LEGAL PRINCIPLE: CONTRACT LAW – Illegality – Contracts Prohibited by Statute – Effect on Guarantee
PRINCIPLE STATEMENT
The implication of the voidance is that neither party can seek the benefit of the guarantee provided by Central Bank of Nigeria under Act 20 of 1977 because the illegality of either party estopped it from enforcing the guarantee agreement. It is the guarantee agreement which is void and unenforceable because of the deceit of the two, principal debtor and creditor which has resulted in an illegal contract.
RATIO DECIDENDI (SOURCE)
Per Achike, JSC (quoting Salami, JCA), in Pan Bisbilder Nigeria Ltd. v. First Bank of Nigeria Ltd. (2000) NLC-1141991(SC) at p. 6; Paras B–D.
"The implication of the voidance is that neither party can seek the benefit of the guarantee provided by Central Bank of Nigeria under Act 20 of 1977 because the illegality of either party estopped it from enforcing the guarantee agreement. It is the guarantee agreement which is void and unenforceable because of the deceit of the two, principal debtor and creditor which has resulted in an illegal contract."
EXPLANATION / SCOPE
Illegality in the underlying contract renders related guarantee agreements void and unenforceable. Neither party can enforce the guarantee where the principal agreement is illegal. The guarantee derives from the principal contract; its validity depends on the legality of the underlying transaction. Illegality estops both parties from seeking benefit under the guarantee. The taint of illegality extends to ancillary agreements. This prevents parties from circumventing illegality by enforcing collateral contracts. The entire transaction collapses where illegality infects the principal obligation. The court will not enforce any part of an illegal scheme, including guarantees.