Revisiting the Doctrine of Guarantorship in a Contract: A Comparative Look at Mian Aqueel & Anor v Exim Bank (U) Ltd and Ecobank Uganda Ltd v King James Comprehensive School Ltd & Others

By Tumuhirwe Paula

Finalist LLB4

Kampala International University

Introduction

The doctrine of guarantorship remains indispensable in modern financial transactions. Whether dealing with banks or private money lenders, it is now standard practice for lenders to require a guarantor before extending credit. Most loan agreements, both formal and informal, now incorporate express provisions for guarantees as part of risk mitigation.

But what exactly is a guarantee?

A guarantee establishes a tripartite legal relationship involving the creditor, the principal debtor, and the guarantor. Under this arrangement, the guarantor undertakes a secondary obligation to satisfy the debt or obligation if the principal debtor defaults. This secondary liability only becomes enforceable upon the failure of the principal debtor to fulfil their primary obligation.

The Ugandan legal framework, particularly the Contracts Act, Cap 284, and judicial decisions from the Commercial Division of the High Court, have steadily shaped and clarified this doctrine.

Legal Definition and Nature of a Guarantee

Section 67 of the Contracts Act, Cap 284 defines a contract of guarantee as "a contract to perform the promise or discharge the liability of a third party in case of default of that third party, which may be oral or written." This definition captures the essence of a guarantee as a contingent liability, a fallback commitment triggered by the principal debtor’s failure to meet obligations.

In Nganda Kaweesi v R.L. Jain [2009] UGCommC 17, the court elaborated:

“A guarantee is a contract whereby the guarantor promises the lender to be responsible, in addition to the principal borrower, for the due performance of the latter’s obligations to the lender... The guarantor’s liability is ancillary or secondary to that of the principal, who remains primarily liable. There is no liability on the guarantor unless and until the principal has failed to perform.”

This reinforces the cardinal principle that the guarantor’s obligation arises only upon default by the principal debtor.

Creditor’s Right to Choose Securities

The creditor, upon default, has the discretion to choose which securities to enforce. A guarantee constitutes one such security and need not be subordinated to others unless expressly stipulated. In Nganda Kaweesi, the court affirmed that:

“There is no rule that the creditor must avail himself of the other securities... before turning to the guarantor. However, any express or implied condition precedent to the guarantor’s liability must be fulfilled before recourse can be had to him.”

Thus, unless the guarantee explicitly makes enforcement conditional upon the exhaustion of other remedies, the creditor may directly proceed against the guarantor.

Scope and Extent of Liability

In Bank of Africa (U) Ltd v Valley Technical Services Ltd & Others [2024] UGCommC 232, Ocaya J restated the legal position:

“Under the contract of guarantee, the guarantor undertakes that he or she will be personally liable for the debt, default or miscarriage of the principal. The guarantor’s liability for the non-performance... is co-extensive with that of the principal.”

This co-extensive liability implies that, unless limited by the terms of the guarantee, the guarantor’s liability mirrors that of the principal debtor.

Yet, as Kiryabwire J (as he then was) noted, citing Halsbury’s Laws of England (4th ed, Vol 20, paras 183–184):

“A guarantor is a favoured debtor... The extent of the liability undertaken by the guarantor will depend upon the terms of the contract of guarantee... It need not be co-extensive with that of the principal debtor.”

This highlights the importance of the strict construction of guarantee contracts to determine the scope of the guarantor’s obligations.

Guarantor’s Rights and Subrogation

The guarantor, though liable upon default, retains certain rights vis-à-vis the principal debtor. In Martin Kirima Baithambu v Jeremiah Miriti [2017] eKLR, the Kenyan court held:

“A guarantor is entitled to call upon the principal debtor to pay the amount of the debt guaranteed, so as to relieve the guarantor from his obligation, even though the guarantor has paid nothing under the guarantee.”

This principle, echoed in Halsbury’s Laws of England, affirms that a guarantor’s equitable rights may accrue prior to payment, particularly where the creditor has acquired a right to demand payment.\

Good Faith, Collusion, and Equity’s Intervention

Equity imposes duties on creditors to act in good faith toward guarantors. The courts have held that guarantors are protected where creditors act fraudulently, collusively, or in bad faith.

For example, where a creditor colludes with the principal debtor to trigger the guarantee, the guarantor may invoke equity to resist enforcement.

In one such case, the court found:

“By the very nature of guarantee and the legal requirement that the guarantor’s liability arises only where there is default... equity anticipates that the creditor should signify good faith towards the guarantor.”

Where bad faith, connivance, or collusion is alleged, a guarantor may justifiably seek to join the principal debtor in proceedings or resist enforcement altogether.

