The low down on providing a surety

Many of us will during our lifetime be requested at some point to stand surety for another person’s debt. But binding yourself as a surety for someone else’s debt is a risk that should be approached with circumspection and not be entered into lightly, and where unavoidable, be approached with a full understanding of the nature and consequences of such a suretyship.

What is a suretyship?

A suretyship is an agreement between three parties being 1) the creditor, 2) the principal debtor and 3) the surety. In terms of this agreement, a surety in his personal capacity undertakes to fulfil the obligations due to the creditor by the principal debtor in the event that the principal debtor fails in whole or in part to fulfil the obligations himself.

What are the requirements and when does it become enforceable?

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. 

A suretyship agreement cannot however exist without a principal obligation. Therefore, the creditor can only claim performance of the obligation from the surety if there is a principal debt and the principal debtor fails to perform in terms of the principal obligation. 

It must also be the clear intention of the parties to enter into a suretyship agreement 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. 

What is a co-principal debtor? 

Most suretyship agreements bind the surety as surety and co-principal debtor, which means that the surety’s obligations are equivalent to those of the principal debtor and he is jointly and severally liable to the creditor. One of the potential consequences of signing as co-principal debtor results in the renunciation of the benefits of excussion. That means that the creditor need not recover the debt from the principal debtor first before enforcing the agreement against the surety. 

Do I need the permission of my spouse to act as surety? 

The Matrimonial Property Act, 88 of 1984, provides that a spouse married in community of property may not bind themselves as surety without the written consent of their spouse attested by two competent witnesses in respect of each such transaction. 

If a person married in community of property signs a surety without the necessary permission from their spouse, the suretyship will in most instances be invalid and unenforceable. 

The only exception to this rule is where someone who is married in community of property signs a suretyship in the ordinary course of their profession, trade or business. 

Is it possible to limit your liability? 

The only way to limit your liability is to satisfy yourself as to the identity of the other parties concerned, the nature and extent of the debt and the period for which you can be held liable. It is important to note that “continuing covering suretyship” clauses are often included in credit agreements. These can potentially bind the surety in perpetuity for the debts of the principal debtor, and bind the surety for debts that may become due any time in the future, even if that surety is no longer involved in any way with the debtor. It is further advisable to not sign as co-principal debtor where such can be avoided. 

Does the National Credit Act 34 of 2005 (“NCA”) apply? 

In Firstrand Bank Ltd v Carl Beck Estates (Pty) Ltd the court stated that the NCA could apply to suretyship agreements and that it clearly fell within the definition of a “credit guarantee” as set out in section 8(5). 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. 

Furthermore, where the principal debtor in terms of the underlying credit agreement is not a “consumer” as defined in the NCA, the surety 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, i.e. raising the defence that the credit guarantee itself amounts to “reckless credit lending”, or that the entire underlying credit agreement is unlawful. The credit provider would also have to follow the special debt collection procedure set out in the NCA if he wished to enforce the credit agreement where the principal debtor has defaulted.

From the above it should be quite clear that a suretyship is a binding obligation that should be understood and approached with caution, so make sure you obtain legal advice before you enter into any suretyship agreement.

April 14, 2015

Sign up to our newsletter

Pin It on Pinterest