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LAW, J. A.
[1] The enactment of the National Bank of Commerce (Establishment and
Vesting of Assets and Liabilities) Act, 1967 (hereinafter referred to as the
Act) had the effect of vesting in the respondent bank all the assets and
liabilities of the banks named in the schedule to the Act, including the
National and Grindlays Bank Limited (hereinafter referred to as Grindlays
Bank) with effect from the 6th February, 1967.
[2] In October, 1964, the appellant was a director of a limited liability
company known as Imara Plywood Limited (hereinafter referred to as the
company) which carried business at Moshi, in Tanzania, and together with two
persons who were also then directors the appellant executed a written
instrument of guarantee in consideration whereof Grindlays Bank agreed not
to require immediate payment of sums then due, or which might thereafter
become due, from the company to Grindlays Bank, to the extent of a maximum
of shs,460,000.
[3] The instrument of guarantee provided, interalia, for it to be binding as
a continuing security for the whole amount which might from time to time be
owing, and contained the following clause which is of importance in the
deter¬mination of this appeal¬
"Specifically and without prejudice to any other provision herein contained
you (meaning Grindlays Bank) are to be at liberty, in case of there being
more than one Undersigned, to release any one or more of the Undersigned
from liability hereunder without prejudicing or affecting your rights in any
way against the other Undersigned."
[4] In 1966 the company negotiated with the Tanganyika Develop¬ment Finance
Company Limited (hereinafter referred to as the Finance Company) and as a
result received advances totalling shs 900,000 which were paid to the credit
of the company's account with Grindlays Bank on various dates between the
17th September and 4th November, 1966.
[5] On the 1st September, 1966, the appellant had written to the Manager of
Grindlays Bank the following letter ¬
Dear Sir,
1st September, 1966.
Re Imara Plywood Limited
I understand that new arrangements have been made for the above mentioned
company to obtain finance from the National Development Corporation and, as
I have not been in favour of the arrange¬ment, I have agreed to sell my
shares to my Co¬ Directors and have resigned my Directorship.
I take it that the securities held by the Bank will be discharged and shall
be obliged if you will confirm that the guarantee given by me to the Bank
has been released.
Yours faithfully,
(sgd)
A. Reid"
[6] The answer to this letter from the Bank Was as follows ¬
"Dear Sir,
8th September, 1966
Imara Plywood Limited
We refer to your letter of 1st September and the undersigned's discussion
with you on the morning of the 3rd September.
We note that you have resigned your director¬ship of the above company but
you will appreciate that we are unable to release you from your personal and
continuing guarantee until such time as the company repays its indebtedness
to the Bank or until adequate alternative security is furnished. We will
advise you as soon as this has been done.
Yours faithfully,
(Sgd)
D.R.F. Murray
Manager.”
[7] The "securities held by the Bank" referred to in the appellant's letter
of 1st September set out above included a mortgage registered against the
title of the company's right of occupancy over 13.53 acre of land at Moshi.
A second mortgage against the same title was re¬gistered by the Finance
Company as security for its loans to the company, on 4th October, 1967, and
on 6th February, 1968, the res¬pondent bank, as successor to Grindlays Bank,
waived its priority, thus transforming its own first mortgage into a second
mortgage and giving priority to the Finance Company's second mortgage which
there¬ by assumed the status of a first mortgage.
[8] At the hearing of the suit before Georges C.J. a certificate was
produced on behalf of the respondent bank to prove the indebted¬ ness of
Imara Plywood Limited. The relevant part of that certificate reads ¬
"…as on 7th January, 197O, Imara Plywood Limited was indebted to the
National Bank of Commerce in the sum of shs.399, 461/25 and that this
indebtedness has arisen subsequent to 1st February, 1967."
[9] The appellant raised a number of defences in the High Court, all of
which failed, and all of which were presented to this Court afresh as
grounds of appeal. The substantial grounds of appeal are, in my view,
firstly that by reason of the receipt by Grindlays Bank on behalf of the
company of shs. 900,000 in September and November, 1966, the company's
indebtedness to the bank was more than extinguished and the appellant's
liability under the guarantee thereby discharged; and secondly, that the
action of the respondent bank in postponing its mortgage in favour of the
subsequent mortgage of the Finance Company without the knowledge and consent
of the appellant as guarantor had the effect of releasing him from all
liability under the guarantee.
[10] As regards the first of these grounds, it is my opinion that, if the
appellant can show that either of the two events postulated in the letter of
8thSeptember, 1966, from the manager of Grindlays
[11] Bank, in fact took place, then the appellant is entitled in equity to
hold the respondent bank (_s successors to Grindlays Bank) to the
undertaking contained in that letter to release him from his obligation
under the guarantee.
[12] These events were:
repayment of the company's indebtedness, or
the furnishing of adequate alternative security.
[13] As regards (b), the learned Chief Justice found as a fact that no
alternative security was provided and the evidence supports this finding.
[14] As regards (a), he made no finding, and it is incumbent on this Court
to do so.
[15] The evidence indicates that the company's overdraft facilities were
limited to a maximum of shs.460; 000.Grindlays Bank's mortgage was expressed
to secure a sum of shs.250, OOO.
