Surety Summary

Many people think that a guarantor gives a reference of the good character of the borrower.
They
do not realize that they are legally bound to pay back the loan if the borrower cannot or will not
pay.
GUARANTEE
A guarantee is a legal contract that binds you to pay the debt of the borrower if the borrower fails
to do so. The financial institution can sue you when the borrower does not pay back his/her debt.
Under section 79 of the Contracts Act 1950, the person who gives a guarantee is called a surety
RIGHTS OF A GUARANTOR There are certain rights accorded to you as a guarantor before and
after signing the contract of guarantee. These include:
1. The right to obtain a copy of the letter of guarantee or contract of guarantee and any other
documents in relation to the loan transaction
2. The right to seek advice from your lawyer before signing the contract of guarantee.
(Nevertheless, you will have to pay the legal fees yourself)
3. The right to the information on the outstanding balance of the account of the borrower
with the financial institution subject to the borrowers consent
4. The right to call upon the borrower to pay off the loan to release you from all your
liabilities under the guarantee. This right can be exercised at anytime and even before the
financial institution has called upon the borrower to pay the debt. However, this right
may be subject to the terms and conditions of the loan, which may vary from customer to
customer
5. The right to be indemnified by the borrower for any payment made to the financial
institution. This means that you can sue the borrower for the amount that you have paid
to the financial institution
Co-extensive Liability
In Malaysia, the principle of co-extensive liability of a surety with that of the principal debtor is
embodied in Section 81 of the Contracts Act 1950. The principle essentially recognizes the
position that the liability of a surety is dependent on the existence of the liability on the part of the
principal debtor as a pre-requisite.
Malaysian Federal Court case of Sim Siok Eng v Kong Ming Bank Berhad (1980) 2 MLJ 21.
Held: the respondent-bank could not in this case claim that the simple contract debt of an
overdraft was merged into the charge and as the claim in this case was on the overdraft, the claim
was statute barred, as in the absence of any stipulation for a demand for repayment on the
overdraft, time ran from the date of the loan or from the last payment of interest or part payment
of capital, if paid before the end of the prescribed period, which was three years.
Malaysian High Court case of Government of Malaysia v Gurcharan Singh & Ors (1971) 1 MLJ
Held:
(1) the contract entered into by the first defendant was void as he was an infant at the relevant
time;
(2) as the second and third defendants were sureties, their liability was co-extensive with that of
the principal debtor, and as the principal debtor was not liable, the sureties also were not liable;
Joint Guarantee
Under a joint guarantee, upon the death of one of the guarantors, the obligations under the
guarantee passes to the surviving guarantors.
Joint and Several Guarantee
Under a joint and several guarantee, upon the death of one of the guarantors, the estate of the
deceased guarantor will remain liable under the guarantee together with the other guarantors.
Singapore cases EUROPEAN ASIAN BANK v CHIA NGEE THUANG & ANOR
KWONG YIK BANK BHD v TRANSBUILDER SDN BHD & ORS [1989] 2 MLJ 301
High Court Case, whether the plaintiffs were t entitled to judgment for more than $100,000
under the guarantee or not
Held (4) The words of the guarantee clearly made the guarantor liable for the repayment
not only of the overdraft facility of $ 100,000 but also the interest which accrued thereon at
the agreed rate
Guarantee vs Indemnity
Holroyd Pearce L.J. in Yeoman Credit Ltd vs Latter, an indemnity is a contract by one party to
keep the other harmless against loss but a contract of guarantee is a contract to answer for the
debt default or miscarriage of another who is to be primarily liable to the promisee. According to
the Contracts Act, it would appear that a guarantee can be oral. However, the provision on
indemnity is silent on this aspect. Does it mean that an indemnity must be in writing? It could be
argued that an indemnity could be oral too.
Indemnity
Contract of indemnity -Section 77 Contract Act states that:
"A contract by which one party promises to save the other from loss caused to him by the conduct
of the promisor himself, or by the conduct of any other person,
One assumes a direct and primary obligation on the basis more of the occurrence
of an event rather than a default.
ANDREW LEE SIEW LING v. UNITED OVERSEAS BANK (MALAYSIA) BHD

