The Supreme Court’s decision establishing whether a guarantor can be sued without the joinder of the principal debtor when the liability of the guarantor crystallizes –
Introduction
At the risk of stating that which may seem trite, it nonetheless remains indubitable that in every part of the world, financing is the catalyst that drives all commercial activities. However, in more recent times, limited access to finance globally has created major constraints in business. Key projects and transactions are inadequately funded due to the lack of sufficient security for the much needed loans. Typically, where a potential borrower is unable to meet the criteria of the lending institution by providing satisfactory collateral, the said borrower may introduce a guarantor to its creditor. The guarantor usually undertakes to pay for the facility in the event the borrower defaults and may also pledge valuable collateral to cover the facility.
The case under review is based on a banker-customer relationship gone awry and which resulted in the creditor seeking to enforce the contract of guarantee after the principal debtor failed to liquidate its debt. Certain interesting procedural and substantive legal issues were raised and dealt with by the Supreme Court in this suit and in addition, it has further expounded the concept of guaranteeship in depth. Facts of the case Rasha Enterprises Limited; the principal debtor, was granted overdraft facilities by the respondent. As condition thereof, the respondent requested a guarantor for the credit facilities. The principal debtor introduced the appellant to the respondent for this purpose. The appellant was also a customer of the respondent bank. In furtherance of this arrangement, the appellant executed a guarantee agreement in favour of the respondent on the strength of which the principal debtor was permitted by the respondent to overdraw its account.
The respondent subsequently claimed that the principal debtor, became indebted to it in the sum of N171,452,649.52k (One Hundred and Seventy One Million, Four Hundred and Fifty Two Thousand, Six Hundred and Forty Nine Naira, Fifty Two Kobo) as a result of the credit facilities aforementioned and it failed to settle its indebtedness despite repeated demands. The respondent’s solicitor wrote the appellant asking him to satisfy the aforesaid indebtedness in fulfillment of his pledge under the guarantee agreement. The appellant refused to honour the terms of the guarantee and the respondent consequently instituted an action in court to recover the money. At the trial court, the appellant contended that he never acted as guarantor in the overdraft arrangement between the respondent and the principal debtor. He further argued that the principal debtor was not a duly incorporated company and that the credit facility was not secured. The appellant did not however testify in proof of his averments in the trial court. The respondent on its part tendered the guarantee form or agreement which the appellant had signed. The trial court held that the respondent failed to prove its case and further that the debt could not be proved against the appellant without joining the principal debtor as a party to the suit.
The respondent being dissatisfied with the judgment, appealed to the Court of Appeal, which allowed the appeal and granted judgment in its favour in the sum claimed at the trial court. Aggrieved, the appellant appealed to the Supreme Court. ISSUES FOR DETERMINATION AND JUDGMENT The main issue for determination before the Supreme Court was: Whether the Court of Appeal was right in its finding that the principal debtor was not a necessary party to the suit. Learned counsel for the appellant argued vigorously that the principal debtor was a necessary party to the proceedings to make same competent and the failure to join the principal debtor in the proceedings at the trial court was a fatal omission which made it impossible in law for the court to determine the alleged indebtedness of the principal debtor to the respondent, which determination was a condition precedent to any liability under a guarantee. In his reaction, learned counsel for the respondent submitted that the respondent had led evidence to prove the indebtedness of the principal debtor and that there was also evidence that the principal debtor failed, refused or neglected to pay the debt as secured by the appellant.
Relying on the case of Olujitan v. Oshatoba (1992) 5 NWLR (Pt. 241) 326 at 329, he further contended that the issue of non-joinder of the principal debtor was never raised by the appellant either as a preliminary point or in his statement of defence, concluding therefore that it was not incumbent to join the principal debtor in an action to join against the appellant in respect of the guarantee agreement. In a well considered judgment, the Supreme Court dismissed the appeal. The Learned Justices noted that the issue of joining the principal debtor in an action to enforce the guarantee did not arise from the pleadings of the parties, evidence, and addresses of counsel before the trial court. The matter was thus raised suo motu without calling on learned counsel to address on it, before basing its decision thereon. On whether or not the guarantee had crystallized the court held thus per ONNOGHEN JSC: “…it is settled law that where a person personally guarantees the liability of a third party by entering into a contract of guarantee or suretyship, a distinct and separate contract from the principal debtor is thereby created between the guarantor and the creditor. The contract of guarantee so created can be enforced against the guarantor directly or independently without the necessity of joining the principal debtor in the proceedings to enforce same.” Comments From the above exposition, it is clear that a guarantor is technically a debtor.
This is so because where the principal debtor refuses to pay, the guarantor will be called upon to repay the loan so guaranteed as was the case in the suit under reference. It is therefore trite that a contract of guarantee is an abstract promise to perform and is a separable obligation independent of the underlying transaction. A guarantor will therefore not be at liberty to escape the obligations he freely contracted to honour. This promise acts as a soft landing for creditors to secure the performance obligation in the event of the principal debtor’s default. With the ongoing banking sector reforms and the immense efforts of banks to recover debts from unwilling debtors, the sound reasoning and logical conclusions of the learned Justices of the Supreme Court in the instant case is a welcome indication that our courts are alive to intricacies of secured credit transactions. However, it is perhaps unavoidable sometimes that their efforts are thwarted due to tactical application of legal techniques by counsel at the courts. For the avoidance of doubt though, the case under review has re-affirmed the settled legal principles on the subject under reference.
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