Can banks sue a guarantor? What does the law of guarantees say in Sri Lanka?
Title: Mahasen Sampath Vithanage Happawana vs DFCC Bank PLC
Case number: SC CHC Appeal 34/2017
Decided on: 2026-05-26
Before: M. Sampath K. B. Wijeratne J. Yasantha Kodagoda, PC, J. A. L. Shiran Gooneratne, J.
The decision arose from a dispute involving a commercial credit facility granted to a private company and provides significant guidance on the interaction between Roman-Dutch law principles of suretyship and modern banking guarantees. The judgment also highlights the importance of contractual autonomy and the legal consequences of signing guarantee documents without properly understanding their contents.
Facts
A commercial bank instituted action in the Commercial High Court seeking to recover over Rs. 5.5 million, together with interest, from an individual who had executed a personal guarantee in support of credit facilities granted to a private limited company.
The company was the principal borrower and beneficiary of the facilities. Following default, the bank chose to sue the guarantor directly instead of making the company a party to the action.
- The guarantor challenged the claim on several grounds. He argued that since the company had obtained the loan and benefited from the facilities, the bank could not maintain an action solely against him without first proceeding against the company.
- He further claimed that he was unaware of the contents of the guarantee documents, alleging that he had signed blank documents without proper explanation. He also denied receiving the bank’s demand letter.
The Commercial High Court rejected these arguments and held the guarantor liable. The matter then came before the Supreme Court on appeal.
The Supreme Court was primarily required to determine whether a bank could sue a guarantor directly without first suing or exhausting remedies against the principal debtor.
Court’s Reasoning
The Court began by examining the principles of Roman-Dutch law, which govern suretyship in Sri Lanka. Traditionally, a surety enjoys the benefit of excussion, a defence that allows the guarantor to insist that the creditor first sue and exhaust remedies against the principal debtor before proceeding against the surety.
However, the Court emphasized that this protection is not absolute. A guarantor may expressly or impliedly renounce this right through the terms of the guarantee agreement.
The waiver clause
The guarantee in question contained a comprehensive waiver clause.
- It expressly allowed the bank to sue the debtor and guarantor together, or to proceed against the guarantor alone.
- More importantly, the guarantor had specifically renounced the right to demand that the principal debtor be sued first.
- The agreement further stated that the guarantor would be liable as a principal debtor and could be sued before any action was taken against the borrower.
The Court observed that contractual freedom is a fundamental principle of contract law. Where parties voluntarily agree to specific rights and obligations, courts must ordinarily give effect to those contractual terms. Since the guarantor had expressly waived the benefit of excussion and accepted liability akin to that of a principal debtor, the bank was entitled to proceed directly against him.
The Court also referred to previous judicial decisions recognizing that modern banking practice often depends on guarantees that provide creditors with immediate recourse against guarantors. Requiring banks to first litigate against defaulting borrowers before pursuing guarantors would significantly undermine the commercial value of guarantees.
Addressing the guarantor’s claim that he did not understand the documents he signed, the Court rejected the argument. It noted that the defence of Non est factum is available only in exceptional circumstances, such as where a person is illiterate, blind, or otherwise incapable of understanding the nature of the document. The guarantor failed to establish any such circumstances.
The Court further stressed the well established principle that a person who signs a document is generally bound by its contents. If an individual signs without reading or understanding the document, the consequences of that negligence must ordinarily be borne by that individual.
The Court was equally unpersuaded by the argument that the demand letter had not been received. The bank had produced copies of the letter together with proof of registered postage. Furthermore, the guarantor had failed to respond to the demand. Consistent with established commercial law principles, the Court noted that silence in the face of a business demand may amount to an admission where the recipient does not dispute the allegations made.
Decision
The Supreme Court affirmed the judgment of the Commercial High Court and held the guarantor liable for the outstanding debt.
The Court concluded that the guarantee agreement validly waived the guarantor’s right to insist that the principal debtor be sued first. Consequently, the bank was legally entitled to institute proceedings directly against the guarantor without making the company a party to the action.
Significance
- This judgment is an important reaffirmation of the law governing guarantees in Sri Lanka. While Roman-Dutch law generally grants sureties the benefit of excussion, the decision confirms that such rights can be validly renounced through contractual agreement.
- The ruling also reinforces a broader principle of commercial law: parties who sign guarantee documents will ordinarily be held to the obligations they undertake. Courts will not readily relieve guarantors of liability merely because they later claim not to have understood the documents they signed.
- For banks and financial institutions, the judgment provides welcome certainty that properly drafted guarantee agreements can permit direct recovery against guarantors.
For guarantors, it serves as a reminder that waivers contained in guarantee documents carry serious legal consequences and should never be accepted without careful consideration.
Download the original Judgement PDF SC/CHC/Appeal No. 34/2017