28/05/2026
Sri Lanka Supreme Court Rules Banks Can Sue Guarantors Directly Without First Proceeding Against Borrowers
Colombo, May 28 — In a significant judgment with major implications for banking and financial disputes in Sri Lanka, the Supreme Court has ruled that banks are legally entitled to initiate legal action directly against a guarantor without first filing action against the principal debtor, provided such a right has been clearly stated and agreed upon in the guarantee agreement.
The ruling was delivered in relation to an appeal filed by a guarantor challenging a previous decision of the Commercial High Court in favour of DFCC Bank PLC.
The case arose after DFCC Bank sought to recover more than Rs. 5.5 million, together with interest, from the defendant, Vithanage Happawana, who had signed as guarantor for credit facilities obtained by a company from the bank.
The guarantor argued before the courts that the company which obtained and benefited from the loan facilities should have been named as a party to the case and sued first before legal proceedings could be initiated against him personally.
However, the Supreme Court rejected this argument and reaffirmed that under Roman-Dutch law, while a surety or guarantor generally possesses the right to insist that the principal debtor be sued first, that protection can legally be waived through a contractual agreement.
Delivering the judgment, Justice Sampath Wijeratne stated that Clause 15 of the guarantee agreement signed by the guarantor expressly granted the bank the right to proceed directly against the guarantor without first taking action against the company that obtained the loan.
The Court further dismissed the guarantor’s defence that he had signed blank documents and was unaware of the contents of the guarantee papers. The judges observed that such a defence cannot ordinarily succeed unless the person signing the documents was illiterate, visually impaired, or otherwise incapable of understanding the nature of the transaction.
Accordingly, the Supreme Court upheld the earlier judgment delivered by the Commercial High Court and ruled that DFCC Bank PLC was entitled to recover legal costs incurred in both courts.
The three-judge bench of the Supreme Court hearing the matter comprised Justice Yasantha Kodagoda, Justice Shiran Gooneratne, and Justice Sampath Wijeratne.
Counsel Harith de Mel, together with Hasini Rupasinghe instructed by Chamithri Kaluhennadige, appeared on behalf of the guarantor.
President’s Counsel Kushan De Alwis, along with Kaushalya Nawaratne, P.C., and Sashendra Mudannayake instructed by Tejaka Perera, appeared for DFCC Bank PLC.
