What to Know Before Signing A Guaranty or Surety Agreement

A guarantee can be defined in legal parlance,
as an undertaking to answer for the payment or performance of another person’s
debt or obligation in the event of a default by the person primarily
responsible for it. It most commonly designates a private transaction by means
of which one person, to obtain some trust, confidence or credit for another,
engages to be answerable for him. Put in another way, a guarantee is
a contract to
answer for the payment of some debt, or the performance of some duty by a third person who
is primarily liable for that payment or performance.

It is a collateral
contract, which does not extinguish the original obligation for payment or
performance. Guarantee was judicially defined in the case of Nwankwo v.
E.D.S.C.S.C.U.A. (2007) 5 N.W.L.R. (Pt. 1027) 377, S.C., as the
assurance that a contract or a legal act, will be carried out. A guarantee
clause was also defined in that case, to be a provision in a contract, deed or
mortgage, by which one person promises to pay the debt of another.

Parties to a Guarantee Agreement.

There are three (3) parties to a guarantee
agreement. That is;

1.
the
giver of a guarantee is called the “Surety”,
“Guarantor” or “Secondary Debtor”. There
may be co guarantors to any given guarantee agreement, who are usually liable
in varying degrees, depending on their personal contracts.

2.
The
person to whom the guarantee is given is the Creditor.

3.
The
person whose payment or performance is secured by the guarantor is termed “the
Principal Debtor”, or simply “the Principal”.

However, it is important to note that
strictly speaking, the Principal Debtor does not usually acquire any right, or
undertake any liability under the contract of guarantee and for this reason, he
cannot sue to enforce the terms of the contract of guarantee. This is so,
unless the agreement is worded in such a way, as to give the Principal Debtor,
any such rights.

Liability of the Guarantor.

Usually, the Creditor is entitled to proceed
against the Guarantor, once the Principal Debtor becomes unable to repay the
debt or interests thereon. It is at this point, that the liability of the
Guarantor, is said to have crystallized.

In the case of F.I.B Plc v. Pegassus
Trading Office (GMBH) (2004) 4 N.W.L.R. (Pt. 863) 377, the Supreme
Court held that the liability of the Guarantor, could take two (2) forms:

1.
the
Guarantor may by his agreement, undertake to discharge the liability, only when
the Principal Debtor fails in his obligation to pay, after his default in repaying
the loan and/or interests on the loan. In this case, the Guarantor’s liability
does not arise, until a demand has been made on the Principal Debtor, who has
defaulted.

2.
The
Guarantor may by his agreement, make himself the “real” debtor technically
referred to as “primary obligor”. Thereby giving the Creditor, the option of
asking him for the repayment of monies due to him, without first asking the
Principal Debtor. In which case, the Principal Debtor simply drops out, so the
Guarantor becomes solely liable.

The latter scenario was held to be the
position in the F.I.B Plc v. Pegassus Trading Office’s case and
the Appellant (Guarantor) was held liable to the Cross-Appellant (Creditor).

It is important to note that the exact
scope/nature of liability undertaken by a Guarantor/Surety under the guarantee
depends upon its terms and is not necessarily the same with that of the
Principal Debtor. While he may guarantee less than what the Principal Debtor
owes, the Guarantor’s obligation cannot exceed that of the Principal Debtor. It
is for this reason, that a guarantee agreement which imposes on the Guarantor,
a greater liability than that of the Principal Debtor is not invalidated but
rather, the amount of the liability will be reduced to the amount owed by the
Principal Debtor.

Obviously, the Guarantor is not liable, where the principal
debt cannot be enforced, as in the case of illegal contracts. Because the
liability of the Guarantor is dependent on that of the Principal Debtor and the
wording of his agreement, the Guarantor’s obligation is extinguished if the
original obligation fails unless it is worded to be enforceable irrespective of
the validity of the underlying contract. Finally on this note, when the
Principal Debtor’s obligations are extinguished, so is the Guarantor’s, in the
guarantee agreement.

Does the guarantee terminate with the
guarantor’s death?

Because guarantee agreements are most often,
personal contracts, the death of the Guarantor, usually brings the contract to
an end. This is unless, the guarantee agreement is worded in such a way, as to
bind the Guarantor’s estate, after death. In which case, the Guarantor’s estate
will be held liable to the Creditor, in the event of the default of the Debtor.

In conclusion, as with every other contractual
document, before signing that guarantee agreement, be sure to read, read and
re-read its terms and conditions, to fully understand what your obligations
are, under the contract. Do not assume you understand all the phrases and
clauses. It may appear simple and straight forward enough, but you will be
surprised how much obligation you may be taking upon yourself. It will be
prudent to obtain professional advice before signing one.