Can a surety be released by the prejudicial conduct of a creditor?

“I agreed to stand surety for my brother-in-law in one of his business deals. He however failed to meet his obligations and the creditor sold off his beach house on an execution sale. However, the house was sold in my view for far less than it was worth and now there is a shortfall which the creditor wants me to stand in for. If they had sold his house for its full value, there wouldn’t be a shortfall. Surely I can’t be held responsible for the shortfall?”

Where assets are sold by a creditor at a fraction of its value, it does prejudice a surety. But, it does not automatically mean that the creditor acted unlawfully. There is no principle in our law that states that should a creditor’s actions in respect of the principal debtor prejudice a surety, the surety can be released from its obligations under the deed of suretyship. The only instance where a surety can be released (totally or partially) is where there has been a breach of a legal duty or obligation by the creditor that was required from the creditor in terms of the principal agreement (e.g. loan agreement) and/or the deed of suretyship. 

If, however, a creditor’s actions are in line with the provisions of the principal agreement and deed of suretyship, the prejudice caused is something that was consented to by the surety, as most deeds of suretyship require that the surety is bound as surety and co-principal debtor for the debts arising from whatever cause. The creditor’s actions can therefore not be seen as a breach of any obligation or legal duty and the surety will not be released from its obligations. Our courts have been very strict in recent judgments stating that sureties cannot expect to be released from a surety merely because there is a shortfall and the onus of proving that the creditor acted unlawfully vests with the surety. The rights of a surety against the creditor are also very limited, with the surety having a right of recourse against the principal debtor for any moneys paid on behalf of the principal debtor by the surety.

There is still a duty on any creditor to mitigate damages that are suffered and to take the necessary steps to ensure that the creditor does not contribute to the damages. Should a surety be of the opinion that the creditor did not take the required steps the onus will again be on the surety to prove that the creditor acted negligently and as a result of the creditor’s negligence, contributed to its damages. But proceeding with execution steps and selling assets on a public auction, is not in itself acting negligently and any proceeds realised from such a sale will be seen as the reasonable price of the assets. The onus that rests on a surety is therefore very high and in most instances, it may be easier for the surety to enforce its right of recourse against the principal debtor and not the creditor.

In your situation, unless the creditor failed to comply with a duty or obligation contained in the principal agreement or deed of suretyship and unless negligence can be clearly proven, it may be very difficult for you to avoid responsibility for the shortfall. I would advise consulting with your attorney to carefully review the contracts and facts of the matter.

July 14, 2017

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