GROUP TWO

PRESENTATION
Group Members

C/Insp Parwaringira

Insp Beneti

Inspector Matadi

D/Insp Makwarimba

Insp Mataruka

Insp Munongwa
THE LAW OF SURETY
 OBJECTIVES
By the end of this presentation, participants should be able to:

Define debtor, creditor, surety and suretyship,

Outline and explain the essential elements of suretyship,

Outline and explain duties and rights of surety, principal debtor and creditor,
Explain securities realization, defences of suretyship and termination of
suretyship,
 Definitions

Creditor
• A creditor is a person, bank, or other enterprise that has
lend money or extended credit to another party.
• Creditor includes a surety for the debtor and a person in a
position by law analagous to that of a surety.
 Definitions
Debtor
• A person or an enterprise that owes money to another
party.
• A debtor is an entity that owes a debt to another entity.
The entity may be an individual, a firm, a government, a
company or other legal person.
 Definitions

Surety
A surety is the guarantee of the debt to another. A surety is the
organisation or person that assumes the responsibility of paying the
debt in case the debtor policy defaults or is unable to make the
payments. The party that guarantees the debt is referred to as the
surety, or as the guarantor.
 Definitions

Suretyship
It is an agreement by which a person (guarantor) undertakes to
perform in underlying obligation if the principal debtor fails to do
so.
 Essential elements of suretyship

• The following are the essential elements of Suretyship:-

[i] The contract must have three parties
[ii] Secondary liability
[iii] There should be an agreement
[iv] There must be existence for a debt
[v] A contract of surety must be in writing
[vi] There should be consideration
[vii] Facts must not be concealed
 THE CONTRACT MUST HAVE THREE PARTIES

• The identity of all the parties must be clear.

• These parties are the creditor, the principal debtor (the credit
applicant /customer) and the surety. All the three parties however
need to be different parties as a person cannot guarantee his own
debt.
• A contract of suretyship exists when someone [called a surety]
agrees to meet the obligation of the debtor, if the principal debtor is
unable to pay the creditor.
• As in the case of Nedbank Ltd vs Wizard Holdings [Pty] Ltd
[2010] [5] SA 523[GSJ] the court held that the essential terms of
the contract of suretyship are the identity of the creditor, the
identity of the debtor and the identity of the surety.
 SECONDARY LIABILITY

• Secondary liability means that the surety agrees to pay an

amount conditional upon the fact that the debtor defaults
on his obligations.
• Thus, in a contract of suretyship, liability of the surety is
secondary, this is to say, the creditor must first proceed
against the debtor if the latter does not perform his
promise, then only he can proceed against surety.
 THERE SHOULD BE AN AGREEMENT

• Suretyship contract is valid when there is an agreement between

the parties.
• The general elements of a contract apply in this type of contract,
for instance, both surety and creditor must have contractual
capacity and consensus must have been reached.
• The contract of suretyship may be entered into by all persons who
are capable of entering into a contract.
• For example, an imbecile cannot act in the capacity of suretyship.
THERE MUST BE EXISTENCE OF A DEBT

• The basis of a suretyship contract is premised on a third

person undertaking to pay or perform duties on behalf of
another person in case of default.
• Thus, a contract of suretyship involves the existence of debt
which is enforceable at law. If no such liability exists, there
can be no contract of surety.
• The surety will therefore only be liable once the
indebtedness of the principal debtor to the creditor has been
established.
• As in the case of Nedbank Ltd v Wizard Hooldings [Pty] Ltd
[2010] [5] SA [GSJ] the court held that the essential terms of the
contract of suretyship include the nature and amount of the
principal debt.
A CONTRACT OF SURETY MUST BE IN WRITING

• Section 6 of The General Law Amendment Act [50] of 1956

stipulates that the suretyship agreement will only be valid if it is in
writing and signed by or on behalf of the surety.
• All essential requirements to the contract must be included in the
written contract for it to be valid.
• In addition, any adjustsments thereto must be in writing as well.
• This was in the case of Plastomark (Pty) Ltd v Ashley and another
[13/3445934] [2014] ZAGP JHC 2 it was held that no terms in
suretyship may be orally varied.
 THERE SHOULD BE CONSIDERATION

