Suretyship is a common contract in civil and commercial dealings — from guaranteeing bank loans to securing leases and public tenders. A surety needs to know the limits of their obligation and when they can be released, and the creditor needs to know how to enforce the guarantee.
Contents
1) Definition and Characteristics
Suretyship is a contract by which a person (the surety) undertakes to the creditor to perform the debtor's obligation if the debtor fails to do so.
- Accessory contract: it follows the guaranteed debt — if the debt is void the suretyship is void.
- Unilateral contract: only the surety is bound; the creditor undertakes nothing.
- Gratuitous on the surety's part unless they receive a fee.
- Consensual: formed by mere agreement without any special form.
2) Formation Requirements
- Capacity: the surety must have full legal capacity — a minor's suretyship is void.
- Consent: no one is bound by suretyship except by express consent — silence does not suffice.
- Subject matter: an existing or future debt of determined or determinable amount.
- Cause: lawful — guaranteeing a debt arising from an illegal contract is void.
3) Scope of the Surety's Obligation
- The surety's obligation may not be more onerous than the debtor's — any excess is reduced to the debt's limits.
- It may be less onerous — e.g. guaranteeing only part of the debt.
- It covers the accessories of the debt (interest and costs) unless otherwise stipulated.
- The surety is not liable for obligations arising after the suretyship unless specially agreed.
4) The Surety's Defences
Benefit of discussion
The surety's right to require the creditor to proceed against the debtor first and exhaust the debtor's assets before claiming from the surety — provided the surety identifies sufficient assets.
Benefit of division
Where there are multiple sureties who are not jointly and severally liable, each may demand that the debt be divided equally among them and be sued only for their share.
5) Joint and Several Suretyship
Where joint and several liability is stipulated between the surety and the debtor:
- The benefit of discussion is lost — the creditor may claim directly from the surety without first pursuing the debtor.
- The benefit of division is lost among jointly and severally liable sureties.
- The surety is treated as a primary debtor for the purposes of enforcement.
6) Discharge of the Surety
The surety is discharged in the following circumstances:
- Payment by the debtor of the principal debt.
- Extinction of the debt by any means (set-off, release, novation).
- Release of the surety by the creditor.
- Creditor's delay in pursuing the debtor until the debtor became insolvent — if the delay caused the insolvency.
- Creditor's surrender of security to which the surety could have been subrogated.
- Expiry of the term fixed for the suretyship.
7) The Surety's Recourse
Personal action
A surety who has paid the debt may recover from the debtor the principal, interest, expenses and compensation for damage — provided the surety notified the debtor before paying.
Subrogation
The paying surety is subrogated to all the creditor's rights and securities — benefiting from the mortgages and privileges that secured the debt.
8) Commercial Suretyship
Commercial suretyship has several distinguishing features:
- Joint and several liability is presumed between surety and debtor — no need for express stipulation.
- Free proof — provable by all means including testimony and presumptions.
- Commercial limitation applies (ten years as a general rule).
- Governed by the Commercial Code in addition to Civil Code provisions.
