What is a "suretyship‟?
A suretyship involves three parties being the creditor, the principal debtor and yourself, as the surety. It is a contract between the creditor and the surety, in his personal capacity, in terms of which the surety 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. In essence, the surety agrees to step into the principal debtor‟s shoes, if that debtor can no longer fill those shoes financially, so to speak, vis-à-vis his creditor.
At what point does a debtor’s debt become enforceable as against the surety?
- A suretyship agreement cannot exist without a principal obligation. Thus the creditor can only claim the performance of the obligation from the surety if the principal debtor fails to perform in terms of the principal obligation.
- The intention of the parties must be to conclude a suretyship agreement.
- The General Law Amendment Act 50 of 1956 provides that a valid suretyship agreement must be embodied in a written document.
- The parties must agree on the extent to which the surety accepts liability and the period for which the surety can be held liable.
In practice most suretyship agreements make provision for the surety to bind himself as surety and co-principal debtor. In such instances, the surety‟s obligations are equivalent to those of the principal debtor and he is jointly and severally liable to the creditor. A consequence of signing as both surety and co-principal debtor results in the renunciation of the benefits of excussion. This means that the creditor need not seek to recover the debt from the principal debtor first before enforcing the agreement against the surety, a particularly onerous arrangement for the surety / co-principal debtor.
What happens when you sign a suretyship agreement without the intention of binding yourself as a surety?
Although the formulated intention to enter into a suretyship agreement is a requirement of a valid suretyship agreement, general contract law principles dictate that it is presumed that anyone who signs a document has the intention of entering into the agreement contained within that document (the caveat subscriptor principle). Therefore the court in the case of Langeveldt v Union Finance Holdings (Pty) Ltd 2007 (4) SA 572 (W), discussed that a surety seeking to be released from liability in terms of a suretyship agreement will have to bear the onus of convincing the court that he had no intention of entering the suretyship agreement in issue.
In a similar vein, the Supreme Court of Appeal held in the recent judgment of Slip Knot Investments 777 (Pty) Ltd v Du Toit 2011 (4) SA 72 (SCA), that a person who was induced to sign a suretyship agreement by fraud or by the misrepresentation of a third party, and who is unaware of the nature of the document he is signing, will nevertheless be bound to the agreement if the lender is innocent and unaware of the surety‟s mistake. The lender would in such a case be entitled to rely on the appearance of liability created by the surety‟s signature, and the surety would not be entitled to rely on his unilateral mistake to escape liability under the agreement.
In terms of this SCA judgment, therefore, where a surety has signed a suretyship agreement with a creditor based on the fraud or misrepresentation of a third party, which is unbeknown to the creditor, the creditor has a valid and enforceable suretyship agreement.
What happens when a suretyship clause is included in an agreement that is yet to be signed?
Should you not wish to bind yourself as a surety and co-principal debtor, such intention needs to be clearly stated and communicated to the other parties, ahead of signature. When signing a contract on behalf of a juristic person, which contains a suretyship clause, it is not sufficient to merely draw a line through the clause and then sign the contract. To reinforce your intention of not binding yourself as surety you should initial next to your amendment of the contract and ensure that the creditor acknowledges this by way similarly initialling that change. This is particularly important where contracts include a “whole agreement” clause that requires any edits to be reduced to writing and acknowledged by all parties.
Whilst it is important that the minds of the parties to an agreement meet, a court will place emphasis on the fact that you may have lead the other party to believe that you were intending to bind yourself as surety and co-principal debtor, if you have not explicitly indicated otherwise in the agreement.
Should you ever find yourself in a situation in which you are called upon to stand as surety for another party, make sure you satisfy yourself as to the identity of the parties concerned, the nature and extent of the debt and the period for which you can be held liable. In this regard, it is worth noting that “continuing covering suretyship” clauses are often included in credit agreements, in relation to the surety. These can potentially bind the surety in perpetuity for the debts of the principal debtor, so binding 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. A practical example is where an MD of a company binds himself as surety in perpetuity for that company‟s debts in relation to a particular supplier or service provider in the face of a suretyship in perpetuity. In such an instance, that surety can successfully be held to a suretyship agreement, even after he leaves the employ of the said company – a most unpleasant surprise that potentially lies in waiting for the unsuspecting surety, long after signature of the initial suretyship agreement.