– The Supreme Court ruled that a bank is legally entitled to institute action directly against a guarantor without first proceeding against the principal debtor, provided the guarantor has expressly waived that right in the guarantee agreement.

Delivering the judgment into an appeal filed by a guarantor, the Supreme Court affirmed the Commercial High Court’s decision holding one Vithanage Happawana liable as guarantor for credit facilities obtained from DFCC Bank PLC. The appeal was based on an action filed by the bank seeking to recover over Rs. 5.5 million together with interest from the defendant in his capacity as guarantor for the company’s loan facilities. The defendant argued that the company, being the principal debtor and sole beneficiary of the credit facilities, should have been made a party to the action and sued first before any proceedings were initiated against him as guarantor.

However, the Supreme Court held that under Roman-Dutch law, although a surety generally has the right to insist that the principal debtor be sued first, such a right can be expressly renounced through contract.Justice Sampath Wijeratne, delivering the judgment, observed that Clause 15 of the guarantee agreement clearly permitted the bank to proceed directly against the guarantor without first taking action against the principal debtor. The Supreme Court also rejected the defendant’s claim that he was unaware of the contents of the guarantee documents and had signed blank papers. The Court held that such a defence could not succeed unless the person signing the document was illiterate, blind, or otherwise incapable of understanding the nature of the transaction.

Accordingly, the Supreme Court affirmed the judgment of the Commercial High Court and ordered that the plaintiff bank be entitled to costs in both courts. The Supreme Court three-judge-bench comprised Justice Yasantha Kodagoda, Justice Shiran Gooneratne and Justice Sampath Wijeratne.Counsel Harith de Mel with Hasini Rupasinghe instructed by Chamithri Kaluhennadige appeared for the guarantor.President’s Counsel Kushan De Alwis, with Kaushalya Nawaratne, P.C. and Sashendra Mudannayake instructed by Tejaka Perera appeared for the bank.