By Robert dos Santos

Due to the extensive use of suretyship agreements within South Africa, certain terms have become standardised through years of repeated application. It is questionable, however, whether the frequency of use has led to an oversimplification of certain terms, causing some suretyship agreements to fall short of the most basic principles of early suretyship law.

Creation of a surety

Suretyship agreements are accessory contracts in that their existence is contingent on a debt or obligation (principal debt) existing or coming into existence between a debtor and a creditor. It is, therefore, necessary that one party, the debtor, be obligated to another, the creditor, for a valid suretyship to be created.

Prior to the commencement of s 6 of the General Laws Amendment Act 50 of 1956, suretyship agreements were regulated by common law and were capable of being entered into orally. Among the various reasons for the enactment of s 6, the legislature sought to protect the parties to suretyship agreements and avoid unnecessary litigation by codifying the law regarding the formation thereof. Section 6 therefore states that: ‘No contract of suretyship entered into after the commencement of this Act, shall be valid, unless the terms thereof are embodied in a written document signed by or on behalf of the surety…’.

Section 6 affords parties a level of protection and certainty by requiring the terms of suretyship agreements to be embodied in a written document. What terms the legislature required to be contained in the written suretyship agreements, however, has been left to the courts to expand.

The meaning and extent of ‘terms’

Providing clarity to the meaning and extent of ‘terms’ within s 6, Miller JA held the following in Fourlamel (Pty) Ltd v Maddison 1977 (1) SA 333 (A) at 345: ‘Confining myself to the word [‘terms’] when used in relation to a contract of suretyship, it is manifest that, for example, identification of the principal debt and debtor is not only a term of the contract but is essential to the creation of the surety’s liability … . It is a term of the contract in the true sense, in that it both defines and limits the surety’s obligation under the contract and determines the extent or scope of the rights and obligations of the parties’.

In the case of Sapirstein and Others v Anglo African Shipping Co (SA) Ltd 1978 (4) SA 1 (A) Trengrove AJA held at 7 that ‘… the identity of the creditor, of the surety and of the principal debtor, and the nature and amount of the principal debt, must be capable of ascertainment by reference to the provisions of the written document, supplemented, if necessary, by extrinsic evidence of identification other than evidence by the parties (namely the creditor and the surety) as to their negotiations and consensus.’

The above dictums have been upheld in numerous subsequent judgments with Van Der Merwe AJ summarising the current position in the recent case of Nedbank Ltd v Wizard Holdings (Pty) Ltd 2010 (5) SA 523 (GSJ) as follows: ‘The essential terms of the contract of suretyship are the identity of the creditor, the identity of the debtor, the identity of the surety, and the nature and amount of the principal debt. Failure to complete the essential terms of the suretyship agreement means that the contract is invalid for failure to comply with statutory formalities.’

The courts have repeatedly stated that an explicit reference to the parties or the principal debt is not necessary and that it is sufficient for the suretyship agreement to make broad reference to the parties or principal debts. It is, therefore, not necessary to cite the precise debt on which the suretyship is created, but is sufficient to state, for example, that the surety is in respect of a guarantee or guarantees entered into or to be entered into between the debtor and the creditor. Extrinsic reference may thereafter be utilised to identify the particular guarantee and the extent of its liability when the surety is called on to perform. This position is practically necessary as parties may enter into numerous debts before and after the commencement of the suretyship agreement. It is not always possible, at the entering into of a suretyship agreement, to forecast which debts will become due and what their extent will be. By identifying the group or category of the principal debt, however, the parties are afforded a degree of certainty in determining where the debt may arise.

It is important to note that while extrinsic reference is possible, such reference is only to be made where a party or principal debt has been identified within the suretyship agreement and such party or principal debt requires extrinsic reference to provide clarity thereon, and not as an action to supplement the terms of the suretyship agreement. The failure to incorporate an essential term of a suretyship agreement will render it invalid. Parties may not thereafter make reference to negotiations or consensus to incorporate terms not initially provided for.

Setting out the principal debt with sufficient particularity

It is not uncommon to be presented with a suretyship term, of varying formulations, which reads as follows: The surety shall be liable for the due and punctual payment and performance by the debtor of all debts and obligations of whatsoever nature and howsoever arising, which the debtor may now or in the future owe to the creditor (the standard term). The standard term is often followed or proceeded by a reference to an identified principal debt or debts that exist or may come into existence between the parties. While there is no closed list on possible identified principal debts, reference is often made to guarantees, credit agreements, bonds, cessions of debt, loans, promissory notes, bills of exchange, cheques, moneys advanced, credit facilities, novated debts, damages, etcetera. By making reference to an identified principal debt and incorporating such into the terms of the suretyship agreement, the parties are defining the nature of the principal debt and establishing the basis on which the suretyship has been created.

A brief reading of the standard term may make it seem innocuous and routine, however, the possibility arises that where the standard term is not supplemented by reference to an identified principal debt, there may be non-compliance with s 6 in that the nature of the principal debt is not stated. In addition, where the standard term is not limited by reference to an identified principal debt, the surety’s exposure to debts and obligations is effectively unlimited, making it difficult if not impossible to define and limit the surety’s obligations and to determine the extent or scope of the rights and obligations of the parties. Application of an unqualified standard clause would therefore lead to sureties being held liable for debts not envisaged by them and uncertainty between the parties.

Unlimited in obligations, liability and time

An additional hardship, which sureties may suffer is that suretyship agreements may be unlimited in liability and time. It is acceptable for parties to enter into suretyship agreements where the surety’s exposure to liability is unlimited and the creditor’s consent is required for the release of a surety. A suretyship agreement containing an unqualified standard term, an unlimited liability clause, and a clause restricting the release of the surety would in effect render a surety liable for an unlimited set of obligations, to an unlimited amount, and for an unlimited period of time. The combination of such terms would at face value appear to subvert the protection due to sureties contemplated in Fourlamel, as well as negate the intention of the legislature in enacting s 6 in theoretically rendering a surety liable ad infinitum.

An essential term

Accordingly it may be necessary for the nature of the principal debt or debts to be identified by reference to the categories or groups thereof in order for a valid suretyship to come into existence and that by only making reference to any debt of whatsoever nature and howsoever arising may fail to identify the nature of the principal debt. As the creation of a suretyship is premised on the existence of a principal debt, it would appear necessary that an essential term establishing the creation of the suretyship itself be incorporated within the suretyship agreement in light of s 6. In addition, setting out the nature of the principal debt or debts remedies the mischief, which the legislature sought to cure in its departure from oral suretyship agreements, defines and limits the surety’s obligation under the contract, and determines the extent or scope of the rights and obligations of the parties.

Robert dos Santos BA Philo LLB (UJ) is an attorney at Ryan D Lewis Inc in Johannesburg.

This article was first published in De Rebus in 2015 (Sep) DR 26.