ZAMBIA INSTITUTE OF ADVANCED LEGAL EDUCATION

COMMERCIAL TRANSACTIONS – LECTURE NOTES

COMMERCIAL SECURITIES

MORTGAGES

A Mortgage is a security effected by the creation or transfer of a legal or equitable

interest in property as security for the payment of a debt or for the discharge of some
other obligation.

A mortgage was defined by Lord Lindley in SANTLEY V WILDE (1899) CH at page

474, as a conveyance of land or an assignment of chattels as security for the payment
of a debt or the discharge of some other obligation for which it is given. The security is
redeemable on the payment of the debt or the discharge of some other obligation,
notwithstanding any provision to the contrary. Section 65 of the Lands and Deeds
Registry Act, Chapter 185 of the Laws of Zambia has somewhat altered the common
law nature of a mortgage as defined by Lord Lindley in Santley V Wilde. Section 65(1)
of the Act provides that a mortgage is simply to operate as a security and not a
transfer or lease of the estate or interest thereby mortgaged, The Section provides that:

“1. A mortgage of any estate or interest in land shall have effect as security and
shall not operate as a transfer or lease of the estate or interest thereby
mortgaged, but the mortgagee shall have and shall be deemed always to have
had the same protection powers and remedies (including a power of sale, the
right to take proceedings to obtain possession from the occupiers and the
the persons in receipt of rents and profits or any of them and, in the case of
land held in leasehold, the right to receive any notice relating to the land the
 subject of the mortgage which under any law or instrument the mortgagor is
entitled to receive) as if the mortgage had so operated as a transfer or lease of
the estate or interest mortgaged.”

A Mortgage may be created by a demise of land, by a transfer of a chattel or by a

charge on any interest in real or personal property for securing a loan or money.

DISTINCTION BETWEEN A MORTGAGE AND A CHARGE

A Charge is regarded as a particular type of Mortgage. One important difference –

- A Mortgage is a conveyance of an interest in property subject to a right of

redemption (that is, a right to have the interest re-conveyed upon repayment of
the loan or discharge of the obligation), whereas a charge conveys nothing but
merely gives the ‘chargee’ certain rights over the property. See LONDON
COUNTY AND WESTMINISTER BANK LTD V TOMPKINS (1918) 1 KB 515.

The Security (Mortgage) is redeemed on payment or discharge of the debt or

other obligation that the borrower (Mortgagor) may have.

Section 3 of the Companies Act, No. 10 of 2017 defines a charge thus:

“Charge” includes:
(a) a security interest or security agreement;
(b) a mortgage or an agreement to give or execute the mortgage whether
on demand or otherwise;
(c) a debenture…”

To similar effect, Millet J in the case of RE CHARGE CARD SERVICES LTD (1987)
BCLC 17 at page 40 observed as follows:

“…Without any conveyance or assignment to the charge, specific

property of the charger is expressly or constructively appropriated to
 made answerable for the payment of a debt, and the charge has
given the right to resort to the property for purpose of having it
realized and applied in or towards payment of a debt.”

CHARACTERISTICS OF A MORTGAGE

A Mortgage basically consists of 2 things:

1. A Personal Contract for payment of a debt.

2. A disposition or charge of the Mortgagor’s interest or estate as security for the

repayment of the debt.

TYPES OF MORTGAGES

1. Legal Mortgage

2. Equitable Mortgage

LEGAL MORTGAGE

A Legal Mortgage of land can only be created by demise or a legal charge and it must
be by deed.

The effect of a Legal Mortgage by demise is to vest the legal estate in the term of years
created by it in the Mortgagee who is immediately entitled to possession of the
property upon execution of the Deed.

The Mortgagor’s legal estate in the reversion of the term of years is not transferred to
the Mortgagee until the right of redemption is destroyed by foreclosure.
Demise – a transfer or conveyance of property from one person to another.
- the grant of a lease for a term of years.

Charge by Way of Legal Mortgage

- If the Mortgagor holds the term on condition that he will not sub-lease
without the landlord’s consent, consent must be obtained to create a
mortgage by sub-demise.
- The legal charge does not involve the granting of a sub-lease and so the
landlord’s consent is unnecessary.

EQUITABLE MORTGAGE

This is a contract which creates a charge on the property but it does not convey any
legal estate or interest to the creditor or lender.

As between parties (Mortgagor & Mortgagee) and so far as equitable rights and
remedies are concerned, an equitable mortgage is equivalent to an assurance and it is
enforceable under the Courts of equitable jurisdiction.