Contract: Guarantee - Guarantee and indemnity - Liability, nature of - Whether guarantors and
indemnifiers liability more extensive than principal borrowers liability - Whether liability of
guarantor and indemnifier dependent on liability of principal borrower, third party or

enforceability of debt
The respondent bank (the bank) granted a loan to one Monzo Sdn Bhd (MZ). The loan was
secured by a charge over two pieces of land and by a Letter of Guarantee and Indemnity executed
by the appellant and one Mok Hwee Huan (MHH). MZ defaulted, was wound up and the two
pieces of land sold under an Order for Sale obtained by the bank, some four years after the
winding up order. The bank commenced proceedings against both MHH and the appellant, but
MHH was adjudged a bankrupt in Singapore, leaving the bank to apply for summary judgment
against the appellant. The appellant contested the banks application only with regard to the
amount due.
Held
(5) The appellants liability, being a person giving the indemnity, was primarily separate and
independent from any other person. He could be made liable for losses which the principal
borrower MZ could not have been made liable. (para 16)
(8) The Letter of Guarantee and Indemnity contained several clauses that showed the intention of
both guarantors to undertake liability for the repayment of the loan and interest, not merely as
sureties but also as principal debtors as well as indemnifiers. In the instant case, the appellant
being a person who had given a guarantee and an indemnity, was primarily liable for losses which
the principal borrower could not have been made liable. His liability was not dependent or
secondary to the liability of the principal borrower. He was a principal debtor himself. (paras 2223)
(9) The liability under a contract of indemnity does not depend on whether the principal debt is
enforceable. It has no reference in law to the obligation of any third person. The liability of the
person who has given an indemnity could be more extensive than that of the principal debtor.
(para 23)
Guarantee
-Contract of guarantee "is a contract to perform the promise, or discharge the liability of a third
person in case of his default. The person who gives the guarantee is called the surety, the person
in respect of whose default the guarantee is given is called the principal debtor, and the person to
whom the guarantee is given is called the creditor. A guarantee may be either oral or written."
- one agrees to assume responsibility for the obligation or debt of another if that other person
defaults
- A guarantee is distinct from a demand guarantee (also called an on demand bond). The latter is
a guarantee that imposes a primary obligation on the guarantor to pay the beneficiary on its first
demand for payment, where the principal fails to perform the contract.
Discharge as Guarantor
Tan Poh Khiang v Malayan Banking Bhd [2015] 1 MLJ 817 (court of appeal)
-November 1995, Novel Villa Sdn bhd-overdraft loan facility-RM1.8M

- secured with 13 pieces of land and a letter of guarantee and indemnity-9 guarantor
-Novel villa defaulted the repayment- Novel villa made a settlement proposal-sum of 1.3mplaintiff accept and discharge 5 of 9 guarantor(not include 2 nd guarantor)- 13 land discharge-bank
claim against the 2nd defendant and others guarantor who were not purportedly discharged under
the said settlement-argue unilateral variation under s.86 of the contract act (Discharge of surety
by variance in term of contract*)- The judicial Commisioner held that by accepting Novels villa
offer of settlement and releasing the charged properties, plaintiff as a creditor dis not discharge
Novel Villas entire liability-no unilateral variation-JC held second defendant still liableCourt of appeal allow appeal with cost
[22] ss87 and 88 of contract act-to release second defendant as a guarantor-learned JC erred in
law on the fact failed to take account the concluded settlement of Novels Villas debt to the
plaintiff, therefore by virtue of s 87 the second defendant release from th guarantee
[23] we doen not accept the said settlement was not meant to be full and final settlement of the
debt- plaintiff did not receive its right to pursue the balance of the debt-due to-accept settlement
of 1.3 m and discharge the 13 charged lands.
[25] second defendant was discharged from liability-upon the acceptance of the settlement
proposal and release the land under provision of ss 87-88 contract act without the consent of the
second defendant. (see Lee Wah Bank ltdv Joseph Eu[1981]1 MLJ)
[26] release 13 pieces of charged land without the consent of second defendant which were
charged to the plaintiff to guarantee the full payment of Novel villas debt to the plaintiff, plaintiff
acted in a way which was inconsistent with the right of second defendant that he was also
discharged as a guarantor under the provisions of s92 contract act.
The booklet also reminds consumers not to sign any guarantee if they:
Do not have a financial, business or moral interest in the transaction and are
uncertain as to the nature of the transaction.
Have doubts as to the ability or integrity of the borrower.
Feel they are under undue pressure or duress to do so
Do not understand the terms of the guarantee and do not have an independent
party explaining it to them.
Believe they have no capacity to settle the debts of the borrowers if the latter fail
to pay.
Potential guarantors also ought to know a loan can be guaranteed by one or more
guarantors.

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What are the rights of a guarantor?

What is the difference between a guarantee and an indemnity?

Many people think that a guarantor gives a reference of the good character of the borrower.

ANDREW LEE SIEW LING v. UNITED OVERSEAS BANK (MALAYSIA) BHD

guarantor and indemnifier dependent on liability of principal borrower, third party or

-November 1995, Novel Villa Sdn bhd-overdraft loan facility-RM1.8M

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