Contractual Law

Understanding Suretyship Agreements: Protecting your interests

August 2, 2023 By Press Office

In our daily lives, we enter into agreements or loans that require our signature. Often more than not, we do not take the time to understand what we are agreeing to by signing on the dotted line. A common agreement in many financial or loan transactions is a suretyship agreement.

What is a suretyship agreement?

“Suretyship” is an accessory contract by which a person (the surety) undertakes to the creditor of another (the principal debtor), that the principal debtor, who remains bound, will perform his obligation to the creditor and, additionally, that if and so far as the principal debtor fails to do so, the surety will perform it, or failing that, indemnify creditor.”

Essentially, a surety agreement is a legally binding promise by one party to take responsibility for another party’s debt if the borrower defaults. a person can choose to agree to be a surety for a portion of the debt or to be a surety and co-principal debtor which is to be jointly and severally liable with the principal debtor. This means in the event of default by the debtor, the creditor/ the bank can elect to sue the debtor or sue the debtor and the surety or sue the surety alone.

In Makuluba v National Development Bank (NDB) and Others, Masunga Meat Market (Pty) Ltd (the Meat Market) had failed to honour its payment commitments to NDB. NDB instituted legal action against Makuluba and 2 others in their capacity as sureties to the Meat Market. Makuluba argued that as NDB had taken security in the form of immovable property belonging to the Meat Market, NDB was obliged to first execute against the security before it can bring any action against him as a surety. The High Court held that Makuluba had not just bound himself as a surety but also as a co-principal debtor and had renounced the benefit of excursion. By renouncing the benefit of excussion, NDB was permitted to pursue the surety before realising any security held by NDB.

This raises a question of benefits and exceptions that are available to sureties and what it means to waive or renounce them. Let’s consider some key exceptions and benefits common in surety agreements:

Exception non numeratae pecuniae: This is the defence that sums of money claimed were in fact never advanced to, or received by or on behalf of, the debtor. This means that a defendant can claim that the plaintiff has not paid the money to him and that therefore the obligation is not owing.
Exception non-causa debiti: This is the defence that there is no cause or reason for the obligation.
Exception – error calculi: This is the defence that the amount claimed has been incorrectly calculated.
Exception – revision of accounts and no value received: These exceptions entitle the debtor to a revision of accounts.
Benefit -excursion: This is a benefit open to a surety by which he can compel the creditor to proceed against the principal debtor first and obtain all he can from the debtor’s estate before proceeding against the surety.
Benefit – divisionis: the right of a surety sued by a creditor to compel the creditor to also sue the co-sureties. This right also ensures the surety is liable only for his or her proportionate share of the debt.
Benefit – de doubus vel plubris reis debendi: This benefit applies when there are two or more principal debtors who are jointly liable but not severally which means each debtor is liable for his own portion of the debt. This benefit can be called upon by a debtor in instances where the creditor claims the whole debt from such a debtor.

The above exceptions and benefits where they have not been renounced or waived by a surety, can be used as defences to any claim brought against them. Once the above exceptions and benefits are renounced or waived, they are no longer available to the surety and entitle the bank/creditor to, for instance, pursue the surety before exhausting all security granted by the principal debtor as was done in the case of Makuluba.

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Should you require any assistance with the implications and application of the surety agreements please feel free to contact us at info@peolegal.co.bw or +267 3975779.

The information contained in this Legal Brief was intended for our clients and correct to the best of the author’s knowledge at the time of publication. Before making any decision or taking any action, you should consult the contacts listed here.

CONDITIONAL CONTRACTS: WHAT YOU NEED TO KNOW

July 25, 2023 By Press Office

Did you know that not every contract comes into force or effect on signature?

Some contracts are subject to conditions which can either suspend their coming into force until a later date or the occurrence of the condition can extinguish or terminate the contract on the occurrence of a future event.

Here are some conditions you need to be aware of:

Condition Precedent (Suspensive Condition)
A condition precedent is a clause in a contract that provides that the performance of the contract or certain obligation will only come into effect on the completion or waiver of a future uncertain event within an agreed time period. Therefore, assuming the essential elements of a contract have been satisfied, a binding contract may be formed but the performance of the contract or certain obligations in the contract will only become due on the fulfilment or waiver of the condition precedent.

Examples of conditions precedent
– Obtaining regulatory approvals- e.g., Competition and Consumer Authority, Botswana Stock Exchange
– Obtaining change of control approvals- required in terms of contractual terms or licensing requirements
– Securing of bank funding
– Obtaining Botswana Unified Revenue Service clearance

2. Condition Subsequent (Resolutive Condition)

A condition subsequent is a clause in a contract which has come into force, which provides that on the occurrence or non-occurrence of a future uncertain event, the contract or a specific clause in a contract will terminate. From the onset, the parties agree that the contract is effective and in force, but should an agreed event happen or not happen at an agreed time, the contract or certain clauses will terminate.

Examples of conditions subsequent
– registration of a lease in notarial form
– regularisation of non-material regulatory submissions
– regularisation of a company’s minute book

It is critical to understand the types of contracts, their conditions and their effects before making any decision or taking any action.