As a general rule, all property, whether real or personal which may be subject of a
legal mortgage can also be charged in equity.

An equitable mortgage may be made or created in the following way:

1. By an agreement to create an equitable mortgage.

2. By a deposit of Title Deeds.

A good security in equity may be created by the deposit of the Title Deeds. (This is
better than just merely agreeing verbally that you have an equitable mortgage).
The deposit of Title Deeds could even be used to secure the debt of a third person –
Third Party Mortgage whereby the borrower uses another person’s Title Deeds to
secure a loan. A deposit of Title Deeds is however regarded as an imperfect mortgage.

MORTGAGOR’S EQUITY OF REDEMPTION

A mortgagor has a right to redeem a mortgage – to pay back the debt so that the
mortgaged property can come back to him/her.

This right continues even if the mortgagor has failed to pay the debt in accordance
with the proviso for redemption. The right arises from the transaction being
considered a mere loan of money which is secured by a pledge of the estate.
For this reason, any provision in the mortgage deed which tends to prevent
redemption on the payment of the debt or performance of the obligation for which the
security was given, is considered to be a fetter or clog on the equity of redemption and
is void.

The mortgagor’s right to redeem is so inseparable from the mortgage that it cannot be
taken away even by an express agreement of the parties.

ESSO PETROLEUM CO. LTD V. HARPERS GARAGE LIMITED (1968) AC 269

(1967) 1 ALL ER 699

The right of redemption continues until the mortgagor’s title is extinguished or

destroyed or his interest is destroyed by the sale of the property e.g. pursuant to a
Court Judgment.

The right of redemption is cancelled by foreclosure. Foreclosure is the legal process by

which a lender cancels (forecloses) a borrower’s right of redemption of the mortgaged
property through a court order (called a foreclosure order). The court sets a date up to
which the borrower can redeem the property by paying off the entire loan balance
including foreclosing expenses. Thereafter the lender is free to sell the property and,
upon the sale, applies the sale proceeds first to the due amount and pays the
remainder (if any) to the borrower.

The borrower remains liable for the due amount if the property remains unsold, and
for the shortfall if the sale proceeds are insufficient to pay off the entire debt. The
lender is generally under an obligation to sell the property at or near its fair market
value (FMV).

The Equity of Redemption represents the sum total of the mortgagor’s rights (in equity)
in the property which is subject to the mortgage. The equity of redemption is the
mortgagor’s right of ownership of the property subject to the mortgage and is an
interest in land which can be dealt with like any other interest in land (RE WELLS
(1933) CH 29).

MAIN PROVISIONS OF A LEGAL MORTGAGE

Among others a legal mortgage has the following main provisions:

1. A Covenant to pay the principle debt and interest on a given date

The first operative part of a mortgage is usually the covenant by the mortgagor
to pay the principle and interest on a particular date.

The amount payable may exceed the sum advanced to the mortgagor.

2. Covenant to pay interest

The covenant fixing the date of payment generally also provides for interest to
be paid. The rate of interest is usually simple interest; however, the mortgagor
can validly agree to pay compound interest. The mortgagee may only charge
compound interest if and only if there is agreement to that effect with the
mortgagor.
 The agreement may be either express or implied from the nature of the dealings
but a mere intimation by the mortgagee that he intends to charge compound
interest is not enough.

There must be assent by the mortgagor which can be inferred from the nature
of business in which compound interest is charged e.g. where a relation of bank
and customer does exist between the mortgagee and mortgagor.

UNION BANK ZAMBIA LIMITED V SOUTHERN PROVINCE COOPERATIVE

MARKETING UNION 1995/97 ZR 207

However, penal interest in whatever form is forbidden by law.

See also the case of CREDIT AFRICA BANK LIMITED (IN LIQUIDATION) V
JOHN DINGANI MUDENDA (2003) ZR 66.

3. Appointment of a Receiver

Every mortgage will have a provision for the appointment of the receiver or
manager particularly if the mortgagor is a limited company incorporated under
the Companies Act and it is in breach of its obligation to pay the amount
secured by the mortgage.
MORTGAGEE’S REMEDIES

When there is default on the part of the mortgagor, the mortgagee is entitled to pursue
the following remedies concurrently.

(i) The payment of principle and interest

This remedy is in accordance with the mortgagor’s covenant in the mortgage

deed to pay principle and interest on a particular date.