[16] The guarantor’s liability under the guarantee was limited to shs.460,
OOO. There is no evidence that facilities exceeding this amount were ever
granted to the company.
[17] In September and November, 1966, the Finance Company paid shs.900, OOO
to the credit of the company at Grindlays Bank. The appellant submitted that
the inescapable inference is that the company's overdraft was thereby
extinguished. To this argument Mr. Borneo for the respondent bank submitted
that as the appellant's liability under the guarantee Was a continuing one,
it would not be affected by the company temporarily ceasing to have an
overdraft.
[18] This submission would be valid if no effect was to be given to the
letter of 8th September.
[19] If effect does have to be given to that letter, then Mr. Borneo
submitted that the appellant, upon whom the onus lay, had not proved that
the company had at any time cleared its indebtedness to the bank.
[20] The appellant could easily have proved, by asking for particulars of
the account on which the respondent bank was suing (as he should have done)
that the company was on any particular date free of indebtedness to
Grindlays Bank.
[21] That lacuna was however filled, in my opinion, by the certificate
produced on behalf of the respondent bank at the trial.
[22] According to this certificate, the indebtedness of the company, for
which it is sought to make the appellant liable, arose "subsequent to 1st
February, 1967".
[23] In other words, on the 1st February, 1967, six days before the assets
and liabilities of Grindlays Bank were taken over by the respondent bank,
the company's indebtedness to Grindlays Bank was nil.
[24] In my opinion, the appellant was at that moment entitled to be
discharged from his liability under the guarantee, in terms of the letter of
8th September, 1966.
[25] I consider that this ground of appeal succeeds.
[26] As regards the second substantial ground of appeal, the res¬pondent
bank for reasons which are not apparent waived its rights to a first
mortgage secured on the company's Right of Occupancy at Moshi and gave
precedence to the Finance Company's second mortgage.
[27] The learned Chief Justice, in respect of this transaction, commented ¬
"It appears to me that the terms of the guarantee did permit such conduct by
the Bank, prejudicial though it may have been to the first defendant,"
that is to say the appellant, and he cited an extract from the guarantee to
the effect that Grindlays Bank was at liberty
"... to vary, exchange, renew, modify or release any securities or
guarantees held by it from or on account of the debtor."
[28] Mr. Borneo supported this part of the Chief Justice's decision. It is
unfortunate that the case of Harilal & Co. Ltd. v. the Standard Bank Ltd.
[1967]E.A. 512 was not cited in the court below,
and in particular the following passage from the judgment of Sir Charles
Newbold, P. at page 520 ¬
"I do not accept the submission that those words would entitle the bank to
change the whole nature of the account which the guarantor guaranteed and
nevertheless impose upon the guarantor a liability arising in circumstances
different from those which were in the contem¬plation of the parties at the
time the guarantee was given".
[29] These words seem to me apposite to the instant appeal. When the
appellant and his co-directors signed the guarantee, the nature of the
transaction envisaged was that Grindlays Bank should have a mort¬gage over
the company's land and factory as a primary security, supported by the
directors' personal guarantees as a secondary security.
[30] By postponing its mortgage, without reference to the appellant, the
whole nature of the transaction was changed. The guarantee, from being a
secondary security, became the principal security for the company's
indebtedness.
[31] This was never in the appellant's contemplation when he gave his
personal guarantee, and I do n9t consider that in these completely altered
circumstances he can be held to his guarantee. In postponing its mortgage,
the respondent bank did some¬ thing not contemplated by the parties, without
the appellant's know¬ ledge, and to his grave prejudice.
[32] The burden on the appellant was thereby unduly increased, in my view so
as to discharge him from his liability under the guarantee.
[33] I am of opinion that this ground of appear also succeeds.
[34] I would allow this appeal, and set aside the judgment and decree in the
court below, substituting therefore a decree dismissing the suit, with such
costs here and below as are appropriate in the case of an advocate litigant
appearing in person.
MUSTAFA, J.A.
[35] I have had the advantage of reading in draft the judgment of Law, J.A.
in which the facts of the case are set out.
[36] The appellant as one of the directors of Imara Plywood Limited
(hereinafter referred to as the 'company) had executed a personal guarantee
dated 9th October, 1964 guaranteeing payment of monies then due and owing or
which from time to time might be owing by the company to the Grindlays Bank.
[37] By virtue of the National Bank of Commerce (Establishment and Vesting
of Assets and Liabilities) Act 1967 all the assets and liabilities of the
Grindlays Bank (among other banks) were vested in the respondent bank as
from the 6th February, 1967.
[38] There are two substantial issues raised in the appeal. I think it will
be convenient at this stage to set out some of the relevant portions in the
document of guarantee.