• Under the contract of suretyship, there must be consideration

between creditor and the surety so as to make the contract
enforceable by law, for instance, anything done or any promise
made for the benefit of the principal debtor may be sufficient
consideration to the surety for giving the guarantee.
• Thus any benefit received by the debtor is adequate consideration
to bind the surety.
 FACTS MUST NOT BE CONCEALED

• In a contract of suretyship there must not be a concealment of

facts. The creditor should disclose to the surety the facts that are
likely to affect the surety‘s liability. It therefore follows that
concealment of facts invalidates the contract.
• Failure
to complete these essential elements of the surety
agreement means that the contract is invalid.
Now handing over the baton to Next Presenter
 SURETY’S DUTY

• The surety has the duty to fulfill the original obligation of

the principal debtor in case of debtor default.
 SURETY’S LIABILTY

A liability is defined as an obligation under law, a legal

responsibility for something, especially costs or damages or
something for which somebody is responsible, especially a
debt.
• A surety has a liability under law on behalf of the principal debtor
in the fulfillment of obligations owed to the creditor.
• The surety’s liability is coextensive of the debtor’s liability.
• This implies that whatever the creditor can recover from the
principal debtor, the same amount of the liability will fall on the
shoulders of the surety in case the debtor defaults payment, that is,
sharing the same limits, boundaries or scope.
• The surety has the obligation to perform or pay in the principal
debtor’s place should he fail to perform.
• In Jans vs Nedcor Bank Ltd, the court aquo held that by its very
nature, a contract of suretyship is burdensome.
• Thus, the surety was regarded equally responsibile for the
fulfilment of another’s obligation upon default by the principal
debtor.
 RIGHTS OF SURETY AGAINST THE PRINCIPAL DEBTOR

[i] Right to security and release

• The surety may require that the principal debtor furnishes security
and demand his release from liability once the principal obligation
falls due.
• This occurs when the principal debtor breaches the agreements
made with the surety and in particular his promise to release the
surety by a certain date.
• In addition, this may also occur where the principal debtor is in
default or has relocated to a foreign land where legal action in
foreign courts has been substantially impeded and also in case
where the surety faces substantially greater risks than when he
agreed to offer the surety due to deterioration in financial situation
on the party of the debtor.
 [ii] Right of recourse

• In case where principal debtor is in mora, and the surety has paid
the creditor for the principal debtor’s debt, he assumes the right to
reclaim the money from that principal debtor.

• The surety is also entitled to additional expenses suffered as a

result of the debtor’s failure to meet his obligation such as interest
on the debt.
 [iii] Right to give notice

• Whenever a creditor comes to surety, for the purpose of seeking

payment, surety can give a notice to the principal to settle the debt.

• This may arise when the creditor approaches the surety before
asking for the debt to be honoured by the principal debtor.
 [iv] Right to Subrogation

• The surety is entitled to be subrogated to the rights of the

creditor against the principal debtor.

• This happens when the principal debtor’s duty to the creditor

is fully satisfied and the surety has contributed to this
satisfaction.

• In this regard, the surety stands in the creditor’s position and

may assert against the principal debtor whatever rights the
creditor could have asserted had the duty not been discharged.
• He assumes the right to recover the amount which he
has paid to the creditor from the principal debtor.

• The principal amount to be subrogated may also

include interest and subsequent cost.
 Rights of surety against co-surities

Right to equal contribution

• Itis possible to have more than one person

standing as surety.
• In such a case sureties are called co-sureties.
Co-sureties are equally liable to the debt and
any co-surety may be sued by the creditor for
the whole amount owing.
 Rights of equal contribution contd……

• Once a co-surety pays the debt to the creditor,

this co-surety has a claim against the co-surety
or co-sureties for their share of debt paid.
• If the creditor releases one or more of the co-
sureties, the remaining sureties are also released
from a proportionate share of liabilities.
Now handing over the baton to Next Presenter
 CREDITOR DUTIES TO SURETY

• The creditor is required to disclose any material facts about the

risk involved to the surety.
• If he does not do so, the surety is relieved of liability.
• For example, a bank [creditor] knows that its client has a previous
record of defaulting and if the client applies for a loan within the
bank, the bank must disclose this information to the surety.
 RIGHTS OF SURETY AGAINST CREDITOR