(ii) Possession

In the case of land, which includes a dwelling house, the remedy of

possession is subject to the limitation that the Court has discretion to delay
the making or enforcement of a Possession Order if it considers that the
mortgagor is likely to pay the money within a reasonable time.

An equitable mortgagee has no right to take possession because he has no

legal estate.

(iii) Foreclosure or Sale after the day Fixed for Redemption

If the time that is given to the mortgagor within which to pay the debt
expires, the mortgagee is entitled to foreclose on the mortgaged property and
also to sale it.

The process of sale does not include a sale by the mortgagee to himself.

DAPONTE V. SCHUBERT (1939) 3 ALL ER 495

The statutory power of sale applies only where the mortgage was made by
deed. Under Section 66(1) of the Lands and Deeds Registry Act, Chapter 185
of the Laws of Zambia, the right to sell mortgaged property is only
exercisable where the mortgage was made by deed.

S. BRIAN MUSONDA (Receiver for First Merchant Bank Zambia Limited

in Receivership) V HYPER FOOD PRODUCTS LIMITED & OTHERS
SCZ Judgment No. 16 of 1999.

The right to foreclosure on a mortgaged property can only be effected by an

Order of the Court. A mortgagee will first apply for and obtain a foreclosure
Order nisi from the Court which gives the Mortgagor an opportunity to
redeem the mortgage within a specified period. In default, foreclosure order
nisi will become absolute thereby destroying the mortgagor’s equity of
redemption.

It is to be noted that an equitable mortgagee does not have the power to sell
the mortgaged property as a way of enforcing the mortgage. He however, has
the right to obtain an order of court for foreclosure and once the property is
foreclosed, the mortgagor’s right of redemption is completely extinguished
and the property must be conveyed to the mortgagee by the mortgagor
unconditionally.

Should the mortgagor fail or neglect to convey the mortgaged property the
Registrar of the High Court for Zambia can execute the Instrument of
conveyance or Assignment by order of the Court pursuant to Section 14 of
the High Court Act, Chapter 27 of the Laws of Zambia.
 (iv) Appointment of a Receiver

The mortgagee may apply to court for the appointment of a receiver, where
the mortgagor breaks any of its obligations to pay. Generally, unless an
action is pending in Court, neither a receiver will be appointed nor will the
Court assist the mortgagee in possession to relinquish possession by
appointing a receiver.

The Conveyancing Act 1881 and the Law of Property Act 1925 gives a
mortgagee power to appoint a receiver. The power to appoint a receiver
arises only when the mortgage money has become due.

 Notice to repay the mortgaged money has been served on the

mortgagor and default has been made in payment.

MORTGAGOR’S REMEDIES

A mortgagor has the following remedies:

(i) Possession

This remedy arises where the mortgagee refuses to deliver up possession of

the mortgaged property after the mortgagor has paid the amount
outstanding.

(ii) Redemption

The mortgagor can exercise his right to re redeem the mortgage.

(a) The Contractual Right to Redeem

 Once a mortgage has been created there will be normally be a
contractual date set for repayment of the loan; this is known as the legal
redemption date. At common law if the monies were not repaid on the
legal redemption date, the property vested in the mortgage. This was
unfair and so equity intervened and created the equitable right to redeem
i.e. it gave the mortgagor the right to redeem the property even after the
legal redemption date had passed.

(b) The Equitable Right to Redeem

Equity allowed the mortgagor an equitable right to redeem on any date

after the date fixed for redemption. Equity took the view that the property
mortgaged was merely a security for the money lent and that it was
unjust that the mortgagor should lose his property because he was late
in repaying the loan. Equity compelled the mortgagee to reconvey the
property to the mortgagor on payment of the principal with interest and
costs even if the legal date of redemption had passed (SALT V MARQUES
OF NORTHAMPTON (1892) AC 1).

The equity of redemption differs from the equitable right to redeem in

that the latter does not exist until the legal date of redemption is past,
whereas the equity of redemption exists as soon as the mortgage is
made.

(iii) Surrender or Release

A mortgagor is entitled to this remedy where the mortgagee refuses to

release a security e.g. refusing to release title deeds in equitable mortgage.
REMEDIES OF AN EQUITABLE MORTGAGEE

1. To Foreclose: Foreclosure is the primary remedy of an equitable

mortgagee since he has no legal estate. The Court Order Absolute will
direct the mortgagor to convey the land to the mortgagee
unconditionally, i.e. free from any right to redeem.

