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When payment of guaranteed loan is not made

WHERE payments of a loan which is guaranteed is not made, the guarantor of that loan becomes liable not only for the amount of the loan that is guaranteed, but also for any interest and charges which may have become due on it.

This is a holding in a judgment issued by the Court of Appeal recently when determining an appeal lodged by a customer with CRDB Bank, Mr Evarist Kawishe, in attempt to save his 100m/- in a Fixed Deposit Account.

Our Staff Writer FAUSTINE KAPAMA revisits the judgment and reports… … .

IN law, a guarantee is 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 is a formal agreement to take responsibility for something, such as the payment of someone else’s debt. On June 30, 2004, Mr Evarist Kawishe, after being persuaded by his friend, Mr Exaud Kwayu, who had bought shares in Simon Agency Limited in order to buy cotton, offered his Fixed Deposit Account (FDR) as an additional security to guarantee 500m/- loan granted by CRDB Bank in a form of an overdraft.

To facilitate the guarantee, Mr Kawishe signed a letter of lien in the sum of 104,110,585/85 as additional security for the loan. Lien is a right to keep possession of property belonging to another person until a debt owed by that person is discharged.

It is an official order that allows someone to keep the property of a person who owes them money until the money has been paid back. Kawishe believed that the guarantee was to expire after one year.

However, as at March 31, 2005, the loan was not paid on reason the company’s business did not go well. This necessitated the Bank to grant additional loan of 1.5bn/- to the company, which was valid for one year and based on the same securities offered by the principal borrower earlier and the FDR by Mr Kawishe.

Despite the second loan, the company did not manage to settle the outstanding loan. Nevertheless, the Bank again granted Simon Agency Limited, during the period of 2007/2008 a further loan of 3bn/- on same securities.

However, up to September 3, 2010, the Company had not settled the outstanding balance of 6,814,158,448/47, which included the principal sum and interests.

The Bank was, thus compelled to sell some of the buildings which were offered as securities by Simon Agency Limited.

The financial institution also uplifted all the outstanding amount of 129,584,209/38 which was in the FDR belonging to Mr Kawishe.

Such action prompted Kawishe to file a case before the High Court’s Commercial Division, contending the Bank had no justification of taking his money for the outstanding debt of principal borrower because there was no binding agreement between them after the guarantee expired on March 31, 2005.

He, therefore, prayed for the judgment and decree against the Bank for the court to declare that the financial institution was in breach of the guarantee agreement and that he was by March 31, 2005 discharged as a guarantor and his account committed by the signed lien was equally discharged.

Mr Kawishe asked the court to declare his liability as a result of the guarantee was not co-extensive to other borrowing by the principal debtor from the Bank without his consent and that it should condemn the Bank for paying itself from his separate accounts contrary to the letter of lien.

He further pressed for general damages and requested the court to order the Bank to refund all sums of money with interest taken by the defendant from his fixed deposit account being 129,584,209/38 and order the financial institution to open his new fixed deposit receipt unconditionally in his name.

The Bank denied the claims, contending that Mr Kawishe did not withdraw his FDR from being used as security and continued to issue additional loans to Simon Agency Limited.

She argued that there was no need to give notice to him, as the modality of the action to be taken was stipulated in the letter of lien. Having heard the evidence from both parties, the High Court dismissed the suit with costs.

Mr Kawishe was dissatisfied by the decision and decided to appeal to the Court of Appeal. As the appellant, he advanced four grounds to fault the judgment of the court to rule in favour of the Bank, the respondent.

The appellant stated that the trial judge erred both in law and facts and misdirected himself on the law and practice of banking involving his letter of lien on his FDR that has never featured in any of the loan agreements merely because he never pleaded non-use of the same.

He stated that the trial judge erred in banking law and practice and facts when he held that his letter of lien involving the FDR was co-extensive and the Bank was at liberty to utilize all monies held there under by the Bank without giving notice to him on due dates.

The appellant stated that the judge misdirected himself when he applied the general principle of law of contract involving continuing agreement that it was him, who had to revoke the guarantee when in this case the extended loan agreement after the guaranteed loan automatically discharged the guarantee.

Justices Kipenka Mussa, Rehema Mkuye and Ferdinand Wambali were assigned to determine the appeal. Having gone through the submissions presented by the parties, the justices, in a move described as adding more salt on the wound, also dismissed Kawishe’s appeal.

According to the record of appeal and the finding of the High Court, they said, there was no doubt that through a letter of lien directed to the respondent, the appellant offered his FDR to provide additional guarantee for Simon Agency Limited to secure a loan.

“We further observe that the appellant explained in his testimony how he was approached by his friend Exaud Kwayu to offer his FDR as an additional guarantee and that he was fully enlightened on the letter of lien which he signed at the respondent’s Lumumba Branch while with his friend,” the justices said.

They fully agreed with the findings of the trial judge on the co-extensive nature of the guarantee which was executed by the appellant through the letter of lien and that such document authorized the respondent at any time to offset the advanced loan upon default whether before or after the due date.

“We wish to emphasize that one of the principle governing the guarantor’s liability is that it is co-extensive with that of the principal debtor. The term co-extensive with the principal debtor implies the maximum extent of the guarantor’s liability in case the principal debtor’s default,” the justices said.

They held that where the payment of loan which is guaranteed is not made, the guarantor becomes liable not only for the amount of the loan that is guaranteed, but also for any interest and charges which may have become due on it.

Expounding further on the matter, the justices pointed out that a person who executed a guarantee need to know that in essence a guarantee is a bonding promise of one person to be answerable for the debt of obligation of another if that other defaults.

It follows that, they said, a contract of guarantee is predicated upon existence of a valid principal obligation owed by the principal debtor and a valid guarantee depends upon the existence of a promise made to a person to whom a debtor is answerable or is to become answerable.

“In the present case, there is no doubt that by executing a letter of lien, the appellant undertook to answer for the debt, default or miscarriage of Simon Agency Limited within the terms of the guarantee.

The principal obligation therefore remained unchanged throughout the life of a guarantee,” they ruled. According to the justices, it is not disputed as per the evidence in the record of appeal that the respondent started with selling the properties of the principal debtor that were pledged as securities and then dealt with the appellant’s FDR for the balance as provided in the letter of lien.

“We think that the trial judge cannot be faulted in applying the principles of the law of contract in view of the wording of the letter of lien and the circumstances of the case that was before him,” they ruled.

The justices noted that the judge found the letter of lien intended to cover even future renewals of the FDR to cover other loans that followed.

“We need to note further that the letter of lien provided for a situation in which even renewed receipts of the FDR would be handed over to the (Bank),” they said.

Referring to the evidence and trial court findings, they pointed out that the FDR was renewed soon after one year and the subsequent years that followed.

The justices concluded that there is no indication that the appellant intended to revoke the letter of lien after the expiry of the first FDR on March 31, 2005.


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