KCB Bank Kenya Limited v Charingcross Communication Agency & Another (Civil Suit E460 of 2023) [2025] KEHC 12291 (KLR)

Factual background

KCB Bank (the Plaintiff) entered into a Murabaha financing agreement with Charingcross Communication Agency (1st Defendant) on 25^th February 2022. The 2^nd Defendant, a director of the 1^st Defendant, executed a personal guarantee and indemnity for Kshs. 37,000,000, undertaking to make full payment of losses, damages, and default expenses in the event of default by the 1^st Defendant.

The Plaintiff financed the 1^st Defendant’s Safaricom dealership facility in the sum of Kshs. 50,511,840.00, repayable in monthly instalments over 60 months. The facility was further secured by a letter of assignment from the 1^st Defendant to Safaricom, undertaking that the proceeds and/or commission would be remitted through an account held by the 1^st Defendant with the Plaintiff for the duration of the facility, and by a chattel over the letters of assignment to Safaricom Limited, registered in compliance with the Movable Property Security Rights Act.

The Plaintiff honoured and fully complied with its obligations under the Murabaha agreement. The 1^st Defendant, on the other hand, initially requested a 3-month moratorium and restructuring due to financial constraints. Upon expiry of the requested 3 months, the Plaintiff contended that the 1^stDefendant refused to honour its part of the agreement. This, according to the Plaintiff, amounted to a breach of the agreement, prompting the filing of this case.

Issues for determination

1. Whether there was a valid contract between the parties.
2. Liability of the guarantor.

Whether there was a valid contract

Upon careful examination of the offer letter and the Murabaha agreement, the Court found that the documents were duly signed by authorised agents of the parties. This was evidence of a clear meeting of the minds and voluntary acceptance of the terms. There was therefore a legally binding agreement between the Plaintiff and the 1^st Defendant. The Court held that the 1^st Defendant’s failure to honour the terms of the agreement amounted to breach of contract.

The Court also found that the offer letter and Murabaha agreement confirmed that, by a guarantee and indemnity agreement, the 2^nd Defendant guaranteed the facility in their personal capacity. The Court stated that the guarantee and indemnity agreement created a secondary obligation on the 2^nd Defendant to make good losses in case of the 1^st Defendant’s default.

Liability of a guarantor

The agreement was titled Personal Guarantee and Indemnity Agreement. The inclusion of the word “indemnity” in the agreement created a primary obligation on the guarantor. This, according to the Court, allows a creditor to pursue the guarantor independently of any action against the principal debtor.

The court held that the primary condition for liability of a guarantor is the default of the principal debtor. Therefore the Plaintiff only needed to prove that the principal debtor (the 1^st Defendant) defaulted. Upon such proof, the guarantor became liable in his personal capacity for any losses, damages, and expenses incurred by the creditor due to the default.

Further, the court held that the liability of a guarantor is limited to the guaranteed amount. In this case, the Plaintiff wanted to hold the guarantor jointly and severally liable for the entire loan amount. The Court disagreed, holding that while a guarantor generally becomes jointly and severally liable with the principal debtor, such liability is limited to the guaranteed amount. This limitation, according to the Court, ensures that parties remain bound to the terms of the contract between them.

Key takeaway

Before agreeing to be a loan guarantor for anyone, make sure you fully appreciate all your resultant legal liabilities. Agreeing to be a guarantor just because the primary debtor is a friend or family member, without fully appreciating the legal consequences of such commitments, can easily expose you to huge financial liabilities. This is because you will be jointly liable with the debtor for the entire guaranteed amount.