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PERSONAL GUARANTEES IN COMMERCIAL TRANSACTIONS: RIGHTS, DUTIES AND LIABILITIES OF GUARANTORS UNDER NIGERIAN LAW
Introduction
Personal guarantees are common in commercial transactions, particularly in bank loans, business financing, commercial leases and credit arrangements. A creditor may require an individual, often a director, shareholder, business owner or associate of the principal debtor, to personally guarantee the obligations of another person or company.
Although signing a guarantee may appear to be a mere formality, it can create significant personal financial liability.
A guarantor is a person who undertakes to answer for the debt, default or obligation of another person, known as the principal debtor, in favour of the creditor.
The Supreme Court in Khaled Barakat Chami v. United Bank for Africa Plc (2010) 6 NWLR (Pt. 1191) 474 (SC) recognised that a contract of guarantee is a separate and distinct contract between the guarantor and creditor. Depending on its terms, the creditor may enforce the guarantee directly against the guarantor without first proceeding against the principal debtor.
What Is a Personal Guarantee?
A personal guarantee is a contractual promise by an individual to meet the obligations of another person or company if the circumstances specified in the guarantee occur.
For example, where a company obtains a ₦20 million loan and its director signs a personal guarantee, the director may become personally liable if the company defaults, depending on the terms of the guarantee.
This means:
A company debt does not automatically become a director's personal debt, but a valid personal guarantee can create personal liability.
Rights of a Guarantor
A guarantor is not without legal protection. Depending on the circumstances and terms of the guarantee, a guarantor may have the right to:
1. Know the Extent of the Guarantee
The guarantor should know exactly what is being guaranteed, the maximum amount involved, the duration of the guarantee and whether interest, charges and legal costs are included.
2. Raise Valid Defences
A guarantor may challenge liability where legally appropriate, including where there are issues concerning fraud, misrepresentation, material variation of the underlying agreement, defective execution, payment, expiry or circumstances falling outside the terms of the guarantee.
3. Seek Reimbursement
Where a guarantor lawfully pays the principal debtor's obligation, the guarantor may, subject to applicable law and the circumstances, have a right to recover the amount from the principal debtor.
4. Exercise Subrogation Rights
After satisfying the guaranteed obligation, a guarantor may, in appropriate circumstances, acquire rights connected with the creditor's position against the principal debtor.
Duties and Liabilities of a Guarantor
The principal duty of a guarantor is to honour the guarantee when the principal debtor defaults and the contractual conditions for enforcement have been satisfied.
A guarantor should therefore understand provisions relating to:
continuing guarantees
“all monies” clauses
interest and penalties
legal and recovery costs
joint and several liability
indemnity clauses
termination or revocation
notice and demand requirements.
A particularly important point is that a creditor may, depending on the terms of the guarantee, proceed directly against the guarantor. The guarantor should not assume that the creditor must first exhaust every remedy against the principal debtor.
Continuing Guarantees: A Major Risk
A guarantor must be particularly careful where a guarantee is described as a continuing guarantee.
A continuing guarantee may, depending on its wording, extend to future transactions or additional indebtedness.
For instance, an individual may believe that he or she is guaranteeing a company's ₦20 million loan, while the document actually covers all present and future monies owed by the company to the creditor.
The financial exposure could therefore be considerably greater than originally anticipated.
Guarantee and Indemnity
A guarantee should also be distinguished from an indemnity.
A guarantee ordinarily relates to the obligation or default of another person, while an indemnity may create an independent obligation to compensate the creditor for specified losses.
Where a commercial document contains both a guarantee and an indemnity, the guarantor's potential exposure may be broader.
The entire document should therefore be carefully reviewed before signing.
Can a Creditor Sue a Guarantor Directly?
Yes, depending on the terms and nature of the guarantee.
This is an important principle established in Nigerian law.
In Khaled Barakat Chami v. United Bank for Africa Plc (2010) 6 NWLR (Pt. 1191) 474 (SC), the Supreme Court recognised that a guarantee creates a separate contractual relationship between the guarantor and creditor and may be enforced directly against the guarantor without necessarily joining the principal debtor.
Consequently, a person should not become a guarantor on the assumption that:
“The creditor must first sue the borrower before coming after me.”
That assumption may be wrong.