Joinder of Principal Debtor and Procedural Fairness

Although traditionally separate, suits involving guarantees may permit the joinder of the principal debtor where necessary to resolve all issues. Order 1 Rule 15 of the Civil Procedure Rules enables such joinder where it is just and convenient. In practice, courts have acknowledged the pragmatic necessity of resolving disputes comprehensively.

In one case, the court noted:

“There is no absolute restriction in law on joinder of the principal debtor... especially where bad faith, connivance at default by and collusion with the principal debtor has been alleged.”

This procedural flexibility promotes fairness and prevents multiplicity of suits.

Recent Jurisprudence

Recent decisions from the Commercial Division reinforce the doctrinal clarity surrounding guarantorship.

Liability of the Guarantor Upon Default

In Mian Aqueel & Anor Vs Exim Bank (U) (Ltd) (MISCELANEOUS APPLICATION NO. 497 OF 2017) [2018] UGHCCD 208 (14 November 2018), the applicants sought to set aside a statutory demand issued pursuant to a personal guarantee. They argued, inter alia, that they should not be held liable before the resolution of a separate pending suit filed by the principal borrower.

Resolution of Issues

Issue 1: Whether the court ought to extend the time within which to file the application setting aside the statutory demand

Counsel for the applicants relied on Rules 5 and 6 of the Insolvency Regulations S.I. No. 35 of 2013 and cited the case of Godfrey Magezi and Another v Sudhir Ruparelia, Civil Misc. Appl. No. 10 of 2002, where the Supreme Court held that court may, for sufficient reason, extend time set by rules or court decisions for doing any act, whether before or after expiration of that time.

He argued that the statutory demand was never served on the applicants, as it was sent to an address (P.O. Box 33151, Kampala) that they no longer used. Instead, he contended that the applicants had changed their postal address to P.O. Box 09, Lugazi as of 11 October 2013, and had formally communicated the change to the respondent, who continued corresponding with them at the new address.

Further, the second applicant was allegedly outside the country at the material time, and the applicant’s advocates, who had been in correspondence with the respondent’s advocates regarding a pending suit (Abisha Steel Industries Ltd v Exim Bank Uganda Ltd, HCCS No. 05 of 2017)—were never served with the statutory demand. Counsel submitted that the 1st applicant maintained physical contact with the respondent, making personal service feasible, and that non-service explained the delay in filing the application beyond the 10-day limit.

In reply, counsel for the respondent submitted that under s 5(3) of the Insolvency Act, 2011, the court must be satisfied that there is “sufficient cause” to justify the extension. He cited Shanti v Hindocha & Others [1973] EA 207, which emphasized that the most persuasive reason for extension is that the delay was not due to the applicant’s dilatory conduct.

Counsel asserted that the respondent consistently used the official postal address (P.O. Box 33151, Kampala) provided by the applicants and was never informed of any change. The statutory demand was sent on 23 March 2017 to that address, and the application to set it aside was filed only on 8 June 2017—well beyond the prescribed 10 days.

He also noted that the applicants had, even after the alleged change in address, used the old postal address on stamped correspondences as late as 2015, thereby creating legitimate reliance by the respondent.

The court reviewed Rules 5 and 6 of the Insolvency Regulations, which permit service via registered mail to the debtor’s address. The court also considered s 5 of the Insolvency Act and s 96 of the Civil Procedure Act, which permit courts to extend time for sufficient cause. It held that “sufficient cause” must be determined case-by-case, guided by fairness and the interests of justice.

In the court’s view, non-service of court process, illness, and other serious disruptions may amount to sufficient cause. However, the applicants failed to prove that the statutory demand had not been served. The “change of address” letter (Annexture A1) bore no stamp or acknowledgment of receipt by the respondent, unlike other correspondences which were stamped and signed. The court noted that even after the alleged address change, the applicants continued using stamps bearing the old address.

Moreover, notices of default dated 4 May and 14 September 2016 were addressed to P.O. Box 33151 and were received and acknowledged by the applicants’ representative. This undermined the credibility of the applicants’ claim that the statutory demand was sent to a wrong address.

The court thus concluded that the respondent served the statutory demand at the official address known to and consistently used by the applicants. The failure to respond within time was due to the applicants’ own negligence or mischief.

Accordingly, the court held that the applicants failed to show sufficient cause to justify extension of time under s 5(3) of the Insolvency Act.

The first issue was resolved in favour of the respondent.

Issue 2: Whether the statutory demand should be set aside and Bankruptcy Cause No. 6 of 2017 dismissed with costs

Applicants’ counsel relied on s 5(4) of the Insolvency Act, 2011, which permits a court to set aside a statutory demand if:

1. There is a substantial dispute as to whether the debt is due;

2. The debtor has a counterclaim, set-off, or cross-demand reducing the claim below the statutory threshold; or

3. The creditor holds property whose value covers the debt.

He submitted that liability under the guarantee only arises upon default by the principal borrower, and that a pending suit (HCCS No. 05 of 2017) filed by the borrower contests the alleged indebtedness. He argued that until that suit is resolved and the lender realizes the security, the applicants cannot be held liable under the guarantee.