[i] The right to Claim Certain Securities

• Surety has the right to claim certain securities from the creditor. Where
a surety satisfies the obligation to the creditor, the creditor has to
release all securities held by him to the surety.
• If at the time of entering into the contract of suretyship the debtor had
given certain securities to the creditor to get the loan, surety has the
right to claim back the securities after making full payment of the loan.
 [ii] Right to set-off

• Right to set off, is another right available with the surety

against creditor, set off means a counter claim.
• Ina suretyship contract, if the debtor borrows some
money from the creditor at the same time the creditor
owing him some money, then at the time of making the
payment the surety has the right to claim the set off.
• As was in the case of Siltek Vs Business Connexion (081/2008)
[2008] ZASCA 136, the creditor had instituted an action against
the debtor and surety for the payment of the sum of R436 430-97.
• The respondent’s defence, which was upheld by the trial court,
was that the claimed debt had been extinguished by set-off.
• Therefore, if the principal debtor has a fair set-off to the whole
claim of the creditor, the surety is also discharged.
 [iii] The benefit of excussion

• The benefit of excussion [beneficium ordinis seu excussions] is

the right of the surety against the creditor to have him proceed first
against the principal debtor with a view to obtain payment from
him, if necessary by attachment of his assets, before turning to the
surety for payment of the debt.
• Where the obligations are met, then the surety is released from the
preceding obligations as was held in Jans v Nedcor Bank Ltd 2003
6 SA 646 [SCA].
• The court held that the obligation of a principal debtor and surety
relate to the same debt.
• If the surety is sued first where he has not renounced the benefit of
excussion, the surety is only liable for the shortfall after excussion
of the assets movable and immovable, corporeal and incorporeal,
of the principal debtor.
• However, properties that are pledged or hypothecated might not be
excused before the surety can pay.
 [iv] The benefit of division

• This right arise where there are several sureties in respect

of the same obligation which then means where creditor
attempts to recover debt form one, he is at liberty to
demand that the due obligation be equally divided.
• [Odendal and Another v Structured Mezzanine
Investments [Pvt] Ltd [482/13] [2014] ZASCA 89
 [v] The benefit of Cession of Actions

• Cession is an act of relinquishing one’s rights.

• A surety who renders performance of the principal obligation may
demand transfer by the creditor all rights which the latter may
enjoy against the principal debtor and co-sureties.
• In this regard the surety can only claim the exact rights that the
creditor would claim against the principal debtor.
• A case to note is that of FNB vs Lyn [1996][2]SA 339A
where a court held that only existing rights may be ceded
and not rights which amount to nothing more than an
expectation.
Now handing over the baton to Next Presenter
 SECURITIES REALIZATION

•A security is a guarantee, reassurance or a form of

promise to the effect that a debt or loan shall be repaid or
performance of certain obligations of a contract.

• The law principally recognises two types of securities

which make the business credit world go namely real
securities and personal securities.
• Real security concerns itself with the property of the debtor which
is used as security for the repayment of the debt to the lender or
creditor.
• Real security may come in the form of Mortgage, Pledge, Liens
and Hypothecs.
• On the other hand, personal security refers to a third party or
person who is outside the relationship between the creditor and the
debtors who comes in to guarantee the repayment of the debt for
and on behalf of the debtor.
• In Zimbabwe, this is buttressed by Section 97 (1) of the
Insolvency Act 6:04 which provides that a creditor obtains
complete protection against potential default of debtor by
ensuring adequacy of real security.
 The Act defines real securities as:

• Mortgage Bonds,
• Pledge,
• Liens and Hypothecs, and
• Notarial Bonds.
 [i] Mortgage

• Thisis a form of security where one’s real property like land,

house or building is used as a guarantee for loan in what is termed
the mortgage bond.
• In mortgage, there is a debtor or mortgagor who is the owner of
property and whilst a creditor or the mortgagee is the owner of the
loan.
• The Mortgage bond will only be valid if the debt it covers is also
valid.
•A mortgage comes into existence upon registration of a
mortgage bond against Title Deeds of the property in the
Deeds Registry.
• Mortgages have the right to foreclosure or call the bond and
have the property sold in the case of insolvency.
• Depending on the terms of the agreement, the mortgager may
let the property but he must not impair the value of the
property.
• The mortgagee has no right to use the property but enjoys the
rights upon the insolvency of the mortgager.
 [ii] Pledge

• A pledge is defined as the placing of owned movable property by a

debtor (the pledger) to a creditor (the pledgee) as a security for a
loan or obligation.