2. To sell: The statutory power of sale applies only where the mortgage was
made by deed; an equitable mortgagee has no power of sale. Under
Section 66(1) of the Lands and Deeds Registry Act, Cap 185 of the Laws
of Zambia, the right to sell mortgaged property is only exercisable where
the mortgage was made by deed.

In the case of Kasabi Industries Limited V Intermarket Banking

Corporation Limited Appeal No. 168 of 2009 the Supreme Court held
inter alia that:
“ 1. An equitable mortgagee does not have the power to sell the
mortgaged property as a way of enforcing the mortgage. He however, Hs
the right to obtain an order of Court for foreclosure and once the
property is foreclosed, the mortgagor’s right of redemption is completely
extinguished and the property must be conveyed to the mortgagee by the
mortgagor unconditionally.”

3. To Take Possession: It is generally said that an equitable mortgagee has

no right to take possession because he has no legal estate.

4. To Appoint a Receiver: An equitable mortgagee has always had the right

to have a receiver appointed by the Court in a proper case.
MORTGAGE PROCEEDINGS IN THE HIGH COURT

In a mortgage action, the Plaintiff can begin the action by a Writ or Originating
Summons. A mortgage action is an action by a mortgagee or mortgagor in which there
is a claim for any of the following reliefs:

1. Payment of money secured by a mortgage.

2. Sale of the mortgaged property.
3. Foreclosure.
4. Delivery up of possession to the mortgagee by the mortgagor.
5. Redemption.
6. Delivery up of possession by the mortgagee to the mortgagor.
7. Release of title deeds by the mortgagee to the mortgagor.

An Originating Summons is appropriate where there is unlikely to be any substantial

dispute of fact and where the matter is simple.

A Writ of Summons is appropriate:

i. Where the facts are so complicated that it would be difficult to try action
without pleadings.
ii. Where an injunction or declaration is sought e.g. case of alleged fraud.

Where a mortgage action is commenced by Writ of Summons summary judgment may

be obtained.

If the defendant does not appear, judgment in default may not be obtained without
leave of court ( Order 12 Rule 9 of the High Court Rules, Cap 27 and Order 88 Rule 7
of the White Book 1999 Edition).

Mortgage actions are commenced by Originating Summons pursuant to Order 30 Rule

14 of the High Court Rules, Chapter 27 of the Laws of Zambia.
Question: Draft a Plaintiff’s Prayer in a Mortgage action.

By this Summons the Applicant claims against the Respondents under Order 30 Rule
14 of the High Court Rules, Chapter 27 of the Laws of Zambia as read with Order 88
of the Rules of the Supreme Court (the White Book)1999 Edition.

1. Payment of all monies due under the Third Party Legal Mortgage ( or Legal
Mortgage or Equitable Mortgage) relating to …..

2. Delivery and possession of the Mortgaged Property being …..

3. Foreclosure and Sale

4. Further or other relief

5. Costs
If the Respondents do not enter Appearance such Judgment shall be entered or an
order made against or in relation to them as the Court may think expedient.

Summary Judgment
Where a mortgage action is commenced by writ of summons, summary judgment may
be obtained.
If the defendant does not appear, Judgment in default may not be obtained without
leave of court Order 12 Rule 9 of the High Court Rules Cap 27 and Order 88 Rule 7 of
the Rules of the Supreme Court (White Book) 1999 Edition.
DEBENTURES

A Debenture is a document which either creates or acknowledges a debt.

Section 2 of the Corporate Insolvency Act No. 9 of 2017 defines a Debenture as

follows:
“Debenture” means a document issued by a corporate that evidences or
acknowledges a debt of the corporate, whether or not it constitutes a charge on
property of the corporate, in respect of money that is or may be deposited with or
lent to the corporate…”

Similarly, Chitty J in LEVY V ABERCORRIS SLATE & SLAB CO (1882) CH 260 at

page 264, observed that “ A Debenture means a document which either creates a debt
or acknowledges it and any document which fulfills either of these conditions is a
debenture”.

Further, in the case of BRITISH INDIA STEAM NAVIGATUON CO. V INLAND

REVENUE COMMISSIONERS (1880-81) LR 7 QBD it was held that a simple
acknowledgement of indebtedness was a debenture.

In general most debentures are securities given by companies.

A debenture may contain either a fixed charge or a floating charge on the company’s
property and undertaking, real or personal and whether present or future as security
for a debt.