[39] They read:¬
"In consideration of your agreeing at the request of the Undersigned not to
require immediate payment of such of the sums mentioned below as are now due
or unpaid and in consideration of any further sums which you may hereafter
advance or permit to become due the Undersigned Alexander Reid, Hasanali
Mohamedali Ladak and Isidoro Basohiera hereby guarantee to you the payment
to you on demand of every sum of money which may be now or may hereafter
from time to time become due or owing to you anywhere from or by Imara
Plywood Limited (hereinafter referred to as 'the debtor' which expression
shall where the Debtor is a firminclude the person or persons from time to
time carrying on business in the name of the said firm) or from or by the
Debtor jointly with any other or others in partnership or otherwise
including the usual banking charges,
(1) This Guarantee is to be a continuing security for the whole amount now
due or owing to you or which may hereafter from time to time until the
expiration of the notice hereinafter mentioned become due or owing to you by
the Debtor and remain unpaid but nevertheless the total amount recoverable
hereon shall not exceed Shillings Four Hundred and Sixty Thousand 460,000
together with interest thereon at your then current rate from the date of
your demand until payment"
(2) This Guarantee is to be in addition and without prejudice to any other
securities or guarantees which you may now or hereafter hold from or on
account of the Debtor and is to be binding on the Undersigned as a
continuing security notwithstanding any settlement of account or the
Undersigned or any of them (if more than one) being under disability 'r
dying until the expiration of one month from the time when you shall receive
notice in writing to the contrary from the Undersigned or the personal
representatives of the Undersigned.
…………………………………………………………………………………..
(7) You are to be at liberty without thereby affecting your rights hereunder
at any time or times until you shall have received the whole amount due or
owing to you by the Debtor or so long as any ,part thereof shall remain
unpaid by 'the Debtor to you to determine or vary the amount of any credit
to the Debtor to vary exchange renew modify or release any securities or
guarantees held or to be held by you from or on account of the Debtor or in
respect of the moneys hereby guaranteed to renew bills or promissory notes
in any manner and to compound with give time for payment to accept
compositions from and make any other arrangements with the Debtor or to or
with the Undersigned or any of them (if more than one) or any obligants on
guarantees bills notes or securities held or to be held by you from or on
account of the Debtor or in respect of the moneys hereby guaranteed….."
[40] The "securities" referred to in paragraph 7 included a mortgage of a
piece of land owned by the company being L.O. No. 13445 in favour of the
bank registered on 7th November, 1964, to secure shs 250,000/-.
[41] During 1966 the company had plans for expansion and it made
arrangements with the Tanganyjka Development Finance Company Limited
(hereinafter referred to as the "Finance Company”) for the injection of sm.
900, 000/- into the company.
[42] The sum was earmarked for specific purposes 720, OOO/- for additional
machinery shs120, 000/- for factory extension and shs.60, OOO/- for the
purchase of logs. The Finance Company between 17th September, 1966 and 4th
November, 1966 paid shs.900,000/- into the bank to the account of the
company.
[43] The appellant had resigned from the company on the 1st September, 1966
and on the same date wrote a letter to the company which reads:¬
"1st September, 1966
Re: Imara Plywood Limited
I understand that new arrangements have been made for the above mentioned
Company to obtain finance from the National Development Corporation and, as
I have not been in favour of the arrangement, I have agreed to sell my share
to my Co-Directors and have resigned my Directorship.
I take it that the securities held by the Bank will be discharged and shall
be obliged if you will confirm that the guarantee given by me to the Bank
has been released."
The bank replied as follows:¬
"8th September, 1966.
Re: Imara Plywood Limited
We refer to your letter of 1st September and the undersigned's discussion
with you on the morning of the 3rd September.
We note that you have resigned your directorship of the above company but
you will appreciate that we are unable to release you from your personal and
continuing guarantee until such time as the company repays its indebtedness
to the Bank or until adequate alternative security is furnished. We shall
advise you as soon as this has been done."
[44] The appellant has submitted, rightly in my view, that in accordance
with the bank's letter of the 8th September, 1966, once the company had
repaid its indebtedness or when alternative security was furnished, the
appellant would be released from his personal and continuing guarantee.
[45] The learned Chief Justice found that no alternative security was
furnished, and I think that finding was sufficiently supported by the
evidence.
[46] The appellant's liability under the guarantee was restricted to
shs.460, OOO/-, which sum was also the limit of the overdraft facilities
allowed the company by the bank.
[47] The appellant has submitted that since the Finance Company had paid in
a sum of shs.900, 000/- to the credit of the company with the bank during
September and November 1966, a sum which was in excess of the limit of the
overdraft facilities allowed by the only reasonable inference was that the
company's indebtedness to the bank was extinguished.
[48] The appellant submitted he therefore was released from liability in
terms of the said letter of 8th September, 1966.
[49] Unfortunately we do not have the assistance of the learned Chief
Justice's finding on this point as he did not deal with it.
[50] Mr. Borneo, for the respondent bank, has submitted that the appellant
had not established that the company had at any time extinguished its
indebtedness to the bank.
[51] It is, I think, on the appellant to discharge this onus.
[52] The payment of monies to the account of the company by the Finance
Company did not necessarily mean that the indebtedness of the company to the
bank had been extinguished.
[53] There could have been continual withdrawals which would keep the
account of the company with the bank always in debit. The appellant was
entitled to ask for particulars of the company's bank account if he had
wanted to establish that the company at some stage was not in any way
indebted to the bank.
[54] The appellant did not or did not choose to do so.
