Sureties in or out of the NCA? Why does it matter?
16 Oct 2023
Credit transactions and lending agreements often involve a third party (the surety) who guarantees the performance of another party’s obligations (the principal debtor) towards a creditor. While surety agreements can provide financial security and confidence in business dealings, they also carry significant legal and financial implications.
As a point of departure, we must first unpack the nature of surety. There are various types of surety agreements in South Africa, including personal, commercial and limited suretyships. Each type serves a different purpose and entails varying levels of risk for the surety. Knowing the distinctions and choosing the appropriate one for your situation is crucial.
- Personal suretyship: In a personal suretyship, the surety assumes full responsibility for the principal debtor’s obligations. Personal assets can be used to satisfy the debt if the debtor defaults.
- Commercial suretyship: Commercial suretyships are commonly used in business transactions. Here, the surety guarantees the debtor’s obligations arising from commercial agreements, such as contracts for the supply of goods or services.
- Limited suretyship: Limited suretyships restrict the surety’s liability to a specific amount or period. This suretyship can provide some protection for the surety, limiting their exposure.
It has already been established in our courts that if the underlying agreement (i.e. the contract concluded between the creditor and the principal debtor) is subject to the National Credit Act 34 of 2005 as amended (hereafter referred to as the “NCA”), then the deed of suretyship shall also be subject to this Act. If the underlying agreement is exempt from the NCA, then the suretyship agreement shall be similarly exempt. But is that the end of it?
What constitutes a valid surety?
Moreover, beyond the types of surety, the first requirement is that there must be a valid deed of surety. A deed of suretyship must adhere to the strict formal requirements set out in the General Law Amendment Act 50 of 1956 (hereinafter referred to as the “Act”) due to the onerous obligations it imposes on the surety. These formal requirements are as follows:
- The deed of suretyship must be embodied in a written document. A person can thus not bind him- or herself as surety in terms of an oral agreement.
- The deed of suretyship must be signed by or on behalf of the surety.
- The deed of surety must set out the identity of the creditor, the surety and the principal debtor.
- The nature and amount of the principal debt must be ascertainable by reference to the provisions of the deed of suretyship. The written agreement may be supplemented by admissible extrinsic evidence in this regard.
Before signing a surety agreement, carefully review the obligations you are committing to. Ensure you understand the terms and conditions, the principal debtor’s obligations, and the consequences of default.
Once we have established that the surety complies with the Act, we should then look at the obligations that have been created.
Understanding the nature of the obligations
In Corrans v Transvaal Government and Coull’s Trustee, Innes CJ said that the definitions of the old authorities came to this, namely “that the undertaking of the surety is accessory to the main contract, the liability under which he does not disturb, but it is an undertaking that the obligation of the principal debtor will be discharged, and, if not, that the creditor will be indemnified.”
Eventually, Forsyth and Pretorius defined the suretyship as an accessory contract by which a person (the surety) undertakes to the creditor of another (the principal debtor), primarily that the principal debtor, who remains bound, will perform his obligation to the creditor and, secondarily, that if and so far as the principal debtor fails to do so, the surety will perform it or, failing that, indemnify the creditor.
Thus, a surety is an accessory agreement contingent on the credit agreement. But is it not in itself a credit agreement under the NCA?
The court in Firstrand Bank Ltd v Carl Beck Estates (Pty) Ltd and Another 2009 (3) SA 384 (T) provided that “there is no doubt” that the obligations of a surety constitute a credit agreement under the NCA, including a credit guarantee pursuant to which one undertakes the obligations of another pursuant to a credit facility or credit transaction. The court further held that the contract of suretyship does not create an independent obligation on the part of the surety, nor does it transform the surety into a principal debtor. This is so, even where the surety has concluded the contract as both surety and co-principal debtor.
This is not the right question to ask. A surety is a guarantee under the NCA. However, even if a surety agreement is a “guarantee” in terms of the NCA, Nedbank Ltd v Wizard Holdings also confirmed that the NCA did not apply to the suretyship agreement if the principal/primary debt did not arise from a credit agreement which fell within the scope of the Act. It follows that even if it is a natural person who has signed a suretyship, the NCA will only apply if the principal debt falls within the ambit of the Act.
The relevance in establishing this is that if one accepts or assumes that the NCA applies to a contract of suretyship and such a contract is a credit guarantee, it could be wise if a credit provider is obliged to conduct a section 81(2) assessment before concluding such contract.
Furthermore, it is accepted that a contract of suretyship constitutes a credit guarantee. In that case, the reckless-credit provisions in the Act will also apply to suretyships that fall within the scope of the Act. The reckless credit provisions stipulate that a credit provider may only enter into a credit agreement after first taking reasonable steps to assess the consumer’s understanding of the risks and costs of the proposed credit and his rights and obligations under a proposed credit agreement. Failure to conduct this reckless-credit assessment could lead to suretyship agreements being declared reckless. Regrettably, this is not the case; however, sureties must carefully consider the obligations they will be agreeing to.
Customers should carefully consider whether or not to provide surety and ensure that the surety meets the established requirements and follows the principal debt.
Surety agreements are essential to many business transactions in South Africa, providing creditors with additional security and assurance. However, these agreements come with significant legal and financial responsibilities for sureties. It is vital to carefully review, understand and seek professional advice when entering such contracts to protect your interests and make informed decisions.
Contact an Attorney at SchoemanLaw Inc for assistance.
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