A Mortgage relates to real and present property and not personal and unascertained
property.
FLOATING CHARGE

This is a charge/Security which is not put into immediate operation but floats so that
the company is allowed to carry on with its business.

It moves with the property it is intended to affect until some event occurs or some act
is done which causes it to settle and fasten on the subject of the charge within its
reach and grasp.

ILLINGWORTH V HOULDSWORTH (1904) AC 355

Lord Macnaghten

“…A specific (fixed) charge…is one that without more fastens on

ascertained and definite property or property capable of being
ascertained or defined. A floating charge, on the other hand, is
ambulatory and shifting in its nature, hovering over and so to
speak floating with the property it is intended to affect until some
event occurs or some act is done which causes it to settle and
fasten on the subject of the charge
within its reach and grasp…”

AMIRAN LIMITED AND OTHERS V AGRIFLORA (Z) LIMITED (in Receivership)

(2004) HPC/0268

RE: YORKSHIRE WOOLCOMBERS ASSOCICATION LIMITED, HOULDSWORTH V

YORKSHIRE (1903) 2 Ch. D 284

“A mortgage/charge by a Company which contains the following characteristics is a

floating charge”
 (i) If it is a charge on a class of assets both present and future.

(ii) If that class of assets is one which in the ordinary course of the business of
the Company will be changing from time to time.

(iii) If it is contemplated by the charge that until some future step is taken by or
on behalf of the mortgagee, the company may carry on its business in the
ordinary way so far as it concerns the particular class of assets charged”.

A floating charge remains dormant until the undertaking charged ceases to be a going
concern or until the person in whose favour the charge is created intervenes.

FIXED/SPECIFIC CHARGE

A Fixed/Specific charge fastens on ascertained or definite property or property capable

of being ascertained and defined.

In a mortgage the security for the loan can be ascertained – i.e. Plot Nos. 9 & 11
Andrew Mwenya Road, Rhodes Park Lusaka.

EFFECT OF A FLOATING CHARGE

Since a floating charge is only a charge on the assets for the time being, a company
can in the ordinary course of business sell, mortgage or otherwise deal with any of its
assets as if the floating charge had not been created until the security becomes fixed.

RESTRICTIONS OF A FLOATING CHARGE

The operations of a floating charge are usually restricted by making a provision in the
debenture that a company shall not create a mortgage or a charge on the assets
ranking in priority to or pari passu with the charge given by the debenture.
CIRCUMSTANCES WHEN A FLOATING CHARGE BECOMES A FIXED CHARGE

In either of the following situation:

(i) The Company ceases its business –

 The floating charge automatically becomes fixed to avoid the assets
being disposed of

(ii) If a company is wound up.

(iii) If a receiver is appointed.

(iv) If some event happens upon which the charge is to become a fixed charge
and if notice is given to that effect in terms of the charge.

The debenture may provide that –

If/upon a floating charge becomes fixed, a company cannot thereafter deal with any of
the property charged except subject to the terms of the charge.

GOVERNMENTS STOCK AND OTHER SECURITIES INVESTMENT COMPANY V

MANILA RAILWAY COMPANY (1897) AC 81

See GOWERS PRINCIPLES OF MODERN COMPANY LAW 6th Edition at P367

“a crystallized charge will bite on all the assets

covered by the charge since a floating charge does
not normally provide for crystallization over part
only of the assets to which it relates. The effect of
crystallization is to deprive the company of the
 autonomy to deal with assets subject to the charge
in the normal course of business”.

Crystallization – floating charge becoming fixed.

GUARANTEES

In certain situations security for a loan may also be provided by a surety under a
contract of guarantee.

A Guarantee is a contract by which a promisor otherwise known as Guarantor or

Surety undertakes to be responsible to the promisee otherwise known as the Creditor,
for the debt or default of another person known as the Principal Debtor or Borrower.

It is a contract whereby the surety or guarantor promises the actual or potential

creditor of a third person (the principal debtor) to be responsible to him, in addition to
the principal debtor for the due performance by the principal debtor of his existing or
future obligations to the creditor, if the principal debtor fails to perform those
obligations.

A Guarantee is usually referred to as a collateral contract which is different from the

original contract between the lender and the principal debtor. It is an accessory, or
secondary contract. For there to be a valid contract of guarantee between surety and
creditor, there has to be a valid principal obligation, between principal debtor and
creditor. A surety’s liability is co-extensive with that of the principal debtor. The surety
is only liable to the same extent that the principal debtor is liable to the creditor and
there is usually no liability on the part of the surety if the underlying obligation is void
or unenforceable.

