Patel & 2 Others v National & Grindlays Bank Limited (Civil Appeal 33 of 1969) [1969] UGCA 1 (1 November 1969)

## IN THE COURT OF APPEAL FOR EAST AFRICA AT KAMPALA

(Coram: Newbold, P. , Duffus, V-P. , & Fuad, J.)

CIVIL APPEAL NO. 33 OF 1?69

BETWEEN

| S. M | PATEL | ) | | | | | | | | |------|---------------|---|--|--|--|--|--|--|------------| | M. C. | PATEL | ) | | | | | | | APPELLANTS | | M. C. | PATEL<br>LTD. | ) | | | | | | | |

## AND

NATIONAL & GRINBLAYS BANK LTD........ o............ *RESPONDENTS*

(Appeal from a Decree of the High Court of Uganda at Kampala (Dickson, J.) dated 11th March, 1969,

in

Civil Suit No. 362 of 1965).

## JUDGMENT OF NEWBOLD, P.

The facts relating to this appeal are set out in the judgment of Duffus, V-P. and I find it unnecessary to repeat them. I agree with him that the relevant guarantees to be considered in order to determine the issues raised on this appeal are, as respects the first appellant, the guarantee of the 14th January, 1963; as respects the second appellant, that of the 7 th August, 1959; and as respects the third appellant, that of the 14th January, 1963. I also endorse as strongly as I can his comments on the pleadings. The failure of each party to plead the facts fully and clearly, the lack of clarity and precision in the pleadings and the failure of the trial judge to frame issues have each contributed in no small way to a confused . ../2

fused position and to the judge deciding issues in favour of the bank when the bank had either not pleaded the facts relevant to the issue or had denied the facts found in its favour. The only issue which arose clearly from the pleadings was whether the appellants were discharged from liability under their guarantees by reason of the action of the bank in opening, without their consent, a new account in favour of the debtor. Fven in this issue no clear distinction is drawn between the position of the several defendants under the various guarantees signed by them. I am by no means clear, either from the pleadings or from the evidence or from the submissions, as to the position adopted by the bank on the question as to whether the guarantees continued in force after the 10th April, 1965, which is the date mentioned in the plaint as the date on which the debtor owed the sum sued for and for which it was claimed the defendants were liable under their guarantees.

Reduced to their simplest form the facts are that the defendants, by different guarantees with different maxima signed on different dates by some, and on no occasion by all, of them, guaranteed the repayment of sums advanced by the bank to a debtor carrying on a coffee hulling business. The sums were advanced in the normal manner by way of an overdraft account. In all but one of the guarantees, the last of which was given on the 14th January, 19^3, there was a clause entitling the bank to open a fresh account with the debtor into which receipts could be credited on the guarantee ceasing to be a continuing guarantee, a position which would arise on the guarantors giving one month1<sup>s</sup> notice to that effect. At the time the guarantees were given the bank held a debenture over the assets of the debtor with ... /3

with power to appoint a receiver and manager thereunder. On or about the 29th June, 1964, the bank closed the account of the debtor which was maintained under the guarantees and opened a new account, which was guaranteed separately by a new guarantor, into which all future amounts were debited or credited. Six months later the bank appointed a receiver under the debenture and on the instructions of the bank sums received from the receiver were credited only to the new account. The result was that over a period the new account was reduced from a considerable debit to a figure which may well have been in credit at the time the appeal was heard. It is possible also that some assets of the debtor were sold under the debenture and the proceeds credited to the new account.

I have no doubt that such action on the part of the bank had the effect, subject to consideration of the position under the Indian Contract Act of the second appellant on his guarantee of the 7th August, 1959? *of* discharging the appellants from their guarantees unless the appellants have consented in their guarantees or by separate agreement to the bank taking such action (see Harilal vs. Standard Bank Ltd. (1967) E. A. 512). A creditor may not, without the consent of the guarantor, so alter the course of his dealings with the debtor as in effect to create a debt which arises from a different course of dealings from that which gave rise to the debt guaranteed. The bank, by its action in ceasing to operate the old account and opening a new account with separate overdraft facilities separately guaranteed sought to compartmentalise its dealings with the debtor, with the result that it obscured the total indebtedness of the debtor. This obscurity very possibly affected its utilisation of the security of the

debenture .../4

debenture, a security which in the final analysis was as much a security for the guarantors as it was for the bank.