• This is equivalent to a mortgage bond but differs in that it binds

movable property.
 Requirements of a Pledge

there must be an object or thing to be pledged [movable

asset],
there must be delivery by pledger and possession by the
pledge,
the object or thing must be delivered with all its additions
which form part of the pledge.
• For example in the Bank of Rajasthan v Hajarima Milap
C. Suran, the respondent was indebted to the bank and
had deposited precious stones as a security.
• In order to recover the debt, the bank filed a suit in the
court. Pending the suit, the parties came to an agreement,
and for enforcement, another suit was filed by the bank.
• The Supreme Court held that if a pledger defaults in
payments of the debt or performance at the stipulated time
of the promise in respect of which the goods were
pledged, the pledgee upon the debt or promise may retain
the goods pledged as a collateral security or he may sell
the thing pledged, on giving the pledger reasonable notice
of the sale.
• If the proceeds of such sale are less than the amount due in respect
of the debt or promise, the pledger is still liable to pay the balance.

• If the proceeds of such sale are greater than the amount so due, the
pledger shall be given the difference.
 [iii] Lien and Hypothec

•A lien is a form of security interest granted over an item of

property to secure the payment of a debt or performance of some
other obligations or put simply a lien is a right of retention or
possession.
• For instance, a garage owner can exercise a lien by retaining a
repaired car if he is not paid for the service provided.
• PTY Ltd Vs Steve Motors and Plant Hire [2007], the
plaintiff who is the owner of a Kia K2700 motor vehicle
sought restoration of the motor vehicle from the defendant
who had taken it into his possession to secure the payment
for the performance of some services.
• The claim of Lien was granted by the court to the
defendant. On the other hand, the landlord’s tacit hypothec
is another form of lien which denotes that the landlord can
retain property of the defaulting tenant.
 [iv] Notarial Bond

• A notarial bond is a form of credit security that is registered in the

Deeds Office over some kind of movable property that the debtor
has put up as security for its obligations to the creditor in terms of
the loan.

• Examples of movable property bonded notorially are vehicles,

jewellery, and valuable artworks.
• Notorial bonds can be particularly useful as an alternative method
of security.

• The first reason is that many borrowers have movable property

that can be used as security, but they are unable to ‘unlock’ the
value of these movable because lenders only want security over
land (in terms of a mortgage bond).
Now handing over the baton to Next Presenter
 DEFENCES OF SURETYSHIP

•A surety is entitled to any defences that exist on the surety

agreement.
• These include defences that relate to general contracts as well as
those that specifically relate to contracts of surety.
• The surety may set up any of the defences ‘in rem’ [against a
thing] that the principal debtor could have raised against the
creditor, for example, defences relating to the validity, or
effectiveness of the original obligation or debt.
• A surety, where he is not bound as a co-principal debtor,
may exercise defences on a contract that would have been
available to the principal debtor.
• The surety may raise defences such as creditor’s breach,
impossibility, illegality of performance, fraud, duress or
misrepresentation by creditor or statute limitations where
appropriate among others.
 [i] Modification of the Contract

• A surety can raise a defence seeking relief of responsibility if the

debtor and the creditor, after entering into a contract, modify or
alter the contract without his consent.
• Modifications include extension of time of payment, release of
collateral or increase the liability, for example, where a debtor
approaches the creditor to have his loan reviewed upwards without
the surety’s agreement.
• Therefore, any changes effected on the contract by the principal
debtor and the creditor relieves the surety’s responsibility unless
the surety agrees to the change.
• This was in the case of Plastomark (Pty) Ltd v Ashley and another
[13/3445934] [2014] ZAGP JHC 2 where it was held that no
terms in suretyship may be orally varied and that all parties must
agree to the variations made.
 [ii] Release of the Principal Debtor

• Since the liability of a surety arises at the default of the principal

debtor, a surety can claim this type of defence whenever the
principal debtor is released from his duties by the creditor.
• If the creditor frees the debtor from the liability, surety is
automatically freed unless the surety consents to remain liable.
 [iii] Breach of Warranty against the Dealer

