The nature and scope of suretyship as it relates to prescription in South Africa

Credit agreements are a key component of modern day economies and legal systems. These credit agreements (obligations) can be created by a delict, enrichment or contract, amongst others. A creditor may require some form of security in the event that the debtor is unable to pay. A surety is this form of personal security, and it occurs when a creditor requires a third party to contractually bind him/ herself for the fulfilment of the obligation. The debtor may also bind his assets as security for the debt, which is known as real security.

Suretyship is accessory in nature, which is what differentiates it from other contracts of indemnity such as insurance. This means that suretyship only comes into being if there is a valid principle debt, or primary obligation. The accessorial nature of suretyship, coupled with the fact that it is a separate contract from that of the primary obligation, has been a contentious issue in as far as it relates to prescription.

 

In Liberty Group Limited v Illman (1334/2018) [2020] ZASCA 38 (16 April 2020), the Supreme Court of Appeal (hereinafter the SCA) had occasion to hear once again such a contention.

 

In this case an insurer entered into a broking agreement with ECE Financial Holdings hereinafter ECE), in terms of which the latter was to act as an intermediary for the insurer’s products. In return for its services, ECE would be paid commission as compensation on premiums received by the insurer. The said commission was paid by the insurer before receiving any premiums.

 

Eight individuals signed separate but identical contracts of suretyship, in terms of which they bound themselves as sureties and co-principle debtors in solidum with ECE for the payment to Liberty of all monies which the former could in future owe to the latter.  The contracts in terms of which commissions were advanced to ECE either lapsed, were cancelled or terminated because of non-payment of premiums to Liberty. This meant that the commissions which Liberty had paid to EC” in advance became repayable by ECE in terms of the agreement, and by the sureties in terms of the deeds of suretyship. The agreement between the insurer and ECE was subsequently terminated.

 

On 22 September 2011, the insurer issued summons against all the sureties for the repayment of the commission. The insurer proceeded to serve the summons on one of the sureties,
John September, on 29 September of the same year.

 

The summons was only served on the defendant, another one of the sureties, five years later. The defendant stated that the claim had prescribed. The insurer rebutted this by stating that service of summons on Mr September within the prescription period interrupted the running of prescription in favour of EC” and everyone else who had bound themselves as co-principle debtors, which included the defendant. The SCA rejected this argument, stating that the fact that the surety had bound himself as a co-principle debtor did not mean that the surety had assumed the responsibility to carry out the principle debtor’s obligation. The surety merely undertakes to indemnify the creditor only in the event the principle debtor fails to discharge his obligation.

 

The SCA conducted an analysis of three of its previous judgments in order to arrive at its decision. It firstly analysed Jans v Nedcor Bank Ltd [2003] 2 All SA 11 2003 (6) 646 (SCA), (hereinafter referred to as Jans). In Jans the court had to consider two opposing views on the effect of a surety binding himself as a co-principal debtor.

 

The one view was that it had the effect of making the surety jointly and severally liable with the principle debtor, and prescription would begin to run in favour of both at the same time. The surety would not be liable to the creditor in any capacity other than that of surety, who had renounced the benefits ordinarily available to him against the creditor.

 

The conflicting view emphasised that the surety’s liability was accessory to that of the principle debtor, regardless of the fact that it is based on a separate contract, and that the surety’s obligation only serves to guarantee performance by the principle debtor. This view reiterated that, because of the accessory nature of suretyship, it similarly ceases to exist when the principle debt ceases to exist.

 

The SCA then analysed Kilroe-Daley v Barclays National Bank [1984] 2 All SA 551 1984 (4) SA 609 (A) (Kilroe-Daley). In this case, the accessorial nature of suretyship to the principle agreement was accentuated. The use of the words ‘principle debtor’ did not convert suretyship into any other form of contract.

 

Lastly the SCA considered Neon and Cold Cathode Illuminations (Pty) v Ephron [1978] 2 All SA 1; 1978 (1) SA 463 (A), (Neon). In Neon the court held that the exclusive consequence of a surety binding him/ herself as a principle co-debtor is that the surety renounces the convenience of excussion and division, and becomes liable with the principle debtor jointly and severally. However, he does not become a co-debtor.

 

South Africa’s jurisprudence is clear on this. A surety and co-principle debtor do not undertake a separate and independent liability as a principle debtor. The inclusion of ‘co-principle debtor’ does not transform suretyship into any other form of indemnity contract. The surety does not become co-debtor with the principle debtor, nor with any of the other co-sureties and co-principle debtors, unless there is an agreement to that effect.

 

This judgment is a desirable reminder to firstly refrain from conflating co-principle debtor to co-debtor. Secondly, this case has re-affirmed the accessorial nature of suretyship, and finally, that the period of prescription is calculated in relation to the principle debt, and should that claim prescribe, so too does the surety agreement, which is actually meant to indemnify the creditor should performance by the principle debtor go south.

  

www.vdt.co.za |012 – 452 1300 |info@vdt.co.za

 

This article is intended for information purposes only and is a brief exposition of the abovementioned legal position. Mention is not necessarily made of all the finer nuances as set out in the abovementioned legislation. This article should under no circumstances be construed as formal legal advice.

© VDT Attorneys

August 25, 2020
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