The precise position will depend on the wording of the guarantee and the circumstances of the transaction.
When Can a Guarantor Be Released?
Depending on the circumstances and the terms of the guarantee, a guarantor may be released from liability where:
the guaranteed debt has been fully discharged;
the guarantee has expired or been validly terminated;
the creditor expressly releases the guarantor;
there has been a material variation of the underlying transaction without the guarantor's consent, where such variation affects the guarantee;
the guarantee is otherwise invalid or unenforceable; or
the creditor's claim falls outside the scope of the guarantee.
However, not every change to a commercial transaction automatically releases a guarantor. The specific wording of the guarantee and the circumstances must be examined.
What Should You Do Before Signing a Personal Guarantee?
Before accepting responsibility as a guarantor, you should:
Read the entire guarantee carefully.
Obtain the underlying loan or commercial agreement.
Determine the maximum amount you may become liable for.
Check whether interest, penalties and legal costs are included.
Determine whether future debts are covered.
Check whether the guarantee is continuing.
Look carefully at “all monies” clauses.
Check for indemnity and joint-and-several-liability provisions.
Understand how and when the guarantee can be terminated.
Obtain independent legal advice before signing.
Keep copies of all relevant documents.
Never sign a personal guarantee simply because you trust the person or company whose obligation you are guaranteeing.
Practical Example
Suppose ABC Limited obtains a ₦50 million business loan from a bank and its managing director personally guarantees the facility.
ABC Limited later defaults.
The director may assume that the bank must first sell the company's assets before taking action against him.
That assumption may be incorrect.
If the guarantee permits direct enforcement and the relevant conditions have been satisfied, the bank may have a claim against the director personally.
The director's exposure may also extend beyond the original principal amount if the guarantee covers interest, charges, legal costs or other liabilities.
The lesson is simple: always understand the full scope of a guarantee before signing it.
About Sun Natha-Alade Law Firm
Sun Natha-Alade & Partners (SNATHAP LAW FIRM) is a Nigerian law firm providing professional legal services to individuals, businesses, corporate organisations and other clients across a range of legal and commercial matters.
The firm is committed to providing practical, strategic and client-focused legal solutions, with particular attention to the legal and commercial realities affecting its clients.
In the area of commercial transactions, the firm advises on commercial contracts, personal guarantees, corporate transactions, debt recovery, dispute resolution and other business-related legal matters. Our approach is focused on helping clients understand their rights and obligations, identify potential legal risks and make informed decisions before entering into significant transactions.
For individuals considering providing a personal guarantee, businesses seeking to obtain or provide commercial credit, and creditors seeking appropriate contractual protection, obtaining proper legal advice at the beginning of a transaction can help prevent avoidable disputes and financial exposure.
At Sun Natha-Alade & Partners (SNATHAP LAW FIRM), we believe that sound legal advice is not merely about resolving disputes it is also about preventing them.
Conclusion
A personal guarantee is more than a signature supporting someone else's transaction. It is a legal undertaking that may expose the guarantor to substantial personal liability.
The decision in Khaled Barakat Chami v. UBA Plc (2010) 6 NWLR (Pt. 1191) 474 (SC) demonstrates the importance of understanding the independent contractual nature of a guarantee and the possibility of direct enforcement against the guarantor.
Before signing, ask:
What am I guaranteeing?
How much can I become liable for?
How long will the guarantee last?
What happens if the principal debtor defaults?
If you cannot answer these questions clearly, seek professional legal advice before signing.
A personal guarantee may be given in a moment of trust, but its legal consequences can last far beyond that moment. Know your liability before you sign.
DISCLAIMER
This article is provided by Sun Natha-Alade & Partners (SNATHAP LAW FIRM) for general information and educational purposes only. It does not constitute legal advice, a legal opinion or the creation of a solicitor-client relationship.
The application of Nigerian law depends on the facts and circumstances of each case, the terms of the relevant contract and the applicable legislation and judicial decisions. Laws and judicial interpretations may also change over time.
Readers should therefore obtain independent legal advice based on their specific circumstances before signing a personal guarantee, entering into a commercial transaction or taking any action based on the information contained in this article.
Sun Natha-Alade & Partners (SNATHAP LAW FIRM) accepts no responsibility for any loss or liability arising from reliance solely on the general information contained in this publication.
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