A Guarantor is discharged if the Principal Debtor performs the obligation guaranteed,

that is to say, he pays the debt. A Guarantee may be a continuing guarantee if it
extends to a series of transactions and is not confined to a single credit or transaction.

Banks frequently lend money on current account by way of fluctuating overdraft – if

the guarantee is not stated to be a continuing security – the Rule in Clayton’s Case
would apply, and so payments in would be treated as payments towards the discharge
of the debt and payments out would constitute unsecured advances. Clayton’s Case
(1816) 1 Mer 572.

NATURE OF A GUARANTEE

An agreement will not be a Guarantee unless there is in existence or contemplation a

Principal Debtor and a Secondary Debtor.

Unless the Guarantee provides to the contrary, the guarantee will be determined or
terminated if the principal obligation is changed without the Guarantor’s consent or if
the principal obligation itself is determined or terminated.

ESSENTIALS OF A GUARANTEE

1. There must be a valid agreement, that is to say, there must be an offer on

ascertainable terms, which offer must receive an unqualified acceptance from
the person to whom it is made.

2. To amount to a guarantee, the offer must be addressed to the Creditor,

consequently, an offer which is not addressed to any individual creditor to
contribute to the assets of the Principal Debtor is not a guarantee.

3. There must be a debt owed by someone which has to be guaranteed.

FORM OF CONTRACT OF GUARANTEE

A contract of guarantee must be in writing and signed by the Guarantor or by some

other person lawfully authorized by him. The writing will be satisfied by any sufficient
note or memorandum of the promise of the guarantee signed by the Guarantor or his
agent.

GUARANTOR’S LIABILITY

A Guarantor has 2 kinds of liability:

1. A promise by the Guarantor which becomes effective if the Principal Debtor fails
to perform his obligation.

2. A promise that the principal Debtor will perform his obligation.

In both situations, the Guarantor’s liability is secondary. The Guarantor has no

liability if the liability of the Principal Debtor is discharged. It therefore, follows that
before any default has been committed by the Principal Debtor, a Creditor cannot
bring an action against the Guarantor to force him to set aside money to provide for
the possibility of a debt becoming due from the Principal Debtor and the Principal
Debtor being in default.

In other words, the Guarantor’s liability only arises when the Principal Debtor is in
default but not before then.

ENFORCEMENT OF GUARANTOR’S LIABILITY

A Creditor can enforce a remedy against the Guarantor on his Guarantee by bringing
an action in Court for Judgment.

The Principal Debtor may or may not be sued in the same action.
 Creditors normally sue both the Principal and the Secondary Debtors in the
same action.
GUARANTOR’S RIGHTS AFTER PAYMENT

Unless the Guarantor has waived his rights, he is entitled to be subrogated to all the
rights possessed by the Creditor in respect of the debt as soon as he has paid the
Creditor the debt due to him under the guarantee.

If the guaranteed debt is secured by a mortgage by the Principal Debtor, the

Guarantor is, on payment of the debt, entitled to a transfer of the Mortgage
notwithstanding that he was not even originally aware of its existence.

GUARANTEE AND INDEMNITY DISTINGUISHED

An indemnity is a contract by one party to keep the other harmless against loss, but a
contract of guarantee is a contract to answer for the debt, default or miscarriage of
another who is to be primarily liable to the promise. Under a guarantee the surety
provides a secondary obligation to the creditor, under an indemnity his obligation is
primary.

The distinction between the two types of obligation is explained in the case of
BIRKMYR V DANELL (1704) 1 SALK 27 at 28 as follows:

“ If two come in a shop, and one buys, and the other to gain him credit, promises the
the seller, if he does not pay you, I will; this is a collateral undertaking and void
without writing, by the Statute of Frauds: but if he says, Let him have the goods, I
will be your paymaster, or I will see you paid, this is an undertaking as for himself,
and he shall be intended to be the very buyer, and the other to act but as his
servant.”

Whether a contract is one of guarantee or of indemnity is a matter of construction. The

distinction is important for 2 reasons:
1. Contracts of guarantee but not contract of indemnity, are unenforceable by the
creditor if they do not comply with Section 4 of the Statute of Frauds1677 (must
be in writing and signed).

2. Liability of a guarantor is co-extensive with the liability of the principal debtor. If

the liability of the principal debtor to the creditor is unenforceable or has been
discharged, the liability of the surety depends on whether the contract is one of
guarantee or indemnity.