The Supreme Court has ruled that a bank is entitled to institute legal action directly against a guarantor without first proceeding against the principal debtor, where that right has been expressly waived in the guarantee contract.
The three-judge bench, comprising Justices Yasantha Kodagoda, Shiran Gooneratne and Sampath Wijeratne, dismissed an appeal by guarantor Vithanage Happawana and affirmed a Commercial High Court decision in favour of DFCC Bank PLC in a Rs. 5.5 million recovery action.
Delivering the judgment, Justice Sampath Wijeratne held that while Roman-Dutch law generally allows a surety to insist that the principal debtor be sued first, that right may be expressly waived by contract. Clause 15 of the guarantee agreement, the Court found, clearly permitted the bank to proceed directly against the guarantor.
The defendant had argued that the principal debtor company, as beneficiary of the credit facilities, should have been pursued first. He also claimed he had signed blank papers without understanding the documents. The Court rejected that defence, holding that such a claim cannot succeed unless the signer is illiterate, blind or otherwise incapable of understanding the transaction.
The Supreme Court ordered costs to be paid to the bank in both courts. President’s Counsel Kushan de Alwis appeared for DFCC, while Counsel Harith de Mel and Hasini Rupasinghe, instructed by Chamithri Kaluhennadige, represented the appellant.
The ruling clarifies a long-running point in Sri Lankan commercial banking practice and is likely to strengthen lenders’ hand in distressed-loan recoveries, particularly as the sector works through pre-restructuring non-performing portfolios.