[55] It is true that the respondent bank in order to prove the indebtedness
of the company produced the following certificate
"CERTIFICATE FOR THE PURPOSE OF GUARANTEE GIVEN ON 9TH OCTOBER 1964 BY
HASSANALI LADAK KANJJ ISIDORO BASCEIERA AND ALEXANDER REID
I NOEL DOMINIC MAMBO as the Manager of the National Bank of Commerce, Old
Moshi Street Branch, Moshi, hereby certify that as on 7th January 1970 Imara
Plywood Limited was indebted to the National Bank of Commerce in the sum of
Shillings three hundred and ninety nine thousand four hundred and sixty one
and Cents twenty five (shs.399,461/25) and that this indebtedness has arisen
subsequent to 1st February 1967.
Dated this 7th January, 1970.
NOEL DOMINIC MAMBO
[56] From this certificate it would seem that the indebtedness, on which the
appellant was sued, "has arisen subsequent to 1st February 1967".
[57] The assets and liabilities of the Grindlays Bank were vested in the
respondent bank on the 6th February, 1967 and the certificate could be
construed to mean that as on the 1st February, 1967, the company was not in
any way indebted to the Grindlays Bank.
[58] If that were so, then in terms of the bank's letter of 8th September,
1966, since the company was not in debt on 1st February, 1967, the
appellant's liability on the guarantee was extinguished.
[59] The learned Chief Justice, however, had dealt with this point he said:-
"There would appear to be inaccuracies in this statement. The indebtedness
of the company to the plaintiff as at 1st January, 1970 may be accurate but
this amount would not have all been advanced nor would it have become due to
the plaintiff after 1st February, 1967. The plaintiff did not come into
existence until 6th February, 1967. Properly the pleading should have
described the sum due as being the total of sums advanced by the Bank to the
company prior to 6th February, 1967 which sum became due to the plaintiff on
that date and sums advanced by the plaintiff to the company from 6th
February, 1967.
[60] I am at a loss to understand Mr. Kanji's preoccupation with 1st
February, 1967 as a date having some re1evance to some period of limitation.
The evidence of Mr. Mambo is that the company's account was current up to
2nd February, 1968. Thereafter there were no debits save for addition of
interest.
[61] Mr. Reid argued that the deficiency in pleading in paragraph 9 was such
that I ought to dismiss the claim. I do not think so. A deficiency in a
pleading should not be a ground for dismissing a claim unless the situation
is such that the plaint failed to disclose a cause of action. Paragraph 7
properly pleaded the guarantee and the devolution of rights under it to the
Plaintiff. Paragraph 8 properly alleged that the Bank and the plaintiff from
time to time advanced further sums on mutual open and current accounts to
the company with the Bank. Paragraph 9 then set out the total indebtedness.
The mis-description is not significant and I would be prepared at this stage
to grant an amend¬ment to correct it."
[62] Paragraph 9 of the plaint averred in part:
"On 5thJanuary, 1970, the Company was indebted to the Plaintiff in the sum
of Shs.399, 461/25 being the total of the amounts advanced and /or became
due from the Company to the Plaintiff subsequent to 1st February 1967"
[63] Mr. Mambo, the official who signed the certificate of indebtedness, in
his evidence said inter alia
"As a result of my investigations I see from this letter that I found out
that the turn¬over of the account of Imara Plywood for 3 years ending
31stDecember 1969 was shillings Shs.805, 602/80 and that there were
withdrawals on the account between the dates 23.12.67 to 2.2.68 after which
time all debts were in respect of interest and bank charges"
[64] I think the learned Chief Justice was right in the way he had dealt
with the phrase "subsequent to 1st February 1971" contained in the
certificate of indebtedness.
[65] The certificate does not speak clearly as regards dates in the context
of the evidence adduced. There was no evidence adduced by the appellant that
the company's indebtedness to the bank was ever discharged. I do not think
that the appellant has shown, on a balance of probabilities, that there was
a stage when the company had "re-paid its indebtedness to the bank".
[66] Further in the letter of 8th September, 1966 there was also this
sentence "We shall advise you as soon as this has been done".
[67] There is no evidence that the appellant was ever so advised. In my view
the ground of appeal that the appellant’s liability as guarantor was
extinguished because the company had at some stage repaid its debts in full
to the bank fails.
[68] I now turn to the other and more important ground of appeal. As stated
earlier there was a mortgage of L.O. No. 13445 in favour of the bank to
secure the sum of shs.250, 000/-. Perhaps because of the monies advanced to
the company by the Finance Company for the company's programme of expansion
the bank waived its priority as a first mortgagee of L.O. No. 13445 in
favour of the Finance Company which then became the first mortgagee. This
was done on the 6th February, 1968. The appellant had no knowledge of and
did not consent to this waiver of priority. The appellant has submitted that
this waiver had the effect of releasing him from all liability under the
guarantee.
[69] It was unfortunate that two decisions of this Court relating to
liability under guarantee namely: Harilal & Co. v. Standard Bank _[1967] E.A.
512 and Patel v. National Grindlays Bank Ltd. _[1970]E.A. 121.were not cited
at the trial court.
