In today’s world many of us will at one stage or another be requested to stand surety for another person’s or entity’s debt, either for a friend, family or as a director of a company. Before binding yourself as a surety one should have an understanding of the nature and consequences of a suretyship agreement
What is a suretyship?
A suretyship is an accessory contract by which one person undertakes liability for another’s debt or financial obligations. For example, when a student takes out a student loan, the bank will require the parent/s to sign as surety for repayment of the student loan, or when a private company applies for a loan, one or more of the directors usually sign as surety for payment should the company fail to pay.
A suretyship agreement normally comprises of three parties being the creditor (for example the bank), the principal debtor (for example the student) and the surety (for example the parent/s of the student). The Surety undertakes to the creditor that the principal debtor, who remains bound, will perform his obligation to the creditor and if the principal debtor fails to do so then the surety will indemnify the creditor. In simple terms the surety agrees to step into the principal debtor’s shoes, if and when the debtor can no longer fill those shoes financially.
What is a co-principal debtor?
In terms of most suretyship agreements the surety binds himself as surety and co-principal debtor. This means that the surety’s obligations are equal to those of the principal debtor and the surety will be jointly and severally liable to the creditor. A creditor can institute action directly against the co-principal debtor without having to first claim from the principal debtor.
What are the requirements for a Surety Agreement?
The General Law Amendment Act, 50 of 1956 provides that a valid suretyship agreement must be embodied in a written document signed by or on behalf of the surety. The existence of a principal obligation is a pre-requisite for a valid surety agreement. The creditor can only claim performance from the surety if there is a principal debt and the principal debtor fails to perform in terms of the principal obligation between himself and the creditor. It must also be the clear intention of the parties to enter into a suretyship agreement and the agreement must clearly identify the parties, the nature and amount of the principal debt as well as the extent and period for which the surety can be held liable
It is important to note that in terms of The Matrimonial Property Act, 88 of 1984, a spouse married in community of property may not bind him/herself as surety without the written consent of the other spouse. If a person married in community of property signs a surety without the written consent of his/her spouse, the suretyship will in most instances be invalid and unenforceable, unless such a suretyship is concluded in the ordinary course of his/her profession, trade or business.
The Rights of the Surety
Some of the most important rights available to a Surety are: :
The Benefit of Excussion
The benefit of excussion means the creditor is obliged to first claim and recover from the principal debtor before turning to the surety for payment of the debt or the part of the debt that remains unpaid.
The Benefit of Division amongst Co-sureties
In the instance where there is more than one surety and where the creditor claims payment of the whole amount or more than a surety’s allotted share then the surety can demand that the debt be divided between all the co-sureties so that each of them ends up paying only their allotted portion..
The Surety’s Right of Recourse
Where a surety has paid the debt of the principal debtor to the creditor, the surety is entitled to claim payment from the principal debtor of the amount that he/she has paid to the creditor.
The Right to Contribution by Co-sureties
A co-surety who has paid the debt is, by law, entitled to recover from each of the other co-sureties contributions of their allotted portions of the debt
What is the effect of the National Credit Act 34 of 2005 (“NCA”) on Surety Agreements?
A suretyship agreement is an important tool that credit providers use in limiting the risk of granting credit. It is therefore important to establish whether a suretyship agreement is a credit agreement in terms of the National Credit Act. Whether or not suretyship agreements will fall within the ambit of the NCA depends on whether or not the principal agreement is regulated by the NCA.
In the recent High Court decision of First Rand Bank Ltd v Carl Beck Estates (Pty) Ltd the court made an obiter remarked that the NCA applies to suretyship agreements and that it clearly falls within the definition of a “credit guarantee” as set out in section 8(5) of the NCA. However, it would only apply to a surety to the extent that the NCA applies to the underlying credit facility or credit transaction (principal debt) in respect of which the suretyship is granted.
Likewise, where the principal debtor in terms of the underlying credit agreement is not a “consumer” as defined in the NCA, the surety (even if he is also a co-principal debtor and in his own right constitutes a “consumer” for the purposes of the Act) would not be able to rely on the protection afforded by the NCA. If the NCA is applicable to a suretyship the surety would be able to rely on various protection mechanisms of the NCA, and would be entitled to raise defences afforded by the NCA such as “reckless credit lending”, or that the entire underlying credit agreement is unlawful. The credit provider would also have to follow and comply with the debt collection procedure set out in the NCA if it wished to enforce the credit agreement where the principal debtor has defaulted.
People should be wary of signing suretyship as you are taking responsibility for the payment of someone else’s debts. Once you have signed as surety it is very difficult to escape liability on the basis that you were not aware of the suretyship clause in the agreement. In terms of current case law a signatory to an agreement is obliged to familiarise himself of the contents of a document which he is signing. This confirms the Roman law expression caveat subscriptor meaning “let the signatory beware.), This however applies to anyone who enters into a contract, and not only to suretyships. It is therefore important that, in order to protect yourself, you should consult with an attorney before you take on the responsibility for someone else’s debts.