Have the appellants, or any of them, consented to the bark opening a ne'w account and taking the action that it did? The judge held that they didv In the guarantee of 7th August, 1959? under which the second appellant is liable no provision exists enabling the bank to open a new account and take the action that it did. In the guarantees of the 14th January, 1963, under which the first and third appellants are liable, provision exists enabling the bank to take the action it did when the guarantee ceased to be a continuing guarantee; but under the terms of the guarantees such a position only arose if the guarantors gave one month'<sup>s</sup> notice to that effect and no such notice was given. 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 overdraft account except for the purposes of debiting interest and opening a new overdraft account. Thus the appellants have not consented in the guarantees themselves to the bank taking such action. It is not clear to me if the trial judge held that the appellants had consented to the bank taking such action in the guarantees themselves, as he referred to the clause in each of the guarantees which enabled the bank to vary the amount of any credit and to grant indulgences to the debtor as if these clauses gave very wide powers. Having regard, however, to the passage quoted by the Vice-President from the judgment of the trial .../5

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the trial judge, the trial judge appears to base his finding on a separate implied agreement rather than on any provision contained in the guarantees. If the judge did consider that the provisions entitling the bank to vary the amount of the credit or grant indulgences entitling the bank to take the action it did, then I regret I am unable to agree with him as in my view they clearly do not. 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 and I did not understand Mr. Keeble to make that submission before us.

Was there any separate agreement under which the consent was given? The judge appears to hold that there was and that it arose from an implied agreement under which, inter alia, the guarantees ceased to be a continuing guarantee and the bank was entitled to open a new account. No such implied agreement was pleaded and, indeed, it is contrary to the attitude taken by the bank on at least some stages of the trial. I think it quite wrong for a judge to find an implied provision in an implied agreement in favour of a particular party when that party has never pleaded such an agreement and, indeed, at times has denied it. May I again refer to the following words of Lord Cranworth, which <sup>I</sup> referred to with approval in Nurdin v. Lombank (1963) E. A. 304 at p.315? when I was dealing with a submission of the existence of an implied agreement :

"When parties ..o/6

''When parties, who have hound themselves by a written agreement, depart from what has been so agreed on in writing, and adopt some other line of conduct, it is incumbent on the party insisting on, and endeavouring to enforce, a substituted verbal agreement, to show, not merely what he understood to be the new terms on which the parties were proceeding, but also that the other party had the same understanding - that both parties were proceeding on a new agreement, the terms of which they both understood. "

I agree with the Vice-President that the judge was not justified in coming to the conclusion that there was an implied agreement under which the guarantees ceased to be continuing guarantees and which entitled the bank to take the action that it did. Thus I am satisfied that as far as the guarantees of the first and third appellants are concerned, which guarantees are to be construed according to the common law and doctrines of equity of England, modified to meet the needs of the people of Uganda, the action taken by the Bank has resulted in their being discharged from their liability under their guarantees.

The liability of the second appellant is, however, to be determined under the Indian Contract Act and by section 133 of that Act it is provided that a variance made without the guarantor'<sup>s</sup> consent discharges the guarantor as to transactions subsequent to the variance. The implication behind the section is that the guarantor remains liable on his guarantee up to the time of such variance. In the Harilal case (supra) I reserved my views on the effect of this section. It would seem that although the section ceased to have effect in Uganda .../?

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Uganda from 1963 I shall have to come to a conclusion as to its meaning. I find the greatest difficulty in understanding what it means. If the implication I have set out above is correct, then the section is in conflict with later sections, such as sections 134, 135 and 139» which set out that a guarantor is wholly discharged by such variance. In Moholalbhai v, Setalwad (1934) 62 I. A. 23, the Privy Council said at p.35 when dealing with the effect of this section :

> "It could hardly be contended that ..... . if a surety guaranteed repayment of an advance to be made to the principal debtor on a specific contract that the advance was to be applied towards the purchase of real estate, the creditor could, whether he and the debtor rescinded the specific contract or not, recover from the surety on the advance of a sum made to finance speculations in shares. "

These words result in a construction of the section in such a way as not to give effect to the implication that the contract of guarantee is valid up to the time of the variance and the guarantor liable for the debt existing at that time. Such a construction would agree with the later sections of the Act and with the common law, though it is not clear what effect, if any, section 133 would then have, unless the section relates only to such minor variances which would not discharge the guarantor. With some hesitation I have come to the conclusion that the section could not have been intended to effect a radical change in the common law and that whatever else it means it should not be construed in such a way as, contrary to the common law

and the .../8

and the later sections of the Act, to retain the existence of a liability under a contract which would otherwise be discharged\* In *my* view, therefore, the action taken by the bank has also resulted in the discharge of the second appellant from his liability under his guarantee.

For these reasons I would allow the appeal, set aside the judgment and decree of the High Court and substitute therefor a judgment and decree dismissing the suit with costs. I would also allow the appellants the costs of the appeal with a certificate for two advocates.

As Fuad, J. agrees it is so ordered.

DATED at KAMPALA this day of November, 19&9•

C. D. NE?/BOLD PRESIDENT