Online Reporter
Trust Maanda
Legal Position
IN most commercial agreements, the lender normally seeks some assurance that the debt it lends to the borrower will be repaid.
In that case the lender enters into an agreement with a third party who binds himself or herself as the guarantor or surety of the debtor so that if the debtor fails to pay the loan, the third party known as surety or guarantor, will be bound to pay what the borrower has failed to pay.
This agreement is a suretyship agreement. A deed of suretyship is an agreement that is concluded by a creditor and a third party who interposes to fulfil the obligations of the borrower or principal debtor. The surety undertakes to be liable to the creditor for the due performance by the debtor of his or her obligations in terms of the principal debt.
Deeds of suretyship are often used in circumstances where a company borrows and the bank for example, requires security for the company’s performance in terms of the agreement. Normally banks require the directors of the company to personally bind themselves as sureties of the company.
In that case if the company defaults, the directors become personally liable to the bank.
In Fourlamel (Pty) Ltd v Maddison 1997 (1) SA 33, the court held that in order to constitute a valid and binding deed of suretyship, factors such as the identities of the surety, the principal debtor and the creditor and the rights and obligations of the parties ought to be laid out in writing. The agreement must state the rights obligations of the parties. The obligations of the debtor must be clearly stated so that the surety will be bound to fulfil what the debtor would have failed to fulfil. The cause of action must be one in respect of which the surety assumed liability. A suretyship agreement to comply with one obligation cannot be for the surety to perform other obligations of the debtor which are not in terms of the suretyship agreement. The cause of action must be one that emanates from the suretyship agreement.
The surety’s liability cannot exceed that of the principal debtor.
The amount of the principal debt must be stated or capable of ascertainment by reference to the deed of suretyship.
For the surety to be binding, the principal debtor must be indebted so that a surety shall only be liable if and when the principal debtor is in default.
Sometimes a suretyship agreement stated the limit of the money that surety should pay. Where there is no limit, the surety is liable for the whole amount owed to the creditor by the debtor. Where the surety guarantees and binds herself as surety “for the repayment on demand of all sum or sums of money which the Debtor may now or from time to time hereafter owe or be indebted in to the said Bank the guarantee is unlimited. It can be unlimited guarantee if a specific amount had been. Indeed, it is clear that the word unlimited does not even grammatically accord with the sentence in which it is inserted, as that space would be relevant where there is a specific figure to be filled in.
The words preceding the blank space illustrate that space is meant for a specific sum of money to be inserted if there is one agreed upon. In a suretyship agreement, there are three parties: the creditor, the principal debtor, and the surety.
The surety assumes liability for the principal debtor’s obligation. If the debtor defaults, the creditor can pursue the surety for payment. A suretyship agreement may provide that the surety bind themselves as surety and coprincipal debtors, if that is the agreement, the surety becomes liable together with the principal debtor. The creditor does not need to pursue the debt with the principal debtor first before pursuing the surety. This means that whenever the debtor has defaulted, the surety becomes immediately liable like they were the principal debtor. The creditor does not need to exhaust
There is a slight difference between a guarantor and a surety. Unlike a guarantor who may only be liable after the creditor has tried to collect from the debtor and executed against his property, a surety is often directly and secondarily liable, meaning the creditor can go to the surety directly if the debtor fails to pay.
Banks normally make the surety bind themselves as co-principal debtors. This way, the bank does not need to exhaust its claim against the debtor in the first place, before pursuing the surety.
A suretyship agreement, like any other contract can be cancelled. The parties can transfer the suretyship agreement to another party who takes over the liability of an existing surety.
Trust Maanda is a legal practitioner and a partner at Maunga Maanda And Associates. He writes in his personal capacity. He can be contacted on +263772432646
