TYPES OF PERFORMANCE GUARANTEE
1. CONDITIONAL GUARANTEE: The enforcement of this kind of guarantee depends upon some extraneous event, beyond the mere default of one party and generally upon notice of the default, and reasonable diligence in exhausting proper remedies against the defaulting party.
2. ABSOLUTE GUARANTEE: This is an unconditional undertaking by the third-party financial institution that the party in debt will pay the debt or perform the obligation. It is an unconditional promise of payment or performance of the principal contract on default of the obligor.
3. COLLATERAL GUARANTEE: This is a contract by which the third-party financial institution undertakes in case the party to fulfil the obligation fails to do what he has promised or undertaken to do, such as pay damages; as distinguished from an engagement of suretyship in this respect that a surety undertakes to do the very thing which the principal has promised to do, in case that latter defaults.
4. CONTINUING GUARANTEE: A continuing guarantee is a guarantee in which a third-party financial institution agrees to be held responsible for a series of transactions for the financial obligations and the performance of contractual obligations by the obligating party to the other party, in the event the obligating party fails to discharge his financial obligations or perform the contractual obligations. In the case of a continuing guarantee, so long as the account is a live account i.e. the account is un-settled and there is no refusal on the part of the third-party financial institution to carry out the obligation, the period of limitation does not at all start to run.
5. SPECIAL GUARANTEE: This guarantee is available only to a particular person to whom it is offered or addressed, as distinguished from a general guarantee, which will operate in favour of any person who may accept it.
For a performance guarantee to be valid, there are basic elements that must come to play as emphasized in Umegu v. Oko and these are:
a. There must be three parties in the contract, namely:
i. A Creditor.
ii. A Principal debtor.
ii. A promisor who undertakes to discharge the principal debtor’s liability should the latter fail to discharge it himself i.e. more often than not, the financial institution.
b. There must be an agreement between the parties;
c. The agreement must be in writing and if not under seal, there must be valuable consideration; and
d. The contract or agreement must not be illegal as illegality generally renders any contract null and void ab initio and the party seeking to enforce it will have no remedy in a court of law.
The Court held in Salawal Motor House Ltd v. Lawal, that it is the law that a guarantor of a loan is technically a debtor because where the principal debtor fails to repay, the guarantor will be called upon to pay the loan so guaranteed. Immediately a guarantor signs the guarantee form, he automatically makes himself liable for the default of the debtor in case of default. This is the extent, to which the law protects the creditor to a performance guarantee in a contract.