[70] In Harilal's case the merchant was granted overdraft facilities by the
bank and the repayment of the overdraft was guaranteed by the merchant'
wife, who also executed a mortgage as security. Some years later the bank
was dissatisfied with the way in which the account was operated and required
the merchant to open a No.2 account which was always to be in credit, and to
transfer £90 monthly from the No. 2 account to the original account. Except
for these monthly credits the original account was not to be operated. No
notice of this arrangement was given to the guarantor. In an action by the
bank against the merchant and the guarantor for the unpaid debt the
guarantor claimed that she was discharged from liability by the variation of
the terms of the original agreement without her consent.
[71] The material parts of the guarantee read as follows:¬
"In consideration of (the bank) allowing (the merchant)certain banking
facilities, i.e. opening an account with, making advances, or otherwise
giving credit, subject to the conditions hereinafter mentioned I (the
guarantor) do hereby guarantee and bind myself jointly and severally, for
the repayment on demand of all sum or sums of money which the said debtor
... may now or from time to time hereafter owe or be indebted to the said
bank It is agreed and declared that it shall always be in the discretion of
the said bank as to the extent, nature and duration of the facilities to be
allowed the said debtor ...that all demands or acknowledgements of
in¬debtedness to the said debtor ... shall be binding on me, that the said
bank shall be at liberty without affecting its rights hereunder, to release
securities and to give time to, or compound or make any other arrangements
with the said debtor.."
[72] The guarantor had submitted that without her knowledge or consent, the
bank altered the terms of the overdraft facilities which she had guaranteed
by requiring the merchant to open a No.2 account and cease to operate the
original account. The bank claimed that the changed arrangements had not
prejudiced the guarantor.
[73] Sir Charles Newbold, P., in his judgment referred with approval to the
Privy Council case National Bank of Nigeria Ltd Vs. Awolesi (1964) 1 W.L.R.
131 in which the facts were similar.
Sir Charles Newbold, P., in his judgment said:¬
"Here the guarantor guaranteed her husband's current mercantile overdraft
account into which he was paying sums and out of which he was drawing sums.
Without knowledge or consent of the guarantor the bank In effect closed that
account and prevented the merchant from depositing to the credit of that
account sums which would normally have been so deposited. On the face of it
that created a material alteration in the course of dealing between the bank
and the merchant and on the face of such a variation would be prejudicial to
the surety. It is urged that the amount by which the guarantor was
prejudiced is trifling as in the end it amounted only to something under
£20. This may be so, nevertheless it is not open to the bank without the
consent of the guarantor to alter the terms of its dealing with the merchant
and at the same time to require the guarantor to be bound by a guarantee
relating to a different course of dealing. The fact that the bank itself
treated the original account as something quite separate from the No.2
account is shown by the fact that the amount which it required the guarantor
to pay is the amount of the original account and not that amount reduced by
the credits standing to the No.2 account. It is also urged that the words
'or make any other arrangements with the said debtor' in the guarantee
distinguished this case from the Awolesi (2) case in which those words did
not appear in the guarantee, though very similar words did. I do not accept
the submission that those words entitle the bank to change the whole nature
of the account which the guarantor guaranteed and nevertheless impose upon
the guarantor a liability for a debt arising in circumstances different from
those which were in the contemplation of the parties at the time the
guarantee was given. For these reasons in my view the guarantor is
discharged from her liability under the guarantee in respect of all
transactions"
[74] In the Awolesi case the debtor owed the bank a sum of money arising
from unpaid cheques.
[75] The guarantor executed a guarantee of the debtor's account up to
£10,500. By the guarantee, the guarantor, in consideration of the bank
"continuing the existing account” with the debtor for so long as the bank
thought fit, "or otherwise giving credit, accommodation or granting time"
guaranteed "on demand in writing…the due payment of all advances, over¬
(drafts, liabilities, bills and promissory notes whether made, incurred or
discounted before or after the debt hereof to or for (the debtor) either
alone or jointly with any other person"
[76] Some time later the debtor opened a new account with the bank, its
opening and subsequent operation took place without the guarantor’s
knowledge. No further cheques were drawn on the first account and the
payments into it were just sufficient to pay the monthly debits of interest,
and the account remained overdrawn at nearly the limit of the guarantee.
[77] However, large sums of money were paid into the second account and at
times the second account was in credit, Their Lordships of the Privy Council
in their judgment said, inter alia
"The question for consideration which depends in the main on the
construction of the document of guarantee itself…
[78] The guarantee refers to 'the continuing of the existing 'account' as
consideration for the guarantee which suggests that the parties had agreed
that the account of the principal debtor existing on December 30, 1955,
should be continued in an unbroken state and that they did not con¬template
the opening of a second account. It is true that the way in which
consideration for a contractual obligation is expressed is not con¬clusive
but it is relevant in construing the terms of the contract itself. It would
appear also that the words 'ultimate balance' in clause 3 and 'account' in
clause 6 can most naturally be read, in the light of clause 1, as relating
to the existing account and that the words 'or otherwise giving credit or
accommodation or granting time' in clause 1 prima facie refer to the
existing account. Their Lordships agree with Taylor and Bairamian F.JJ. in
construing the guarantee in the narrow sense of a guarantee of the account
as it existed at the date when the guarantee was given. When the bank
allowed Taiwo to open the second account they were permitting the position
of the respondent to be prejudiced as to his guarantee, for, as happened
thereafter, it was possible for Taiwo to make payments into the bank without
releasing the respondent from his liability under the guarantee. The opening
of the new current account was an unauthorised departure from the terms of
the contract of guarantee.
