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.
Should you require any assistance with the implications and application of the surety agreements please feel free to contact us at email@example.com 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.