The basic element of a guarantee as recognised under Omani law is the existence of “offer” and “acceptance” between the guarantor and the creditor. A guarantee is characterised as a commercial guarantee if the underlying debt is commercial in relation to the debtor.
Under the Oman Commercial Code, the guarantors are jointly and severally liable among themselves and with the principal debtor and the creditor may choose to proceed directly against the guarantor or simultaneously against both the guarantor and the principal debtor regardless of whether or not the principal debtor is solvent.
It must be noted, however, that if the creditor brings an action against the guarantor, it is incumbent upon the latter to join in the debtor as a party. Failure to implead the debtor in the suit could leave the guarantor with no right of recourse against the debtor if the debtor has already discharged the debt or if the debtor is able to establish that the claim is a nullity or is time-barred. Similarly, the guarantor is obliged to put the debtor on notice before paying off the debt.
Upon discharging the debt, the guarantor is subrogated to the rights of the creditor and the guarantor will be entitled to ‘step into the shoes’ of the creditor and exercise the creditor’s rights against the debtor. At the time of payment of the debt, the creditor is obliged to deliver all the necessary documents to the guarantor to enable him to enforce the right of recourse against the debtor. If the debt is secured by a mortgage then the creditor must relinquish the mortgage rights in favour of the guarantor. The creditor has a duty to safeguard the securities held to cover a guaranteed debt and the guarantor would be released from the guarantee to the extent any damage or loss has been caused to the collateral due to the creditor’s fault.
The Commercial Companies Law requires explicit authorisation by the Articles of Association or by a shareholders resolution of a company for guaranteeing the debts of third parties that are not granted in the ordinary course of the company’s business. It is always prudent to obtain the shareholders approval before granting corporate guarantees.
Tuesday, March 6, 2012
Commercial Guarantor Liability
Monday, March 7, 2011
Legal Developments in Oman - March 7, 2011
Guarantees and Indemnities
Guarantees and indemnities are both forms of what is known in legal terminology as ‘suretyship’. Suretyship refers to a promise by one person to be liable for the payment of another person’s debts or the performance of another person’s obligations in the event of that person’s failure to pay or perform (or a failure in relation to some other condition).
Guarantees and indemnities are often confused, but there are important distinctions between them.
Guarantees
A guarantee is a promise by the guarantor to a third party that a principal will meet its obligations to the third party – whether by the payment of a debt or by the performance of a duty. In essence, the guarantor says to the third party, “if the principal fails to pay you or perform for you, I will do so.”
Indemnities
An indemnity is a promise to be responsible for another party’s loss and to compensate them for that loss on an agreed basis. For example, the indemnifying party might say, “if it costs more than $100 to repair your car, I will reimburse you for any amounts over $100.”
Guarantees vs. Indemnities
The key distinction between a guarantee and an indemnity is that a guarantee presupposes an original contract, while a contract of indemnity is original and independent.
A guarantor cannot be liable for anything more than what was promised by the principal. The concept is that the obligations of the guarantor stand behind those of the principal and only come to the fore once the principal is in breach of its obligations. The guarantee can therefore be seen to be an accessory contract to the principal’s main contract.
An indemnity, in contrast, provides for concurrent primary liability with the principal to answer for a third party’s loss.
Whether the contracting parties choose to use a guarantee or an indemnity, it is important to record all important contractual promises in writing.
