In a landmark judgment reinforcing the strict legal obligations of financial guarantors, the Supreme Court of Sri Lanka has ruled that a bank is legally entitled to initiate legal action directly against a guarantor without first proceeding against the principal debtor, provided the guarantor has expressly waived that right within the guarantee agreement.
The ruling came as a three-judge Supreme Court bench dismissed an appeal filed by a guarantor, affirming a previous decision by the Commercial High Court. The case held the defendant, Vithanage Happawana, liable as a guarantor for credit facilities obtained from DFCC Bank PLC.
The Legal Dispute
The bank had originally filed an action seeking to recover over Rs. 5.5 million, alongside accumulated interest, from the defendant in his capacity as the guarantor for a company’s loan facilities.
The defendant countered the lawsuit by arguing that because the company was the principal debtor and the sole beneficiary of the credit facilities, the bank should have made the company a party to the action and sued them first before initiating any legal proceedings against him.
Roman-Dutch Law vs. Contractual Waivers
Delivering the judgment, Justice Sampath Wijeratne observed that under Roman-Dutch law—which governs such civil matters in Sri Lanka—a surety or guarantor generally holds the right to insist that the creditor first exhaust all legal remedies against the principal debtor (a doctrine known as the benefit of discussion).
However, the Court emphasized that this common-law right can be expressly renounced through a voluntary contract.
Upon reviewing the documents, the Court noted that Clause 15 of the guarantee agreement signed by the defendant clearly and unambiguously permitted DFCC Bank to proceed directly against the guarantor without taking initial action against the principal company.
Court Rejects “Blank Paper” Defense
The Supreme Court also strongly rejected a secondary defense raised by the appellant, who claimed he was unaware of the contents of the guarantee documents and alleged that he had signed blank papers.
The Court held that such a defense cannot succeed in a court of law unless the person signing the document is:
- Illiterate
- Blind
- Or otherwise mentally or physically incapable of understanding the nature of the transaction.
For a legally capable individual, the Court reiterated that signing a legal document binds them to its terms under the principle of caveat subscriptor (let the signer beware).
Ruling Outcome: The Supreme Court affirmed the judgment of the Commercial High Court and ordered that the plaintiff bank be entitled to legal costs in both courts.
Legal Representation
The Supreme Court three-judge bench comprised Justice Yasantha Kodagoda, Justice Shiran Gooneratne, and Justice Sampath Wijeratne.
- For the Guarantor (Appellant): Counsel Harith de Mel with Hasini Rupasinghe, instructed by Chamithri Kaluhennadige.
- For the Bank (Respondent): President’s Counsel Kushan De Alwis, with Kaushalya Nawaratne, P.C., and Sashendra Mudannayake, instructed by Tejaka Perera.
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