Suretyship Agreement

Suretyship Agreement

A suretyship agreement is one in which a surety binds himself to a creditor for the debts of a third party, the principal debtor. The point of the agreement is to provide for security of a debt in the favour of a creditor in the event the debtor defaults. The surety’s obligation commences only if the principal debtor fails to fulfil its obligations.

What You Need To Know Before Signing A Suretyship Agreement:

  • Read the so-called fine-print;
  • It is pivotal to understand each aspect of the contract;
  • Recognise the risks involved;
  • Know the exact amount you are liable for and include interest (if applicable)
  • Term of the loan.
  • Any additional risks of liability eg. Legal fees.

At What Point Does A Debtor’s Debt Become Enforceable As Against The Surety?

  • A suretyship agreement cannot exist without a principal obligation. Therefore, the creditor can only claim the performance from the surety if the principal debtor fails to perform.
  • The intention of the Parties must be to conclude a Suretyship Agreement.
  • The General Law of 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.

What Happens When You Sign A Suretyship Agreement Without The Intention Of Binding Yourself As A Surety?

Although the 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 agreement contained within that document.

A surety seeking to be released from liability in terms of suretyship agreement will have to bear the onus of convincing the court that he had no intention of entering the suretyship agreement in issue.

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, such intention needs to be clearly stated and communicated to the other parties, ahead of signature. When signing 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 a surety you should initial next to your amendment of the contract and ensure that the creditor acknowledges this by way similarly initialling that change.

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 is obliged to be released (totally or partially) is where there has been a breach of a legal duty or obligation owed by the creditor to the surety that was required from the creditor in terms of the principal agreement (eg. Loan agreement) and/or the deed of 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 acted negligently and did not take the required steps the onus will again be on the surety.

Make sure you are aware of all the rights and obligations contained in a Suretyship Agreement before signing it. It is very difficult to be released later on as the discretion to do so lies squarely on the creditor.

It is essential to note the nature of the agreement, the extent of the debt, and for how long you can be held liable for same. It is equally important to ensure that you are released from any past suretyship agreements that may have been signed. They can potentially come back to haunt sureties long after they sign the suretyship agreement or long after the relationship between the surer and the principal debtor has been terminated.

It is important to seek legal advice if you have any hesitation in signing a Suretyship Agreement. Why not call us at Martin Vermaak Attorneys. We help people with things like this all the time.

 

 

Savannah Bailey

Paralegal