In this week’s blog post we discuss Zimbabwean law on contracts of guarantee.
What is a contract of Guarantee?
In simple terms a guarantee contract is an autonomous agreement between the guarantor and the creditor. It is essentially a promise by one party (the “guarantor”) that a second party (the “principal debtor”) will fulfil his or her obligations to a third party (the “creditor”). Usually the underlying obligation is a loan. If the principal debtor defaults on the loan, then the guarantor undertakes to pay it – subject to the terms of the guarantee contract. A guarantee must be paid according to its terms, and liability under it is not affected by the relationship between the creditor and principal debtor that gave rise to its issue. The effectiveness of the guarantee under our law is not tied to the underlying loan agreement which gives rise to the obligation between, the debtor and creditor. It is a separate agreement, with distinguishable obligations.
A guarantee may cover either, general indebtedness for an unlimited period of time or may be a once off cover, for a single advancement of a specific loan amount advanced to the principal debtor, in which case it is a single transaction guarantee and covers no other loans. The general indebtedness guarantee is one where the guarantor guarantees all amounts due and owing in connection with the debt or other indebtedness owed to the Creditor. It is not limited as to time or amount.
How is a guarantee agreement different from suretyship agreement?
Guarantees and suretyships are both forms of security for a principal obligation, however there is an important difference between these two forms of security. Generally, guarantees create independent principal obligations, while suretyships create accessory obligations, which are ancillary to a valid primary obligation.
Formalities at law:
Generally, the normal rules of contract law apply to guarantees, including the rules pertaining to formalities, interpretation and enforcement. A guarantee is a contract and is governed by the general principles of contract law. The formalities of a contract include, offer and acceptance, consensus and capacity to enter into the contract.
In addition to the foregoing requirements, our courts have held that a guarantee should state and include:
a. the name of the creditor;
b. the name of the guarantor;
c. the name of the principal debtor;
d. and the rights and obligations of the parties.
Ordinarily, the guarantor renounces a number of legal exceptions and benefits in the guarantee, most typically the following – non numeratae pecuniae, non causa debiti, error calculi, revision of accounts and no value received, and to waive the benefit of excussion, division et divisionis and in certain cases that of de duobus vel pluribis reis debendi.
It is critical for a guarantor to understand the meaning of these before signing the agreement, because once the agreement is signed they cannot be disputed. The following is a simplified explanation of the meaning and effect of the renunciation of exceptions and benefits:
Renunciation of benefits
A renunciation of the following benefits entitles the creditor to recover the full debt from the guarantor who renounced these benefits:
- Beneficium ordinis seu excussionis – A waiver of this benefit by a guarantor entitles the creditor to claim payment from the guarantor without first exhausting the legal remedies against the principal debtor.
- Beneficium de duobus vel pluribus reis debendi – A waiver of this benefit by a guarantor allows the creditor to recover the full debt from such guarantor, without first requiring payment from the principal debtor.
- Beneficium divisionis – A waiver of this benefit by a guarantor entitles the financial institution to recover the full debt owed by the principal debtor against that guarantor.
- Renunciation of exceptions – The renunciation of a legal exception will not preclude such exception from being raised as a defence to anyone in the event that a dispute arises or legal proceedings are instituted. However, should an exception be raised as a defence by any party after waiving such exception, then the onus of proving that such exception and the relevant facts relating thereto, will lie with that party.
- Exceptio non causa debiti – The purpose of renouncing exception is to place the onus of proving the absence of a cause of debt on the debtor and guarantor.
- Exceptio errore calculi – This is the defence that the amount claimed has been incorrectly calculated.
- Exceptio non numeratae pecuniae – This is the defence that moneys claimed were in fact never advanced to, or received by or on behalf of the debtor.
Enforcement of a guarantee by a creditor
In order to sustain a claim against a guarantor, a creditor is required to show that the principal debtor is obligated to it and has defaulted in repaying the debt or that the guarantor has accepted liability for the debt. The rationale behind the idea of a guarantee, is that the guarantor undertakes to answer to the creditor in the event that the principal debtor fails to pay the debt. A creditor who has a guarantee at his disposal has an election to proceed against the principal debtor or guarantor. Once a creditor shows that the principal debtor has defaulted and sues a guarantor he becomes entitled to summary judgment unless the guarantor raises a triable issue or valid defence to the claim. A guarantor cannot insist that a creditor proceeds against the principal debtor first before he acts against him. For as long as the principal debtor has defaulted in its payments and remains liable to the creditor, the guarantor can be called upon to make good its obligation in terms of the guarantee contract, unless the guarantees having terminated.
Termination of guarantee
A contract of guarantee may be terminated by the guarantor in line with the terms of the contract. However ordinarily the guarantee will terminate when the obligations of the underlying agreement between the creditor and principal debtor have been extinguished. Where a guarantor wants to terminate the guarantee it is advisable that such termination be in writing, addressed to the creditor and principal debtor outlining the reasons for termination in line with the specific terms of the guarantee agreement.
Conclusion
In conclusion, guarantee contracts serve as an important form of security for creditors. However, they may have devastating effects on guarantors where the principal debtor defaults on its obligations to the creditor. It is therefore critical for guarantors to understand their obligations under the guarantee agreement, and to ensure that termination provisions are clearly spelt out. It is also prudent for the guarantor to ensure that they keep a close eye on the principal debtors’ borrowing and repayments, and where the guarantee is limited, ensures that as soon as the principal debtor pays the creditor it notifies the creditor that its guarantee is terminated, to avoid the principal debtor borrowing further amounts on the strength of their guarantee.
Disclaimer:
The information and opinions expressed above are for general information only. They are not intended to constitute legal or other professional advice. For clarification, assistance, or any questions please contact Lex Amicus, by email at: lexamicus@outlook.com.
Lex Amicus 