Suretyship is an aspect of contract law that is often misunderstood and can lead to underestimated legal implications. A suretyship can, for example, occur in an attempt to help another secure credit, a property through a lease, or as a business owner. You may innocently sign as surety without understanding the full implications of such an agreement. It may later come as a shock when you are dragged to court over their unfulfilled obligation.
What is a surety?
A surety is a person who takes responsibility to fulfil the obligations of the principal debtor in an agreement if such debtor fails to fulfil the obligations. This basically means that the surety undertakes to pay the debts of the principal debtor if they fail to make payment. One of the purposes of a suretyship is to protect the creditor from loss as they would have someone else to claim from besides the principal debtor.
In order for a surety to be held responsible for the debt, they must sign a suretyship agreement or agreement with a surety clause in. A suretyship is not valid unless it is in writing, signed by the surety and the principal debt must be clearly set out in the agreement.
A suretyship is also only valid if the principal debt is valid. This means that the surety cannot be held liable for the principal debtor's outstanding debt, if the debt is not actually owed. For example, debts generally prescribe after a period of three years if not claimed by the creditor. This means that if the principal debt has prescribed, the surety cannot be held liable to pay the outstanding debt.
Where are suretyship clauses found?
Different agreements, including lease agreements and loan agreements, may contain a suretyship clause. This means that a suretyship agreement does not necessarily appear in the form of a single standing agreement with a “suretyship agreement/deed” label, it may be in the form of a few lines in another agreement.
For this reason, employees and directors of companies should be cautious when signing documents on behalf of the companies they work for. For example, if the company is entering into a lease agreement, the landlord may insert a clause in the lease agreement indicating that the signatory on behalf of the company shall be bound as a surety for the company. The effect of such a clause would be that if the company fails to pay the monthly rent, then the employee shall be personally liable for the debt. An employee/director who does not want to be personally liable for the company's debt should ensure that the suretyship clause is removed from the agreement.
A person should also be careful and read the document when signing agreements as a third party. A possible scenario in this regard would be where someone is applying for a loan in their personal capacity, such as a student loan, the creditor may require a person who is more financially capable than the student to sign as surety. The implication would be that if the student fails to repay the loan, then the person who signed as surety may be called upon to pay the debt.
What happens when a suretyship is enforced?
The enforcement of a suretyship means that the surety may be taken to court to pay the debt of the principal debtor. Should the creditor be successful in court and the surety does not have the means to pay the debt, then the property of the surety may even be attached and sold off in auction to pay the primary debtor's debt.
What should be noted is that in the event the surety paid the principal debtor's outstanding debt, the surety will have the right to claim the amount from the principal debtor.
It is worthwhile being aware of how being married in community of property impacts a suretyship. The Matrimonial Property Act 88 of 1984 provides that a person married in community of property may not bind themself as surety without the written consent of their spouse. This consent is not required when the surety is signing the agreement in the course of business or trade. However, whether it was a business-related suretyship agreement or not, if the primary debtor fails to pay and the surety is taken to court, then the property of the surety's joint marital estate may be attached to satisfy the debt.
Conclusion
In the circumstances, signing as a surety for someone's obligations in an agreement may seem like a quick act of kindness, but the consequences can be dire. It is important for one to first of all ensure that you do not unintentionally sign an agreement as a surety, this requires reading before signing. Secondly, if you do intend to be bound as surety, you must understand the full implications and be willing to accept that you may indeed end up being liable to pay the debt.
Did you know…A surety undertakes to pay the debts of the principal debtor if they fail to make payment.