A suretyship agreement remains accessorial to the main agreement

August 1st, 2020

Liberty Group Ltd v Illman (SCA) (unreported case no1334/2018, 16-4-2020) (Makgoka JA (Swain, Mokgohloa, Nicholls JJA and Koen AJA concurring))

On 10 March 2003 Liberty Active Ltd (Liberty), a subsidiary of Liberty Group Ltd, the holding company, concluded a written broking agreement with ECE Financial Holdings (ECE) in terms of which ECE was to act as an independent intermediary for its financial products. As compensation for its services, ECE would be paid commission on premiums received by Liberty for contracts issued pursuant to proposals submitted by ECE. ECE was placed in final deregistration on 24 February 2011. Between March 2003 and February 2005, eight individuals, including the respondent, each signed separate but identical deeds of suretyship in terms of which they bound themselves as sureties and co-principal debtors in solidum with ECE for the payment to Liberty of all money, which ECE could in future, owe to Liberty, ‘from whatsoever cause arising’. During March 2003 and March 2011, and before receiving any premiums in respect of contracts issued on proposals submitted by ECE, Liberty advanced commissions to ECE. However, during the same period, up to August 2011, the contracts in respect of which commissions were advanced to ECE, either lapsed, were cancelled or terminated, because of non-payment of premiums to Liberty. As a result, the commissions, which Liberty had paid in advance, became repayable to it by ECE and by the sureties in terms of the deeds of suretyship. Later, all the rights to claims arising from the claw-back commissions in respect of the broking agreement were ceded to the holding company, Liberty Group Ltd. On 22 September 2011, the appellant, as cessionary, issued summons against all the sureties and co-principal debtors for the re-payment of the amount due. It alleged in its particulars of claim, among others, that the agreement between the parties was terminated on 14 March 2011. On 29 September 2011 the summons was served on one of the sureties, Russel John September (Mr September), the seventh defendant. He failed to deliver a notice of intention to defend. As a result, the appellant obtained default judgment against him on 27 January 2012. With regard to the respondent, who was the sixth defendant, the summons was served on him on 31 March 2016, approximately five years after it was issued. The respondent raised a special plea of prescription to the appellant’s claim. The respondent asserted that to the extent that the appellant’s claim against him was based on the alleged termination of the agreement on 14 March 2011, such claim became prescribed after three years of that date, in terms of s 11 of the Prescription Act 68 of 1969. The appellant delivered a replication to the respondent’s plea of prescription, the essence of which was that: As the appellant and Mr September had bound themselves to the appellant as sureties and co-principal debtors in solidum with ECE, they became ‘co-debtors.’ The claim against ECE and the sureties became due on 14 March 2011. Service of the summons on Mr September within the prescription period, interrupted the running of prescription in favour of ECE and all co-debtors, including the respondent. Accordingly, it was pleaded, the claim against the respondent had not prescribed.

The main issue on appeal is whether sureties who also bind themselves as co-principal debtors become co-debtors with the principal debtor, and with each other. The secondary issue is whether the service of a summons on any of the sureties interrupts the running of prescription in favour of the others.

In order to resolve the issues, the SCA considered three of its decisions, namely Kilroe-Daley v Barclays National Bank Ltd 1984 (4) SA 609 (A); Neon and Cold Cathode Illuminations (Pty) Ltd v Ephron 1978 (1) SA 463 (A) and Jans v Nedcor Bank Ltd 2003 (6) SA 646 (SCA).

In the Jans case, the issue was whether the interruption in the running of prescription in favour of the principal debtor, interrupted the running of prescription, in favour of a surety. After an extensive review of the authorities, the court pointed out that there were significant differences between the relationship existing between the principal debtor and surety on the one hand, and that between co-debtors, in solidum on the other. The court accordingly concluded that an interruption or delay in the running of prescription in favour of the principal debtor, interrupted or delayed the running of prescription in favour of the surety. As between co-debtors, the common law allowed the judicial interruption of prescription of a co-debtor by service on another co-debtor. In this regard, it is significant to point out that the appellant in its replication, referred to the respondent and other sureties as ‘co-debtors’. This is at the heart of the appellant’s case. The sum total of the appellant’s case is that the sureties, by binding themselves also as ‘co-principal debtors in solidum’ with ECE, the subsidiary nature of their obligations lapsed. Their liability became equal to that of the principal debtor, and they in fact, became co-debtors. The appellant’s case continues to be that the effect of a renunciation of the benefit of the legal exception of excussion is that the surety’s liability is no longer subsidiary to the primary liability of the principal debtor. The addition of the words ‘co-principal debtor in solidum’ signalled an intention that the liability shall be of the same scope and nature as that of the principal debtor. This made the principal debtor and the surety, co-debtors. Thus, service of summons on any of them, Mr September in this case, interrupted prescription running in favour of the rest.