[79] In Ward v. National Bank of New Zealand Ltd. their Lordships said: 'A
long series of cases has decided that a surety 'is discharged by the
creditor dealing with the principal or with 'a co-surety in a manner at
variance with the contract, the 'performance of which the surety had
guaranteed'
[80] On the construction of the contract so far accepted there was a
substantial variation of the contract of guarantee to the prejudice of the
respondent without his knowledge for he lost the benefit of all sums paid in
by the principal debtor into his No.2 account, which was, as the ledger
shows, at times in credit to the extent of as much as £2,500. The
respondent's guarantee therefore must be taken to have been discharged."
[81] It will be seen that the main consideration is the con¬struction and
interpretation of the guarantee document in each case.
[82] Each guarantee has to be considered on its own before the rights and
liabilities of the parties can be determined. It does not seem that in
either the Harilal or the Awolesi case was there a clause similar to that in
paragraph 1 of the guarantee document in this case which reads in part ¬
“…so long as any part thereof shall remain unpaid by the Debtor to you to
determine or vary the amount of any credit to the Debtor to vary exchange
renew modify or release any securities or guarantees held or to be held by
you from or on account of the Debtor or in respect of the moneys hereby
guaranteed "
[83] However, this identical clause appears in the Patel case (it was
paragraph 8 in the guarantee there) in which the guarantors claimed that
they were discharged from their liability by the debtor's opening a new
account without their consent.
[84] In the Patel case Duffus, V.-P., (as he then was) after referring to
some relevant portions of the guarantee document stated:¬
"This is a very wide guarantee and it covers all advances or amounts of
money due by the debtor company at any time or place and was not limited as
in the 1959 guarantee to 'overdrafts on current accounts'. Paragraph 2
states that it is 'a continuing security for the whole amount now due or
owing to you or which may hereafter from time to time become due or owing'.
On the face of these paragraphs, these guarantees are not limited to one
account nor to overdrafts on current account…
[85] The new account was never in credit. The position would have been
different if the new account was in credit and respondent bank continued to
charge the debtor company, and also the appellants, interest on the
outstanding amounts on the previous accounts without first deducting the
amount to the credit of the new account. This position never arose...
[86] There can be no doubt that a surety will be discharged if there is a
variance in the terms of the guarantee contract as between the guarantor and
the principal debtor, if such a variation is done without the surety's
approval and consent. This question has been fully dealt with by this Court
in its decision in the case of Harilal v. Standard Bank _[1961] E.A. 512
which followed the decision of the Privy Council in the National Bank of
Nigeria Ltd. v. Awolesi, (1964) 1 W.L.R. 1311. The trial judge distinguished
the facts in both of those cases and in this case.
[87] I agree that the facts are different. The last three guarantees in this
case give a very full guarantee and in my view a much wider guarantee than
in the Harilal and National cases and as I have already pointed out, the
opening of the new account does not appear to have effected any material
alteration in the contract between the bank and the debtors nor for that
matter as between the bank and the guarantors if the guarantees continued."
[88] Duffus, V'-P'J (as he then was) held that the guarantors were liable in
the Patel case despite the opening of a new account in view of the wide
terms of the guarantee they had given.
[89] Sir Charles Newbold, P., held a different view and Fuad, J., formally
agreed with him. Newbold, Po, did not deal specifically with the terms of
the guarantee as such but contented himself with following the decision in
the Harilal case.
[90] However, he said¬
“It is true that the terms of the actual guarantee in the first clause are
wide; but these wide terms must be re¬lated to the nature of the debt and
the course of dealing at the time the guarantee was given and they would
not, especially in the light of the other provisions of the guarantee,
permit of the bank changing the course of dealings, ceasing to operate the
old over-draft account except for the purposes of debiting interest and
opening a new overdraft account…The law has always been jealous to protect a
guarantor who, especially in a continuing and fluctuating liability, is very
much at the mercy of the creditor. I reject entirely the submission referred
to by the judge that these guarantees gave to the bank carte blanche to do
what it wished…"
[91] I do not think that Newbold, P., meant that contracting parties cannot
stipulate, by suitable words in a guarantee, the right of a creditor to vary
the conditions in his dealings with the debtor which are within the scope of
the terms of a guarantee without prior reference to the guarantor. There can
be in my view, guarantees so worded that guarantors would remain liable
despite variations of the conditions of the guarantee without their consent
being obtained in circumstances as if consent in advance was given. It all
depends on how the terms are worded.
[92] It may be that certain variations are unenforceable because they offend
public policy or are unconscionable, but nothing of that sort arises here.
Paragraph 7 of the guarantee already referred to is expressed in very wide
terms.
