Why am I being made to service a loan I guaranteed?


The general feeling is that this law creates an injustice and opens door for those who seek to swindle financial institution at the expense of unsuspecting guarantors.

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Hi Eric.

I guaranteed someone a Sacco loan to buy a car. The gentleman defaulted after paying for a few months. He disappeared with the car and I don’t know where the car is at the moment. The Sacco sent me a message to start servicing the loan. At the moment, I am doing so. My question is, why can’t the Sacco look for the car so that they can auction it and recover their money? Am I justified to sue the Sacco? I feel victimised. Worried guy

Dear Worried Guy,

Jonathan Baron in his paper, Trust: beliefs and morality, asks this question: “If trust is a good, and if we want to promote it, what exactly do we want to promote?” In self-reflection, he adds, trust is a belief about the goodness or rationality in others.

As many legal scholars will tell us, it is very difficult to legislate trust or morality, since the concept is relatively fluid and varied by every individual’s value system, way of upbringing besides their experiences, influences and preferences as they age.

It should be known that trust in law is an implementable demonstrative component of a relationship characterised by fidelity to certain clearly defined obligations or terms, often accorded respect through a force of punishment if infidelity creeps in. This applies to people as well, only the force of punishment likely leads to severed relationships, or new relational pillars, mostly anchored on doubts.

Your friend’s dishonesty, besides the suffering you are experiencing should remind readers of the difference between legal and natural person. A legal person has no capacity for emotional intelligence, while the natural does. This means that legal persons stick to the strictness and rigidity of law, which explains the SACCO’s hardness or inflexibility towards your plight.

You are in this situation because you entered into a contract of guarantee, that is covered and operationalised by Section 3 (1) of the Law of Contract. This kind of contract, which must be in writing, protects the creditor from the failure of a borrower to repay what they borrowed. It transfers the loan obligations of the principal to the guarantor, upon default by the borrower on repayment. 

This position has been emphasised by several court decisions, which primarily affirm the automatic transfer of the debtor’s responsibility to the guarantor in the event of default. In the case of Bandari SACCO Limited Versus Christopher Okwi & Five Others (Civil Appeal No. 73, of 2012), the High Court, on dismissing a decision of the Cooperative Tribunal, upon an appeal before it, held that it is not the duty of the court to re-write covenant between parties, but to hold them to their bargain and own negotiated and settled terms of engagement. This means that the court will always respect and promote the terms between the guarantor and the borrower.

The guarantor’s position in such matters is what on the streets could be termed as cooked and served for the creditor to feed unto fulfilment. This was demonstrated by the Decision of the Court in the matter of Ebony Development Company Limited Versus Standard Chartered Bank Limited of 2008, where Justice Joyce Khaminwa stated as follows, “...the obligation of a guarantor is clear. It (sic) becomes liable upon default by principal debt…. It is not guarantor to see to it that the borrower complies with his contractual obligation but to pay on demand the guaranteed sum.” Many court decisions have clarified that a creditor need not exhaust all possible avenues of repayment from the debtor, before seeking the guarantor’s side of the bargain. The action by a creditor to recover what the debtor owes is based and driven by the fact that a guarantor becomes liable for the debt once called upon, with all indications that the borrower has defaulted. 

In the foregoing, all people, who have guaranteed or intend to, in future for the love and respect of their friendship besides the camaraderie developed over time amongst colleagues need to understand and contend with the following: their signature if appended on a contract of guarantee, as a guarantor creates and cements an executable liability obligation without reference or notice by the creditor; their contract of guarantee permits the creditor to demand from them the money borrowed by the borrower, as if the two (principal and guarantor) are same person; the lender doesn’t have to proof recovery attempts, and is allowed to restructure the loan without negotiations with the guarantor, similarly, recover any and every other charge related to the management of the debt owed, which may include legal fees and interest rates amongst other transactional costs.

The decision in the matter of Henry Mbugua Versus Patrick Gachie Kigo, of 2004, seem to suggest the automatic fight transfer, that would have been between the borrower with a lender upon default, to the guarantor and the person guaranteed. This is the context in which the rights of the guarantor emerge. Therefore, the guarantor has the right to subrogation, which empowers him or her to recover from the borrower what has been paid to the lender including surrendered property, as was partly given by the decision in the Bandari SACCO Limited Versus Christopher Okwi & Five Others case.

With this hindsight, and the possibility of default, as Covid-19 demonstrated, every person before guaranteeing must be aware of the right to decide the percentage of the loan or specify the amount to be guaranteed.

The general feeling is that this law creates an injustice and opens door for those who seek to swindle financial institution at the expense of unsuspecting guarantors. The Law of Contract (Amendment Bill) of 2019, which was rejected, would have remedied some of these concerns as raised by you. 

Eric Mukoya has over 17 years’ experience working in the social justice sector. He’s the executive director of Undugu Society of Kenya. Legal query? Email [email protected]


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