further held that the Respondent was not required to first sue any of the employees before pursing the Appellant, as the Appellant had a direct and independent obligation to repay the employee debts.

In summary, the CAT affirmed the Appellant's obligations under the collective guarantee agreement were absolute and independent of any action against the employees. The Appellant was directly liable to repay the outstanding loan amounts as specified in the collective guarantee agreement and the Respondent was entitled to recover the full debt without first pursuing the employees.

Conclusion

Rex Investment Limited underscores the enforceability and binding nature of employer-guaranteed loan arrangements. It demonstrates that where an employer expressly undertakes to ensure repayment of employee loans under a guarantee agreement, such obligations may be direct, absolute and independent of any default by the employees. Employers must therefore recognise that entering into such agreements creates clear legal responsibilities and failure to comply can result in enforceability liability. This decision reinforces the principle that guarantee contracts are to be interpreted according to their terms and the court will uphold the obligations explicitly stipulated, ensuring that financial institutions can recover outstanding loans without being required to first pursue employees. Ultimately, the case affirms the importance of strict adherence to the terms of guarantee agreements in employment-related financial arrangements.