[93] They permit the bank, without its rights being affected in any way, so
long as the whole amount or any part thereof owing was still due and unpaid
“to very exchange renew modify or release any securities or guarantees held
or to be held by you from or on account of the debtor or in respect of
monies hereby guaranteed…"
[94] What the bank did was to waive its right to a first mortgage over a
piece of land in favour of the Finance Company.
[95] The provisions of paragraph 7 of the guarantee permit the bank to
“re1ease any securities” let alone convert a first mortgage into a second
mortgage. There was evidence that the Finance Company had injected a large
sum of money, shs. 900,000/-, into the company, thus enriching the assets of
the company whose value must have appreciated considerably.
[96] The mortgage on the land was only to secure 235,000/-. In these
circumstances it can hardly be said that the variation in this case had
caused any prejudice to the appellant. I am therefore of the opinion that
the waiver by the bank of its first mortgage in favour of the Finance
Company had not the effect of releasing the appellant from his liability
under the guarantee, nor had the variation caused the appellant any real
prejudice.
[97] I respectfully agree with the view expressed by Duffus, V.-P., (as he
then was) in the Patel case that the question for consideration in each case
is “what was the actual guarantee given".
[98] In my view the terms of the guarantee given by the appellant here are
so wide that the guarantor had in effect given consent in advance to the
kind of variation that had taken place in this case.
[99] I would dismiss the appeal.
SPRY, V.-P.
[100] I have had the advantage of reading the judgments of Law and Mustafa,
J.J.A. They contain all the facts out of which this appeal arises and I
shall not repeat them. I agree with them that two substantial issues arise.
[101] The first concerns the effect of the letter of 8th September, 1966,
written to the appellant by the manager of National and Grindlays Bank Ltd.
I am satisfied that this constituted an offer to release the appellant from
his obligations under the instrument of guarantee if either of two
conditions were performed: either the existing debt due from Imara Plywood
Ltd. had to be repaid or an alternative security had to be agreed. No
agreement was reached as to an alternative security but it was submitted by
the appellant that the debt was repaid.
[102] It is unfortunate that the appellant did not call for further and
better particulars which might have settled this question beyond doubt by
production of a statement of the company's account.
[103] The guarantee was limited to a sum of shs 460, 000 and there is
evidence that shs.900, 000 was paid into the company's account. The fact
that this money was said to be "ear-marked" for certain purposes is, I
think, immaterial if it was paid unconditionally to the bank. This makes it
very probable that the company's account was, at least temporarily, in
credit but the onus of proof was, I think, clearly on the appellant and I do
not think he can be said to have discharged it. However improbable it may
be, it is not impossible that the bank may have allowed the overdraft
greatly to exceed the limit of the guarantee.
[104] There is, however, another factor to be taken into account. Relying on
a provision in the instrument of guarantee, the National Bank of Commerce,
as successor to National and Grindlays Bank Ltd, proved the amount of the
debt sought to be recovered by a certificate signed by a manager.
[105] This says that on 7th January, 1970, the debt amounted to shs
399,461/25 and that such indebtedness had arisen subsequent to 1st February,
1967.
[106] That means that no part of the debt sued on was owing on the latter
date. The letter of 8th September, 1966, fixed no time limit and it has not
been suggested that the offer it contained was ever withdrawn. The offer
could be accounted by conduct, chat is by the payment into the company's
account of a sum sufficient to clear the overdraft, and in my opinion the
certificate of indebtedness itself affords the evidence that this was done.
[107] The learned Chief Justice spoke of "inaccuracies" in the plaint, and
went on to say
"The indebtedness of the company to the plaintiff as at 1st January, 1970
may be accurate but this amount would not all have been advanced nor would
it have become due to the plaintiff after 1st February, 1967."
[108] He went on to point out that the National Bank of Commerce did not
come into existence until 6th February, 1967, and said that the plaint
"…should have described the sum due as being the total of sums advanced by
the Bank to the company prior to 6th February, 1967, which sum became due to
the plaintiff on that date and sums advanced by the plaintiff to the company
from 6th February, 1967".
[109] That was not the case put forward by the respondent and, with respect,
the Chief Justice was not entitled to decide the case on a basis that had
neither been pleaded nor proved. The case for the respondent rests on the
certificate of indebtedness. If it was false, no debt was proved, if it was
true, the debt arose after 1st February, 1967.
[110] I would only add, on this issue, that I attach no significance to the
final sentence in the letter of 8th September, 1966, saying that the bank
would advise the appellant when his guarantee was released.
[111] If I am right in thinking that the letter constituted an offer, and if
that offer was accepted by conduct, the appellant's position could not be
prejudiced by the failure of the bank to notify the appellant that his
guarantee was released.
[112] On this ground, I agree with Law, J.A that the appeal must succeed.
That being so, it is not strictly necessary to deal with the other main
issue, that is, whether the appellant was discharged from his guarantee by
the action of the respondent in agreeing to postpone its mortgage to that in
favour of the Tanganyika Development Finance Co. Ltd.
[113] The chief Justice dealt briefly with this question.
He said
"It appears to me that the terms of the guarantee did permit such conduct by
the Bank, prejudicial though it may have been to the first defendant… The
Bank was entitled to waive their priority and the first defendant was not
thereby released...”