The court, however, reaffirmed its earlier position that the suit by the principal borrower was filed after the statutory demand had already been served. Section 3(1)(a) of the Insolvency Act presumes a debtor is unable to pay if they fail to comply with a statutory demand.

The court held that guarantors become liable upon default by the principal borrower and that the creditor is not required to wait for a court decision in the pending civil suit. The applicants failed to provide any evidence of payment or a counterclaim, nor did they attach bank statements or affidavits to demonstrate that no debt was owed.

The court emphasized that mere submissions by counsel without supporting evidence are insufficient. It found the applicants’ claim of “no debt due” untruthful and contradicted by the respondent’s affidavit (para 14), which detailed how the principal debtor defaulted and was placed under receivership in November 2016.

Given that the guarantors were duly served and the debt was not disputed with cogent evidence, the court found no merit in the request to set aside the statutory demand or dismiss the Bankruptcy Cause.

The second issue was also resolved in favour of the respondent.

Ruling:The court dismissed the application for extension of time and declined to set aside the statutory demand. It found that the applicants had failed to demonstrate sufficient cause or establish any valid legal basis for the reliefs sought. The Bankruptcy Cause No. 6 of 2017 was to proceed.

Commentary

The court rejected this argument, affirming that a guarantor’s liability is not contingent on the resolution of the principal debtor’s claims but rather arises immediately upon default. Justice Mutonyi held that the creditor is not obligated to await the outcome of litigation involving the principal borrower, especially where there is no substantiated dispute over the debt.

This reasoning is consistent with Section 70(2) of the Contracts Act, Cap 284, which provides that “the liability of the surety is not affected by the creditor's forbearance to sue the principal debtor.” Thus, guarantorship is an accessory contract with an independent enforceability pathway upon default.

Recovery by the Guarantor After Payment

The court’s analysis in Ecobank Uganda Limited v King James Comprehensive School Limited & 2 Others (Civil Suit 654 of 2017) [2023] UGCommC 211 (15 September 2023) complements and expands this doctrine by addressing the rights of guarantors after payment.

In that case, the plaintiff bank received a total of UGX 470,380,898 from guarantors, USAID and SIDA, following default by the first defendant.

The issue was whether this sum was recoverable from the principal debtor for the benefit of the guarantors.

Justice Anna B Mugenyi reaffirmed that guarantors who satisfy a debt step into the shoes of the creditor and acquire all rights of enforcement.

Section 84(2) of the Contracts Act provides that "a guarantor is entitled to recover from a principal debtor any sum the guarantor rightfully paid under the guarantee." Further, Section 80 vests in the guarantor all rights previously held by the creditor against the debtor. In this light, the court rightly concluded that Ecobank was entitled to recover the UGX 470 million from the defaulting borrower for the benefit of the guarantors.

Importantly, the court referenced the SIDA/USAID Guarantee Agreement (PE 9), specifically Article V Section 5.02, which imposes a duty on the guaranteed party (Ecobank) to reimburse the guarantors on a pro rata basis once any funds are recovered from the debtor. This contractual provision reinforced the statutory indemnity under Section 84 of the Act.

Statutory and Contractual Rights

Both Mian Aqueel and Ecobank v King James illustrate how statutory and contractual provisions operate in tandem to govern the obligations and remedies available in guarantorship relationships.

While the Contracts Act lays the foundation, detailed guarantee agreements often supplement and particularize rights, especially where international guarantors or development partners are involved.

The statutory demand procedure in Mian Aqueel was properly grounded in the Insolvency Act, 2011 and the Insolvency Regulations, 2013. The court held that non-response to a properly served statutory demand triggers a presumption of inability to pay debts. Conversely, in Ecobank, the court emphasized the lender’s duty to pursue recovery even after a guarantee claim has been settled—underscoring the dynamic obligation on creditors to mitigate loss and indemnify guarantors.

Conclusion

The doctrine of guarantorship, while enabling credit expansion, also provides safeguards for guarantors based on both contract and equity law. Ugandan courts have consistently clarified the contingent nature of a guarantor’s liability, the creditor’s discretionary enforcement powers, and the guarantor’s rights of subrogation and joinder.

As jurisprudence continues to develop, particularly in light of complex commercial realities, the balance between creditor remedies and guarantor protections will remain a crucial aspect of Uganda’s commercial legal landscape.

By Tumuhirwe Paula

Finalist LLB4

Kampala International University