The concept of surety can be daunting and misunderstood. This often results in serious consequences if a party is ill-informed. Therefore, a person signing as surety needs to understand what they will be committing to and what they will be liable for should the debtor fail to satisfy its debts.
This article will unpack the crucial considerations when agreeing to suretyship.
Considerations When Drafting A Suretyship Agreement
When agreeing to a suretyship, it is essential to understand that the surety agrees to bind itself to the terms of the agreement. Should the debtor fail to honour the contract, they will take responsibility for the debt and be liable for payment.
There are two forms that a suretyship may take – unlimited liability or liability limited to a specific amount. If the suretyship is limited to a specific amount, the suretyship agreement needs to stipulate the particular amount payable.
By not being specific, the impact of the suretyship can be detrimental should the debtor fail to pay their debt. In addition, a debtor can potentially bind the surety in perpetuity for the principal debtor's obligations and secure the surety for debts. This will cause future liability or payment even when the surety no longer has any involvement or bond to the debtor.
On 3 June 2021, the South African Supreme Court of Appeal presided over the case of Van Zyl v Auto Commodities (Pty) Ltd (279/2020)  ZASCA 67;  3 All SA 395 (SCA); 2021 (5) SA 171 (SCA) (3 June 2021). The Supreme Court of Appeal held that even though the Companies Act 71 of 2008 , precludes creditors from bringing claims against the company after implementing a plan, the Act does not affect nor does it extinguish the liability of the surety for the debt.
As a result of the Supreme Court of Appeal judgment, it can now be said with certainty that section 154 does NOT affect or extinguish the liability of a surety for the debt. It merely deals with the consequences of implementing a Plan in terms of business rescue and it does not have an effect on the liability of a surety.
The Relationship Between The Surety And The Principal Debtor
When a surety pays the principal debt, they have the right to recover from the debtor the amount paid and any alternative interest or expense suffered in the process. A person signing as surety may approach a court for relief where a debtor refuses to pay him back for an expunged debt.
It is important when drafting a suretyship agreement, that the parties ensure their intentions are correctly reflected and that they are not signing anything that they do not 100% understand and agree to commit themselves to.
A misunderstanding of the implications of a suretyship agreement may result in unwanted contractual consequences.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.