[114] The provision in the guarantee to which the Chief Justice was
referring reads as follows
"You (that is to say, the bank) are to be at liberty without thereby
affecting your rights; hereunder at any time or times …to… release any
securities…held by you from… the Debtor."
[115] Prima facie, those words enabled the respondent to do just what it
did, because the power to release a security would include the lesser power
to postpone it.
[116] It is unfortunate that two cases of some relevance were not cited to
or considered by the Chief Justice.
[117] The first is Harilal & Co v. The Standard Bank Ltd.[1967] E.A 512. In
that case a bank altered the terms upon which it extended overdraft
facilities to a merchant without the consent of a guarantor.
[118] The bank relied on a provision in the instrument of guarantee, which
reads:
"the said bank shall be at liberty without affecting its rights hereunder,
to make…any other arrangements with the said debtor…"
[119] Of these words, Sir Charles Newbold, P., said
"I do not accept the submission that those words would entitle the bank to
change the whole nature of the account which the guarantor guaranteed and
nevertheless impose upon the guarantor a liability for a debt arising in
circumstances different from those which were in the contemplation of the
parties at the time the guarantee was given."
[120] The other members of the Court concurred with that part of his
judgment.
[121] The other case is Patel v. National & Grindlays Bank Ltd. [1970] E.A.
121. The facts of that case are sufficiently different from the present to
make it clearly distinguishable but I would quote one sentence from the
judgment of Sir Charles Newbold, P., in which he said
"It is true that the terms of the actual guarantee in the first clause are
wide, but these wide terms must be related to the nature of the debt and the
course of dealing at the time the guarantee was given and they would not,
especially in the light of the other provisions of the guarantee, permit of
the bank changing the course of dealings…"
[122] Later in his judgment, he said
"The law has always been jealous to protect a guarantor who, especially in a
continuing and fluctuating liability, is very much at the mercy of the
creditor. I reject entirely the submission referred to by the judge that
these guarantees gave to the bank carte blanche to do what it wished…"
[123] Subject to what I am about to say, I would think the position is that
general words in a guarantee may give a creditor wide freedom of action
within the broad framework of the transaction as contemplated by the parties
at the time when the guarantee was given, but cannot empower -a creditor to
change the nature of the relationship between himself and the debtor to the
prejudice of the guarantor.
[124] There is, however, a question which was not raised in the trial court
or before us and which, indeed, never appears to have been considered by any
court in East Africa: that is, whether it is permissible to contract out of
the provisions of section 85 of the Law of Contract Ordinance (Cap.433).
Section 1(2) of the Ordinance reads as follows
"(2) Nothing in this Ordinance contained shall affect…any incident of any
contract not inconsistent with the provisions of this Ordinance."
[125] It is a curiously worded provision, but it would appear to mean that
nothing in a contract may be inconsistent with the express provisions of the
Ordinance.
[126] This interpretation would be consistent with the fact that a
substantial number of sections contain the words "In the absence of any
contract to the contrary” or other words to the like effect. No such words
appear in section 85.
[127] I see nothing unreasonable in this, as applied to section 85. The
terms of contracts of guarantee are rarely negotiated: most such contracts
are made either with corporations such as banks or hire purchase finance
companies or else with money-lenders. The surety is usually presented with a
standard form of guarantee, which he must either accept or reject. As Sir
Charles Newbold said, the law has always been sympathetic towards the surety
and I see nothing so extraordinary in the idea of the legislature providing
a statutory protection as to justify ignoring what appears to be the meaning
of section 1(2).
[128] I have succeeded in tracing one Indian decision on this question. It
is the decision of the Appellate Civil Division of the High Court of Bombay
in K.R. Chitguppi & Co. v. Vinayak (1921) Bom.157 and it deals with sections
I and 133 of the Indian Contract Act, which are in similar terms to sections
1 and 85 respectively of our Ordinance.
[129] In that case, a letter of guarantee expressly waived "all or any of
the rights as surety (legal, equitable, statutory or otherwise) which may at
any time be inconsistent herewith and which he might be otherwise entitled
to claim and enforce." Shah, J., said
“I do not see how any such general agreement could be interpreted as
amounting to that specific consent to the variation con¬templated by section
133. Such a consent necessarily implies that the surety has know¬ledge of
the nature of the variation do not say that a surety can never anticipate
the nature of a future variation and give his consent in anticipation of
such variation."
[130] Hayward, J., concurring, said
"It seems to me impossible to hold that these provisions of the letter were
not in express terms inconsistent with the provisions of the Contract Act.
Wherever it has been intended that independent provisions should be
permitted, it has always been expressly provided for such provisions by the
introduction of the phrase 'in the absence of any contract to the contrary'
which occur in section 146 and a number of other sections of the Indian
Contract .Act."
[131] I am not aware of any decision overruling or inconsistent with those
judgments.
[132] I find the reasoning in them highly persuasive but I would not base my
decision on any such finding, since the question has not been argued before
us.
[133] I base my decision entirely on my view of the first issue.
[134] There will be an order in the terms proposed by Law, J.A. |
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