Signing surety for another person, whether family, business partner or friend, can seem like a simple formality in order to help that person successfully conclude an important transaction. But before signing on the dotted line, make sure you know what you’re in for.
What signing surety really means
A suretyship agreement is an agreement in terms of which the surety (a third party) undertakes to the creditor (in the case of a bond, this would be a financial institution) to fulfil the obligations of the purchaser (the principal debtor) should he fail to do so.
Therefore the objective of the surety agreement is to limit the potential of loss to the lender that may arise if the purchaser defaults on the terms of the agreement. The purchaser will always remain liable for his obligations in terms of the loan agreement, and the surety’s obligations will commence only if the purchaser fails to fulfil his obligations.
The surety’s liability
In terms of our common law, a creditor would first have to claim and recover from the principal debtor all outstanding amounts due to the default which would include the outstanding capital amount, interest, administration fees and legal fees. In practice, most suretyship agreements specifically stipulate that the surety binds himself “as surety and co-principal debtor”. Should this be the case, the creditor will be able to hold the surety liable for the purchaser’s liabilities even though the creditor did not fist attempt to recover the outstanding liabilities from the principal debtor.
The amount that the creditor will be able to claim from the surety will depend on whether the surety signed the agreement binding him for a limited or unlimited amount.
The general contract law principles of South Africa dictate that it is presumed that anyone who signs a document has the intention of entering into the agreement contained within that document, hence the caveat ‘the signer beware’. The courts have found that a surety seeking to be released from liability in terms of a suretyship agreement will have to convince the court that he had no intention of entering the surety agreement.
Releasing a surety
There is a three-fold enquiry which is used by our courts to establish whether a surety can be released from the agreement he or she signed:
- Was there a misrepresentation as to one party’s intention?
- Who made the representation?
- Was the other party misled by the representation?
The Supreme Court of Appeal recently found that a person who was induced to sign a suretyship agreement by fraud or by the misrepresentation of a third party, and who is unaware of the nature of the documents he or she is signing, will nevertheless be bound to the agreement if the lender (creditor) is innocent and unaware of the surety’s mistake and that the surety agreement will therefore be valid and enforceable.
As a result, the importance of entering into a suretyship agreement with a clear understanding of the terms of the contract and one’s obligations cannot be overstated.
Follow Snymans on Facebook for more legal information, tips and news about property.