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Alexander Reid v National Bank of Commerce (Civil Appeal No. 28 of 1971) [1971] EACA 6 (9 September 1971)

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IN THE COURT OF AFPEAL FOR EAST AFRICA
         AT DAR ES SALAAM

(CORAM: SPRY, V-P., LAW AND MUSTAFA, JJ.A.)

CIVIL APPEAL NO 28 OF 1971

BETWEEN

ALEXANDER REID………………………………………. APPELLANT

AND

THE NATIONAL BANK OF COMMERCE……………………. RESPONDENT

(Appeal from a decree of the High Court of Tanzania at Dar es Salaam (Georges, C.J.) dated 9
th February, 1971 in Civil Case No.2 of 1970)

9th September 1971.

The following judgments were read:-

LAW, J. A.

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.
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.
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 determination 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."

In 1966 the company negotiated with the Tanganyika Development 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.

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 arrangement, 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"

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 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 will advise you as soon as this has been done.
Yours faithfully,

(Sgd)

D.R.F. Murray
Manager.”

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 registered by the Finance Company as security for its loans to the company, on 4th October, 1967, and on 6th February, 1968, the respondent 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.

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."

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.

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
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.

These events were:
(a)     
repayment of the company's indebtedness, or
(b)      the furnishing of adequate alternative security.

As regards (b), the learned Chief Justice found as a fact that no alternative security was provided and the evidence supports this finding.

As regards (a), he made no finding, and it is incumbent on this Court to do so.

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.

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.

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.

This submission would be valid if no effect was to be given to the letter of 8th September.

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.

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.

That lacuna was however filled, in my opinion, by the certificate produced on behalf of the respondent bank at the trial.

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".

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.

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.

I consider that this ground of appeal succeeds.

As regards the second substantial ground of appeal, the respondent 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.

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."

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 contemplation of the parties at the time the guarantee was given".

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 mortgage over the company's land and factory as a primary security, supported by the directors' personal guarantees as a secondary security.

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.

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.

The burden on the appellant was thereby unduly increased, in my view so as to discharge him from his liability under the guarantee.

I am of opinion that this ground of appear also succeeds.
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.

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.

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.

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.

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.

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….."

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/-.

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.

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.

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."

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.

The learned Chief Justice found that no alternative security was furnished, and I think that finding was sufficiently supported by the evidence.

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.

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.

The appellant submitted he therefore was released from liability in terms of the said letter of 8th September, 1966.

Unfortunately we do not have the assistance of the learned Chief Justice's finding on this point as he did not deal with it.

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.

It is, I think, on the appellant to discharge this onus.

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.

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.

The appellant did not or did not choose to do so.

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

From this certificate it would seem that the indebtedness, on which the appellant was sued, "has arisen subsequent to 1st February 1967".

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.

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.

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.

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.

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 amendment to correct it."

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"

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 turnover 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       "

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.

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".

Further in the letter of 8th September, 1966 there was also this sentence "We shall advise you as soon as this has been done".

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.

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.

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.

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.

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 indebtedness 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.."

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.

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        "

In the Awolesi case the debtor owed the bank a sum of money arising from unpaid cheques.
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"

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.

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…
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 contemplate the opening of a second account. It is true that the way in which consideration for a contractual obligation is expressed is not conclusive 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.

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'................

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."

It will be seen that the main consideration is the construction and interpretation of the guarantee document in each case.


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  "

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.

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…

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...

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.
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."

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.

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.

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 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, 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…"

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.

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.

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…"

What the bank did was to waive its right to a first mortgage over a piece of land in favour of the Finance Company.

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.

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.

I respect fully 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".

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.

I would dismiss the appeal.


SPRY, V.-P.

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.

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.

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.

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.

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.

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.

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 with drawn. 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.

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."

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".

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.

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.

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.

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.

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...”

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 …torelease any securities…held        by you from…      the Debtor."

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.

It is unfortunate that two cases of some relevance were not cited to or considered by the Chief Justice.

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.

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…"

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."

The other members of the Court concurred with that part of his judgment.

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…"

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…"

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.

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."

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.

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.

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).

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.

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 contemplated by section 133. Such a consent necessarily implies that the surety has knowledge 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."

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."

I am not aware of any decision overruling or inconsistent with those judgments.

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.

I base my decision entirely on my view of the first issue.

There will be an order in the terms proposed by Law, J.A.