Should you require any assistance please feel free to contact us at info@peolegal.co.bw or +267 3975779.

The Four Essential Elements of a Contract. – What you need to know

July 6, 2023 By Press Office

A contract is a promise that is legally binding. It can be written or oral. When two parties make a contract, one party agrees to do something for the other in exchange for something of value. For a contract to be considered legally binding, it must include four key elements, namely, offer, acceptance, consideration, and the intention to create legal obligations.

It is worth noting that an offer and acceptance do not have to be separate or formal. In most cases, people contract by signing a document with the agreed terms or by one party making an offer that the other party accepts. Acceptance can be expressed through words or actions. Because of this, it is essential to be aware of what makes a contract. You should be careful not to unintentionally bind yourself to an agreement by your actions or conduct when the intention was to only agree on initial negotiation terms.

What are the four essential elements of a contract?

Offer

An offer is a promise by one party to enter into a contract based on specific terms. To be a valid offer, the offer must be firm, complete, clear, certain, capable of being accepted and made with the intention of being bound on acceptance.

Many disputes arise because people fail to draft a comprehensive written document and no lawyers are involved in the negotiation process.

Practical tips –

Use a single document: Set out the entire details of understanding between the parties in one document. Include a clear “entire agreement” clause to ensure the document represents the entire understanding between the parties.
Approach offers carefully: Unless using corporate standard terms and conditions- avoid sending out offers which can be immediately accepted. Instead, send out an invitation to negotiate and wait for the other side to make the offer.
Share unsigned agreements: Avoid sending out signed agreements, provide a blank agreement that requires your counter signature to become binding.
Apply caveats: Use caveats such as “subject to contract” to avoid any negotiations being interpreted as a formal offer. This helps avoid misunderstandings and assumptions.
Establish expiration dates: Binding offers should have a clear expiration date. This ensures that the offer remains valid only for a set period.
Specify a particular manner of acceptance – Clearly state the preferred method in which the other party must accept the offer. Whether written response, email, or other means, clarity in acceptance methods reduces confusion and potential disputes.

Acceptance

Acceptance refers to the final and unambiguous agreement to the terms of an offer. An offer must be accepted exactly as stated for it to form an agreement. An acceptance can be explicit or implied. An express acceptance is an affirmative statement by the offeree (person who accepts or declines) that they accept the terms of the offer. An implied acceptance is when the offeree takes some action that indicates their acceptance of the offer e.g., where a supplier does not communicate acceptance but delivers the goods per the order and requests payment.

However, it is important to note that if a party accepts an offer but introduces changes to the terms or rejects certain terms, a contract is not formed as the offer has been rejected. In such cases, a counteroffer has been made and the counteroffer is open for acceptance or rejection.

Practical tips: –

Acceptance by intended recipient: The acceptance must be by the person to whom the offer was originally made. This cannot be accepted by someone else on their behalf
Follow prescribed forms: Acceptance must be in the prescribed form (if any)
Avoid conditional acceptance: Do not accept an offer (whether expressly or by conduct) with the hope that some unacceptable terms in the offer can be renegotiated later. Once accepted the offer is binding
Ensure clear and unambiguous acceptance: Once you are satisfied with the terms make sure your offer is unequivocal- do not turn the acceptance into a counteroffer by adding additional terms.

Consideration

A contract is based on the notion of reciprocity- one party cannot enforce a promise unless it has given or promised something in return. This, in legal terms, is called “consideration.” Consideration can be of any value, even if it is not equal to the promise made. It is important to note that the parties are free to make a deal that may not be beneficial to one side. In some cases, as in employee non-compete agreements, the courts may consider the fairness of the consideration.

Practical tips:

Be clear on the consideration: Always make sure the contract clearly states what consideration is being given, even if it is a small amount.

Intention to create legally binding obligations

For a contract to be valid, both parties must have the intention to enter into a legally binding arrangement. If there is no such intention, then there is no contract. In determining whether or not the intention to create legally binding obligations exists, the court will consider the parties’ conduct as a whole and not just their subjective intention.

A contract must not be against public policy to be enforceable.

Practical tips: –

Certainty: Clearly state whether the agreement is intended to be legally binding, regardless of the label attached to it, i.e. “MOU” or “heads of terms”
Be careful of labels: Be cautious of ambiguous labels and clarify the intention to create legally binding obligations.
Capacity: Ensure each party has the legal capacity to contract – whether age or mental capacity
Lawfulness: An agreement which requires the parties to engage in illegal activities makes such an agreement illegal. (The purpose of the agreement must not violate the law)

By following these practical tips, you can navigate the process of entering a contract more effectively and reduce the risk of misunderstandings and disputes. Seeking legal advice will also provide valuable guidance and ensure that you and your rights are protected.

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Should you require any assistance with the implications and application of any contract or the negotiation of a contract please feel free to contact us at info@peolegal.co.bw or +267 3975779.

The information contained in this Legal Brief was intended for our clients and correct to the best of the authors’ knowledge at the time of publication. Before making any decision or taking any action, you should consult the contacts listed here.