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A Bank Guarantee is a financial instrument designed to provide security and mitigate risk in business transactions by creating an independent obligation on the bank to pay the beneficiary upon first demand. A Bank Guarantee is a financial arrangement provided by a lending establishment. It can be seen as a written tripartite contract granted by a bank, on behalf of its customer, and in relation to its commercial contract with a third party. By the issuance of this guarantee, the requisite bank takes responsibility for the payment of money in case of non-performance of contractual obligations by its customer towards the third party.
There are primarily two types of Bank Guarantees that exist within the scope of law, which are Conditional Guarantees and Unconditional Guarantees. In a conditional Guarantee, the bank (guarantor) makes the payment only after the requisite conditions for invocation are fulfilled. Whereas in unconditional Guarantees, the guarantor makes the payment of the Guarantee to the beneficiary on the simple invocation of the bank guarantee, devoid of any prerequisite conditions. However, this payment obligation is governed by the principle of autonomy, which insulates the bank from disputes arising in the underlying commercial contract.[i]
Conversely, an arbitration clause in that same contract mandates that all disputes between the principal parties must be resolved through arbitration rather than litigation. Such clauses are governed by the Arbitration and Mediation Act, 2023 (AMA), and are generally enforced by courts.
In Nigeria, a valid arbitration agreement requires a written clause or separate agreement. Courts are obliged to give effect to it: where a party sues despite an arbitration clause, the other party may ask the court to stay proceedings and refer the matter to arbitration. Therefore, arbitration clauses are binding on signatories and enforceable under Nigerian law, unless shown to be void or inapplicable.
This article seeks to examine how arbitration clauses affect the enforcement of Bank Guarantees in Nigeria and whether an arbitration clause can limit a beneficiary’s right to call on a Bank Guarantee, and under what conditions.
BANK GUARANTEES UNDER NIGERIAN LAW
A Bank Guarantee is essentially a contract of guarantee or suretyship, involving three parties: the creditor (beneficiary), the principal debtor (customer of the bank), and the guarantor (the bank). Unlike a traditional Contract of Guarantee, which creates a secondary obligation on the guarantor to pay a debt only if the principal debtor defaults, a Bank Guarantee imposes a direct and primary obligation on the bank itself. This instrument is treated as a distinct and separate legal contract from the main commercial agreement it secures.[ii]
In practice, Nigerian courts treat a Bank Guarantee as a solemn undertaking and a contract under seal obliging payment. In Nwosu v Zenith Bank Plc (2015)[iii], the Court of Appeal summarized the classic rule for on-demand guarantees: “A bank guarantee shall effect payment on demand by the beneficiary giving a written statement that the principal has failed to perform his obligations. Such a written statement will be the sole condition for the guarantor to pay under the guarantee. The guarantor will not take additional steps to determine any facts or documents relating to the underlying contract…” In enforcement, the beneficiary can sue the guarantor directly, and a creditor can enforce the guarantee against the guarantor alone.
THE EFFECT OF ARBITRATION CLAUSES ON THE RIGHTS OF PARTIES UNDER BANK GUARANTEES IN NIGERIA
An arbitration clause is an agreement within a contract that disputes will be resolved by arbitration rather than by litigation. Under Nigerian law, arbitration agreements must be in writing and express the parties’ consent to arbitrate. They are strictly construed and generally enforced: absent fraud or unconscionability, courts will honor the parties’ choice of arbitration. In effect, a party sued in breach of an arbitration agreement can compel arbitration and halt the court case.
Legally, an arbitration clause is treated as separable from the contract; even if the main contract is set aside or frustrated, the arbitration agreement survives unless it too is specifically voided. This ensures that a clause covers all disputes connected with the contract if the clause is broadly worded. The arbitration clauses create a binding process, precluding resort to courts for covered disputes. The key issue is whether an arbitration clause (and its requirement of arbitration) can restrict a beneficiary’s enforcement rights under a bank guarantee. The answer depends on what agreement contains the clause and who has consented to it.[iv]
Another effect of arbitration clauses is the mandatory stay of proceedings. The AMA 2023 now mandates that a court must stay its proceedings and refer the parties to arbitration if a valid arbitration agreement exists. The only exceptions are if the agreement is found to be null and void, inoperative, or incapable of being performed. This means the guarantor (bank) and the beneficiary, both signatories of the guarantee, must arbitrate their disputes unless there are valid exceptions not to arbitrate.[v]
An underlying arbitration clause does not give the bank a defence. Only an arbitration clause within the Bank Guarantee would compel the beneficiary to arbitrate that particular claim.[vi]. This means that where the guarantee stands alone and includes no arbitration provision, the beneficiary remains free to enforce the guarantee by court action or demand. Nigerian courts have emphasized the beneficiary’s independent rights under a guarantee. The beneficiary’s right to call on the guarantee and the bank’s obligation to pay are intact, even if the underlying dispute may have to be arbitrated between the original contracting parties.
In Nigeria, Bank Guarantees are treated as independent contracts whose enforcement is largely unaffected by arbitration clauses found in other agreements. A beneficiary of a Bank Guarantee can enforce it directly on demand once the guaranteed default occurs. An arbitration clause in the underlying contract will not bar the beneficiary from suing on the guarantee, but only when the guarantee document itself contains an arbitration clause; then the courts will stay out of litigation as provided for under the AMA 2023.[vii]
[i] Investigating The Impact Of Arbitration Clauses In Contractual Agreements, accessed August 15, 2025, https://omaplex.com.ng/investigating-the-impact-of-arbitration-clauses-in-contractual-agreements/
[ii] A complex matter: Bank guarantees and arbitration agreements – Wolters Kluwer, accessed August 15, 2025, https://legalblogs.wolterskluwer.com/arbitration-blog/a-complex-matter-bank-guarantees-and-arbitration-agreements/
[iii] Nwosu v Zenith Bank Plc (2015) NWLR (PT.1464) 314
[iv] AUTONOMY OF CONTRACT OF BANK GUARANTEE WILL NOT APPLY WHEN THERE IS FRAUD | ALP | A leading corporate commercial law firm in Lagos, Nigeria, accessed August 16, 2025, https://www.alp.company/resources/case-digests/case-digest-banking-bank-guarantee-autonomy-contract-bank-guarantee-will-not
[v] Stay Of Proceedings Pending Arbitration: Protecting the Interests of Third Parties to Arbitration In Nigeria. accessed August 15, 2025, https://jsdlp.ogeesinstitute.edu.ng/index.php/jsdlp/article/view/302?articlesBySimilarityPage=2
[vi] Guarantee Contracts in Nigeria – IIARD, accessed August 17, 2025, https://www.iiardjournals.org/get/JLGP/VOL%201/GUARANTEE%20CONTRACTS%20IN%20NIGERIA.pdf
[vii] The Arbitration and Mediation Act of 2023. Accessed August 16, 2025, https://www.gelias.com/images/Newsletter/Review_of_the_Arbitration_and_Mediation_Act_2023_Article.pdf
Written by Olufe Popoola & Olatunji Bamidele for The Trusted Advisors
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