• If the principal debtor has a valid defence of breach of warranty

against the dealer, it can also become a defence to a surety.
• For example, A purchases a computer on credit from B, and C
being the surety for the purchase, if the computer was defectively
made and A refuses to make further payments on it, the creditor
dealer might try to collect the balance due from surety C.
• As a result, C can use any of the defences against the dealer that A
has, if they go to the merits of the primary contract.
 [iv] Statute of Frauds

• A surety is also entitled to the defence of statute fraud where

suretyship is obtained either by misrepresentation or concealment.
• The creditor intentionally misrepresent or conceal certain material
facts at the time of entering into contact with surety, which may
affect the principal debtor’s ability to perform his obligation, the
surety can raise this defence and will not be held liable if the
debtor fails to honour the obligation.
• An example of concealment is where the creditor fails to reveal
known information pertaining to debtor’s history of default to the
surety.
• In the case of Musgrone and Watson (Private) Limited vs Rotta
1978 RLR 129 the Court held that where a surety has been
induced to enter into a contract by the fraud of a third party, the
suretyship contract is void ab initio.
Now handing over the baton to Next Presenter
 TERMINATION OF THE SURETYSHIP
CONTRACTS

• Termination of a suretyship contract means the end of the

legal relationship that exists between parties to the
contract.

• This can be achieved in a number of ways that include the

following amongst others:-
 [i] By Revocation

• In a suretyship contract, the surety has a right to terminate of his

suretyship by giving notice to the creditor with regards to future
transactions, where the contract is a continuing one, extending into
a series of transactions, unless where there exist an express or
clearly inferential provision to the contrary in the contract.
• Ordinarily, a suretyship contract cannot be revoked if the liability
has already been accrued, for instance, where a bank has already
disbursed the money to the principal debtor.
• However, when the surety is being subjected to conduct that is
prejudicial to his interests, as in ABSA Bank Ltd v Swart and
Others (3753/2011) [2013] ZAECPEHC, the contract is
terminated.
 [ii] By Payment made by the Principal Debtor

• Since the nature of the suretyship is ancillary, settlement of the debt

by the principal debtor automatically terminates the suretyship.
• Thus, when the principal debtor completes the payment, the sureties
are immediately discharged, because the obligation no longer exists.
• However, as payment is an act of two parties, that is, the party
tendering the debt and the party receiving it, the money or thing due
must be accepted.
 [iii] By Death of Surety

• The death of the surety discharges him from liability with regards to
future transactions in case of a continuing guarantee, unless it is
expressed in the contract to the contrary.
• In Wilhelm versus Chain, 300 U.S. 31 [1937], the court dismissed
the existence of a suretyship contract in the case of a deceased
surety on the bond given by the bank.
• Therefore, the surety’s survivors or legal representatives will not be
liable for transactions after the death of the surety unless expressly
mentioned in the contract.
 [iv] By Release of the Principal Debtor

• Suretyship contract is terminated by the release of the principal

debtor by the creditor, discharging his obligation.
• This means whenever the principal debtor is released from his
duties by the creditor, the surety is released too. Since the liability
of the surety arises at the default of the principal debtor, and the
creditor frees the debtor from the liability, surety is automatically
freed unless the surety consents to remain liable.
 [v] By Compromise

•A compromise is a settlement by agreement of disputed

obligations.
• Surety contracts may be terminated after negotiations between the
creditor and principal debtor resulting in a compromise.
• When the creditor and principal debtor make a compromise by
which the principal debtor is discharged, the surety is also
discharged.
A compromise is usually considered appropriate where:-
there is significant doubt concerning the creditor’s ability to
prove his case in court for the full amount of the debt,
the debtor is unable to pay the full amount due in a reasonable
time or if the full amount due could not be collected in a
reasonable time using enforced collection,
collection costs exceed amounts recoverable.
A compromise is usually considered appropriate where:-
there is significant doubt concerning the creditor’s ability to
prove his case in court for the full amount of the debt,
the debtor is unable to pay the full amount due in a reasonable
time or if the full amount due could not be collected in a
reasonable time using enforced collection,
collection costs exceed amounts recoverable.
 [vi] By Novation

