To Guarantee or Not? Rights of Loan Guarantors in Kenya

So, you finally joined the shiny new Sacco your friend referred you to. After a few months and some significant savings, the same friend asks you to be their guarantor for a loan. Sitting at your desk after lunch at your favorite four-star kiosk “kibandaski,” your friend brings the loan application forms. As they munch on a huge banana, they casually mention needing KES 500,000 for a small project back home and request you to guarantee at least KES 200,000. You quickly sign the loan application form without reading it, thinking, “What could go wrong?”

A few months later, you realize your salary and Sacco shares have been deducted. Your friend used the loan for a holiday to the Mara, while your salary and Sacco shares are being garnished. They didn’t inform you of any challenges in repaying the loan. As a result, you receive only half of your salary, while your friend enjoys a luxurious lifestyle.

The Big Question: To Guarantee or Not to Guarantee the Loan?

Applicable Laws

The law on guarantorship in Kenya is founded on:

The Constitution of Kenya, 2010
The Law of Contract Act Cap 23, Laws of Kenya (LCA)
Case law (decided cases)

What is the Legal Position on Guarantees?

An agreement of guarantee is covered by the Law of Contract Act, Cap 23, which stipulates that a contract of guarantee is a written promise by the guarantor to answer for the debt of the principal debtor made to a lender.

Section 3(1) of the LCA states:

“No suit shall be brought whereby to charge the defendant upon any special promise to answer for the debt, default or miscarriages of another person unless the agreement upon which such suit is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or some other person thereunto by him lawfully authorized.”

In February 2019, a bill was introduced to amend the LCA by adding Subsection 3(1A), which would require the plaintiff to first realize the security of the principal before suing the guarantor. However, this amendment was rejected by the President for reasons including interference with the operations of the capital markets and adverse effects on credit for micro, small, and medium enterprises.

Rights of Guarantors Before Satisfying the Debt

Right to Property: Guarantors have a right to ownership of property and cannot be arbitrarily deprived of any property.
Type of Guarantee: Guarantees can be “On-Demand” or “Conditional,” depending on whether payment is required immediately upon demand or only after certain conditions are met.
Liability: The guarantor’s liability arises only after the principal debtor defaults. Creditors should first demand payment from the principal debtor.
Right to Demand Payment: Guarantors can call on the principal debtor to pay the guaranteed debt.
Right to Information: Guarantors are entitled to accurate, timely, and regular updates from the creditor regarding the loan.

Effects of Variations in Terms of Guarantee

Unauthorized Changes: If the creditor alters the contract without the guarantor’s consent, the guarantor may be discharged from the obligation.
Court Precedents: Various legal cases, such as Reid vs. National Bank of Commerce (1971) and Holme vs. Brunskil (1878), support the guarantor’s right to be informed and to consent to changes in the contract.

Effects of Creditor/Sacco Not Acting in Good Faith

Bad Faith: If the creditor acts in bad faith or colludes with the principal debtor, the guarantor may be discharged from the obligation.
Court Rulings: Cases like Martin Kirima Baithambu v. Jeremiah Miriti [2017] highlight the importance of creditors acting in good faith.

Defenses and Remedies for Guarantors

Variation of Contract: Unauthorized changes to the contract can discharge the guarantor.
Release of Security: If the creditor releases the debtor’s security without the guarantor’s consent, the guarantor may be released from the obligation.

Recommendations and Conclusion

The law in Kenya generally favors creditors over guarantors. The rejected amendment to the LCA aimed to address the imbalance by requiring creditors to exhaust the principal debtor’s assets before pursuing guarantors. Guarantors who settle the debt can file a case against the principal debtor under the principle of subrogation and seek indemnification.

For guarantors, it is crucial to seek legal advice before signing any guarantee and to conduct thorough due diligence. If you guarantee a loan, be prepared for the potential financial consequences.

We hope this information helps you understand the intricacies of guarantorship in Kenya. For further information or legal assistance on compliance or any other legal issues, contact us at:

Email: info@wka.co.ke
Website: www.wka.co.ke
Phone: +254 798 03 580
Address: Nairobi Hub, Parklands, Valley View Business Park, 6th Floor, City Park Drive, Off Limuru Road