The aforesaid submission was contrary to the jurisprudence of the SCA in the decisions of Kilroe-Daley and Neon. In Kilroe-Daley, the accessorial nature of a suretyship agreement to the main contract was emphasised, despite it being a separate contract from that of the principal debtor and his creditor. The addition of the words ‘co-principal debtor’ did not transform the contract into any contract other than one of suretyship. Consequently, if the principal debt became prescribed the surety’s debt also became prescribed and ceased to exist.

In Neon it was held that the sole consequence of a surety binding himself as a co-principal debtor is that, as regards the creditor, they renounce the benefits, such as excussion and division available to them, and they become liable with the principal debtor jointly and severally. It did not make them a co-debtor.

The appellant submitted that Kilroe-Daley and Neon, to the extent that they limited the effect of the phrase ‘and co-principal debtor’ to only a tacit renunciation of the legal exceptions, had been wrongly decided. To that end, the appellant placed reliance on a dictum by Wessels JP in Union Government v Van der Merwe 1921 TPD 318 at 322: ‘We must give some meaning to the words “co-principal debtor”. … The addition of these words shows that the surety intends that his obligation shall be co-equal in extent with that of the principal debtor: or otherwise expressed, that his obligation shall be of the same scope and nature as that of the principal debtor.’

The appellant further relied on the article by JC Sonnekus ‘Borg en tegelyk medehoofskuldenaar is ’n contradictio in terminis en onversoenbaar’ (2018) 2 TSAR 256, that the words ‘co-principal debtor’ do not only operate as a renunciation of the benefits of the surety, these words show that the surety intended that his obligation shall be co-equal in extent with that of the principal debtor. The appellant, therefore, submitted that the SCA ignored this phrase in Kilroe-Daley and Neon and the cases, which followed these decisions, and this phrase should have been given a textual interpretation.

This criticism was rejected. In all of the cases sufficient attention was devoted to the phrase, and a proper contextual meaning attributed to it. The flaw in the criticism of the decisions, is the conflation of two distinct concepts: Co-debtors and co-principal debtors. The undertaking of the surety is accessory to the main contract. It is an undertaking that the obligation of the principal debtor will be discharged, and if not, that the creditor will be indemnified. What is more, the dictum in Union Government was explained in Neon at 472 – 473 where Trollip JA said that he did not think that Wessels JP, when saying that the surety’s obligation ‘shall be of the same scope and nature as that of the principal debtor’, meant to convey that by signing as co-principal debtor, the surety became a party to the main contract. Earlier, at 471C – 472E it was pointed out that the correct legal position was as follows: Although the surety binds himself as co-principal debtor, that does not render him liable to the creditor in any capacity other than that of a surety who has renounced the benefits ordinarily available to a surety against the creditor. They do not become a party to the contract between the creditor and the principal debtor. A surety and co-principal debtor does not undertake a separate independent liability as a principal debtor; the addition of the words ‘co-principal debtor’ does not transform his contract into any contract other than one of suretyship. The surety does not become a co-debtor with the principal debtor, nor do they become a co-debtor with any of the co-sureties and co-principal debtors, unless they have agreed to that effect. The jurisprudence of this court in Kilroe-Daley and Neon accordingly correctly reflects South African law on this topic.

With regard to prescription, the court held in para 21 that if a creditor, through the service of a process, claimed payment from one co-debtor who bound themselves jointly and severally with others, the remaining co-debtors could not rely on the extinction of the debt by prescription. The principle was received into Roman-Dutch law and extended to sureties by adopting the view that interruption of prescription in respect of a principal debtor served to interrupt prescription in respect of a surety. The appellant urged the SCA to apply this principle to the converse situation. It was found by the court a quo that neither in the Roman law nor in the Roman Dutch law had it ever been suggested that the converse should apply – in other words that interruption of prescription against the surety should constitute interruption of prescription against the principal debtor. The Roman Dutch writers, who wrote extensively on the topic and debated it were ad idem that the converse should not apply. It is consequently simply not part of our common law.

Tshepo Mashile LLB (University of Limpopo) is a legal practitioner at Mkhonto and Ngwenya Inc in Pretoria.

This article was first published in De Rebus in 2020 (Aug) DR 32.

South African COVID-19 Corona Virus. Access the latest information on: www.sacoronavirus.co.za