• Novation means replacing an existing obligation by a new

one. This automatically discharges the existing obligation.
• Entering into a fresh contract between the same parties
constitutes another mode of discharging a surety from his
liability. As in the case of Zimbabwe Football Association v
Mufurusa 1985 ZLR 244 ,1985 (3) SA1050(Z), it was held that
the agreement between the creditor and principal debtor
amounts to a novation, thus the surety is discharged.
• The defendant guaranteed a loan taken by a musical promotions
company from the plaintiff.
• The principal debtor defaulted in repayment of the loan. It offered
to pay in installments and the creditor accepted payment of the
monthly installments.
• The creditor sued the surety for the full outstanding
amount. Summons were issued against the surety who
contended that the initial agreement had been novated by
the agreement entered into between the creditor and the
principal debtor to which he was not a party and that his
liability fell away.
• Therefore, where any change to the contract is brought about
through agreement between the creditor and principal debtor
without the consent of the surety, the surety is released.
 [vii] By Delegation

• Delegation is the operation by which a person (the new debtor) is

assigned the original debt, and assumes liability to a creditor for
the payment of a debt owed to that creditor by another person (the
original debtor).
• Where a perfect delegation occurs, that is, where the original
debtor is absolutely discharged by the creditor, the respective
suretyship contract is automatically terminated and the surety
stands discharged.
• However, in an imperfect delegation where the original debtor is
not discharged, the creditor retains the right to the original debtor
and he remains liable in the event of non-payment of the debt by
the new debtor.
 [viii] By Set-off

• Usually, a contractual set off occurs where payments are due from
both parties to a transaction, and the parties agree that, instead of
both parties making separate payments, the party due to make the
larger payment should just pay the difference between the two
amounts due.
• In the case of Siltek versus Business Connexion (081/2008) [2008]
ZASCA 136, the appellant had instituted an action against the
respondent and surety for the payment of the sum of R436 430-97.
• The respondent’s defence, which was upheld by the trial court,
was that the claimed debt had been extinguished by set-off.
• Therefore, when the principal debtor has a fair set-off to the whole
claim of the creditor, the surety is also discharged.
 [ix] By Alteration of the Contract

• If the principal debtor and creditor change the nature of the

contract, so that it is no longer the same, the surety will be
discharged.

• For instance, where the creditor and the principal debtor either
change the mode of payment or extend the period of payment
without the consent of the surety, such an alteration of the contract
discharges the surety.
• As an example, creditor A, a bank agrees with debtor B to hike a
loan repayment instalment without informing the surety C, and in
this case, C would hence be discharged from his liability as a
surety for accruing subsequent to the variance of the contract
without his consent.
• Therefore, an alteration of the contract discharges the surety of his
liability, thus terminating the suretyship.
[x] Fraudulent Activity by Creditor or Principal Debtor

• Fraud by the creditor in relation to the obligation of the surety, or

by the debtor with the knowledge or assent of the creditor, will
discharge the liability of the surety.
• The surety has the right to cancel the contract on the basis of a
legal wrong committed, by either the creditor or the debtor without
his knowledge.
• This situation occurs where the creditor or principal debtor
misleads a surety into signing a suretyship agreement either
through undue influence, misrepresentation or fraud.
• As in the case of Musgrone and Watson (Private) Limited versus
Rotta 1978 RLR 129, the Court has held that where a surety has
been induced to enter into a contract by the fraud of a third party,
the suretyship contract is void ab initio.
• In that case, the court held that the fraud by the third party negated
the intention of the surety to be bound and therefore no contract
could come into being.
 [xi] By Accord and Satisfaction

• This is a method of discharging a claim whereby the parties agree

to give and accept something in settlement of the claim and
perform the agreement.
• In this case, the accord is the agreement and the satisfaction is its
execution or performance.
• This results in a new contract substituting an old contract which is
thereby discharged.
• However, the new contract must contain all the elements of a valid
contract.
• Therefore,accord and satisfaction between the principal debtor
and the creditor will discharge the surety, and his entire obligation
becomes extinct.
 End of Presentation

Additional Contributions by fellow

group members, followed by
questions and comments from the
House.
We thank you, Tatenda, Siyabonga