Guarantee Agreement

A Guarantee Agreement in Kenya secures a debt or duty by making the guarantor liable should the principal obligor fail to perform.

Kenya's law of guarantee is largely derived from English common law and is codified in Part II of the Law of Contract Act Cap. 23. Key provisions govern the rights of the Guarantor following payment — including the right of subrogation (stepping into the Creditor's shoes), the right of contribution from co-guarantors, and the right to indemnity from the Principal Debtor. These rights protect the Guarantor from bearing the full economic burden of another party's default.

Guarantee Agreements are widely used in Kenya across all sectors of the economy. Commercial banks and microfinance institutions regulated by the Central Bank of Kenya (CBK) under the Banking Act Cap. 488 routinely require personal guarantees from company directors and shareholders as a condition of extending credit to corporate borrowers. The Kenya Revenue Authority (KRA) accepts tax payment guarantees under the Tax Procedures Act No. 29 of 2015. Government procurement under the Public Procurement and Asset Disposal Act No. 33 of 2015 requires performance guarantees from successful tenderers. Insurance companies licensed by the Insurance Regulatory Authority (IRA) under the Insurance Act Cap. 487 issue surety bonds that function as guarantees in construction and public works projects.

A Guarantee Agreement must be distinguished from an indemnity. Under a guarantee, the Guarantor's liability is secondary — it arises only on the Debtor's default — while under an indemnity, the Indemnifier assumes primary liability regardless of the Debtor's default. The distinction matters because a guarantee is discharged by certain events (such as material variation of the underlying obligation without the Guarantor's consent) that would not discharge an indemnity. Kenyan courts, following authorities including Kenya Commercial Bank Ltd v. Muigai [2016] eKLR, have consistently applied this distinction.

Section 8 of the Law of Contract Act Cap. 23 imposes a mandatory writing requirement: no action shall be brought to charge any person upon any special promise to answer for the debt, default, or miscarriage of another person unless the agreement or some memorandum or note thereof is in writing and signed by the party to be charged or their authorised agent. An oral guarantee — however clearly made and however many witnesses were present — is unenforceable under Kenyan law. This makes the written Guarantee Agreement not merely advisable but legally essential.

SACCO Societies regulated by the SACCO Societies Regulatory Authority (SASRA) under the SACCO Societies Act No. 14 of 2008 make extensive use of group guarantees and co-member guarantees to secure loans advanced to individual members. These arrangements are governed by the SACCO's by-laws as well as the Law of Contract Act Cap. 23, and are fundamental to the co-operative credit model that serves millions of Kenyan workers, farmers, and entrepreneurs.

At forms-legal.com, our Kenya Guarantee Agreement template is designed to reflect current Kenyan law and banking practice, providing clarity and legal certainty for Creditors, Debtors, and Guarantors alike.

A Guarantee Agreement in Kenya is required in any situation where a Creditor is unwilling to extend credit, grant a lease, or enter a commercial arrangement with a Principal Debtor on the strength of the Debtor's own financial standing alone and seeks additional security through a third-party commitment.

The most frequent scenario is bank lending. Commercial banks including Equity Bank, Kenya Commercial Bank (KCB), and Co-operative Bank of Kenya routinely require personal guarantees from directors and shareholders of private companies seeking business loans. Microfinance institutions regulated by the Microfinance Act No. 19 of 2006 require group guarantees from borrowing members. Development Finance Institutions such as the Kenya Industrial Estates (KIE) require guarantees from promoters of industrial projects.

Landlords of commercial premises — particularly in Nairobi's Central Business District, Westlands, and industrial areas — require a Guarantee Agreement from a creditworthy guarantor where a prospective tenant is a newly incorporated company with no credit history. The guarantor (often a director or major shareholder) guarantees the tenant's payment obligations under the lease.

Government procurement under the Public Procurement and Asset Disposal Act No. 33 of 2015 requires bid bonds and performance guarantees from tenderers. These instruments function as guarantees and must be issued in a form acceptable to the procuring entity — typically a bank guarantee or an insurance bond.

