WHAT IS A “ SURETYSHIP” ?
A surety involves three parties, the creditors, the principal debtor and the surety.
It is a contract between the surety and the creditor in terms of which the surety binds himself to perform the obligations of the principal debtor to the creditor, if principal debtor fails in whole or in part to fulfil the obligations.
Suretyships are used by creditors, in every day business practice, to decrease their exposure or to limit their risk when contracting with a principal debtor.
WHAT ARE THE REQUIREMENTS FOR A VALID SURETYSHIP?
Suretyship is a contract and as such the principles of contract law applies to suretyships.
Section 6 of the General Law Amendment Act 50 of 1956 is applicable to suretyships as reads as follows:
“No contract of suretyship entered into after the commencement of this Act, shall be valid, unless the terms thereof are embodied in a written document signed by or on behalf of the surety…”
The above section clearly states that the “terms” of the suretyship must be embodied in a written document and it has been accepted that these “terms” refers to:
The identity of all parties (creditor, principal debtor and surety); and
The nature and amount of the principal debt.
It is important to note that all three parties must be different parties as a person cannot stand surety for his own debt.
Further to the above, for a valid surety to become binding the intention of the parties to conclude a suretyship agreement must be clear and the parties must agree on the extent to which the surety accepts liability and the period for which the surety can be held liable.
Lastly, a valid suretyship contract cannot exists without a principal debt existing. In other words, a creditor can only claim from a surety if a valid suretyship contract was entered into between the surety and creditor in terms of which the surety binds himself to fulfil the principal debtor’s obligation if he fails to do so.
WHAT IS THE EFFECT OF BINDING YOURSELF AS SURETY AND CO-PRINCIPAL DEBTOR?
In terms of common law, the creditor is required to firstly claim and recover the debt from the principal debtor before the creditor can proceed against the surety.
However, this is not the case in every day practice as most creditors require the surety to sign not only as surety but also as the co-principal debtor.
Binding yourself as both the surety and co-principal debtor has to effect that you renounce the common law defence and benefit of excussion and division. In this event that surety and principal debtor will be jointly and severally liable for the debt and the creditor will not be obliged to claim and recover from the principal debtor first as the principal debtor and surety will be equally liable for the debt.
In this “suretyship” issue::
- What is a “suretyship” ?
- What are the requirements for a valid suretyship?
- What is the effect of binding yourself as surety and co-principle debtor?
- Possible defences to a claim based on suretyship
POSSIBLE DEFENCES TO A CLAIM BASED ON SURETYSHIP
In the event of a creditor instituting a claim against a surety, the surety is entitled to raise any of the defences to which the principal debtor would have been entitled to.
These defences can inter alia relate to:
The delivery of goods, in a case involving goods sold and delivered;
The rendering of services, in a case involving services rendered;
The quantification of damages and/or the amount claimed; and/or
Any other defence(s) to which the principal debtor would have been entitled to.
The surety can also have a possible defence based on the suretyship contract itself if it does not comply with the requirements as set out in Section 6 of the General Law Amendment Act 50 of 1956, in that the suretyship omits an essential term.
The Courts have however stated that the doctrine of incorporation applies to suretyships and thus if the suretyship contract omits an essential term, but the term is contained in a different document or agreement, the said document or agreement can be incorporated into the suretyship contract.
It is also important to remember that oral evidence can be led regarding the identity of the parties, if this term or element is unclear from the suretyship contract itself.
Although not a defence against a claim instituted by the creditor, the surety must keep in mind that in the event of the creditor claiming fulfilment of an obligation by him, he will have a claim against the principal debtor.
The Honourable Judge Levenberg, quoted Caney’s The Law of Suretyship, 5th ed. in the matter of Boshoff, P.J. vs Propinvest Eleven (Pty) Limited and stated:
“It is trite law that: “The surety who has paid the debt of the principal debtor to the creditor has a right of recourse against the debtor; he is entitled to reimbursement by the principal debtor of what he has paid the creditor.”