Employers in Kenya require fidelity guarantees from employees handling cash or valuables — particularly in banks, savings and credit co-operative organisations (SACCOs) regulated by SASRA (the SACCO Societies Regulatory Authority), and retail businesses. Suppliers extending trade credit to distributors or retailers also commonly require a Guarantee Agreement from a director or related company before agreeing to open a credit account.

International trade transactions involving letters of credit issued through commercial banks licensed by the CBK also involve guarantee mechanisms that are documented through formal Guarantee Agreements aligned with the Law of Contract Act Cap. 23 and international banking practice.

Housing developers and mortgage finance companies regulated under the Mortgage Refinance Companies Act No. 41 of 2018 and the Housing Finance Company of Kenya require personal guarantees from directors of developer borrowers before advancing project finance for residential developments. County governments awarding long-term concessions or build-operate-transfer agreements under the Public Private Partnerships Act No. 15 of 2021 also typically require parent company guarantees from the ultimate beneficial owner of the project special purpose vehicle before the concession agreement takes effect.

A legally sound Guarantee Agreement in Kenya under the Law of Contract Act Cap. 23 must include the following essential elements to be enforceable and effective.

**Identification of Parties.** The Guarantee Agreement must clearly identify three parties: the Creditor (the party to whom the guarantee is given), the Principal Debtor (the party whose obligations are being guaranteed), and the Guarantor (the party giving the guarantee). Full legal names, identity card or passport numbers, and physical addresses are required. For corporate parties, the registered name, registration number under the Companies Act No. 17 of 2015, and registered office address must be stated.

**Description of the Guaranteed Obligation.** The agreement must describe precisely the obligation being guaranteed — for example, repayment of a loan of Kenya Shillings [amount] advanced under a Loan Agreement dated [date], or performance of obligations under a lease or a commercial contract. Ambiguous descriptions of the guaranteed obligation can be relied upon by the Guarantor to resist enforcement.

**Extent of Liability.** The agreement must state whether the guarantee is limited (capped at a specified sum) or unlimited (covering the full outstanding obligation). Kenyan courts have held that a guarantor is entitled to be discharged beyond the stated limit of their guarantee, making a clear cap provision critically important for the Guarantor's protection.

**Continuing Guarantee Clause.** Where the Creditor requires the guarantee to cover a fluctuating debt — such as an overdraft facility or a revolving credit line — the agreement should expressly provide that the guarantee is a continuing guarantee covering all amounts outstanding from time to time up to the specified limit.

**Conditions of Demand.** The agreement should specify the conditions under which the Creditor can call upon the Guarantor — for example, whether the Creditor must first make demand on the Debtor, exhaust other remedies, or whether the guarantee is payable on first demand without conditions.

**Rights of the Guarantor.** The agreement should acknowledge the Guarantor's statutory rights under the Law of Contract Act Cap. 23, including the right of subrogation, the right to require the Creditor to take steps against the Debtor before calling on the guarantee (unless the guarantee is expressly independent), and the right to contribution from co-guarantors.

**Events of Discharge.** The agreement should address the circumstances in which the guarantee will be discharged — including payment in full by the Debtor, material variation of the underlying obligation without the Guarantor's consent, or release of the Debtor by the Creditor. Courts in Kenya follow established common law principles on guarantee discharge that are reflected in the Law of Contract Act Cap. 23.

**Governing Law and Jurisdiction.** The agreement must state that it is governed by the laws of Kenya and that disputes are subject to the jurisdiction of the High Court of Kenya (Commercial Division) or the relevant Magistrate's Court depending on the value of the guaranteed obligation.

**Execution Formalities.** The Guarantee Agreement must be signed by the Guarantor and the Creditor before witnesses. Guarantees given by individuals are often required by financial institutions to be executed before a Commissioner for Oaths under the Oaths and Statutory Declarations Act Cap. 15 to confirm that the Guarantor understood and freely entered into the obligation.

Access the professionally drafted Kenya Guarantee Agreement at forms-legal.com to confirm your guarantee meets all requirements under Kenyan law and current banking practice. Under Kenya law, Section 3 of the Companies Act 2015 (No. 17 of 2015) and Section 15 of the Employment Act 2007 (No. 11 of 2007) govern the core requirements for this type of document.