STUDY UNIT 4

STUDY UNIT 1: GENERAL INTRODUCTION TO REAL

SECURITY AND SURETYSHIP

GENERAL INTRODUCTION TO REAL SECURITY AND SURETYSHIP

 The debt relationship (obligation) is created by a delict, a contract, or any of the
various legal causes such as negotiorum gestio or enrichment. A creditor may in
certain circumstances demand some form of security in order to protect himself
against the possibility of the debtor being unable to pay his debt when due.
 The creditor may require that a third party should bind himself contractually for the
performance of the obligation, in which instance we are dealing with personal
security known as suretyship.
 If the debtor has assets, the creditor may request him to bind all or part of his assets
as security for the debt. In this case we are dealing with real security.
 If the debtor has a personal right or claim (against a third party), he may also cede
this personal right or claim to the creditor as security, in which event the principles
applicable to real security also apply.
 In most instances, real security is preferred to personal security due to the
advantages it has for the creditor.
 In the case of suretyship, the creditor merely obtains an additional personal right
against the surety which still entails the risk that he will neither get performance
from the principal debtor nor from the surety (who is also a debtor).
 In contrast, in the case of real security, a specific thing (property) is separated to
secure the performance of the obligation by the debtor.
 The creditor with real security therefore enjoys priority as to the proceeds of the
thing over other creditors without such security.
 It is important to note that both personal and real security are dependent on the
existence of a so-called principal debt or obligation, which entails that the security
can only exist insofar and for as long as the principal debt exists.
 For this reason, both suretyship and real security are said to be of an accessory
nature. This principle implies that there should be a valid principal obligation
between the debtor and creditor for the security right to exist.

From Slides =
 When a creditor provides a loan to a debtor, the creditor does so with the hope and
expectation that the debtor will repay the loan, usually with interest.
 In order to incentivise the debtor to repay the loan on time and in full, a creditor might
want to insist on the debtor providing it with some sort of security for the repayment of
the loan.
 ‘Credit security’ is the generic term used to the different arrangements that provide
creditors with the security for the repayment of loans.
Examples of the types of security =
1. Cession: A wishes to borrow money (R1 Mil) from ABSA, however, ABSA requires that A
cedes his insurance policy to it a security for the repayment of the loan. Should A fail to
repay the loan, then ABSA will cash out A’s insurance policy.
2. Pledge: A wishes to borrow money from ABSA, however, ABSA requires that A delivers
his motor vehicle as a form of security. Should A fail to pay, then the pledgee will enjoy
the proceeds of the assert which was pledged and also has a preferent claim of the
pledged item above other creditors of the pledgor.
3. Mortgage bonds: A wishes to buy a house which costs 1 Mil, he goes to Absa to loan 1
Mil. However, Absa requires that upon registration of the bond in the deeds office, then
will Absa have a limited real right over the house.
4. Suretyship, etc

STUDY THEME 2: SURETYSHIP

A suretyship contract may formally be described as a contract in terms of which a third party
(the surety or co-sureties) binds himself (or themselves) to the creditor (the principal
creditor) for the proper performance of the whole or part of the debt of another (the
principal debtor).

NATURE OF SURETYSHIP CONTRACT

 It is fundamental to the suretyship contract that there should be a valid principal
obligation (debt). The suretyship contract is accessory to the principal debt and can
only exist and continue to exist if the principal debt still exists. Therefore, should the
principal obligation come to an end, the suretyship will also lapse.
 Another consequence of this principle is that, for the suretyship to be valid, it is
essential that the principal debt must be valid too. In this sense, the accessory
obligation shares the fate of the principal one.
 Where a person binds himself as surety with the accessory liability of another surety
he is known as a rear surety whose liability is dependent upon the validity of the
original surety.
 Suretyship is based on a main (principal) or primary obligation (debt) and a
secondary obligation which is dependent on or accessory to the existence of the
former.
 This latter characteristic distinguishes suretyship from other contracts of indemnity
which take on a variety of forms such as guarantee, indemnity and insurance.
a) In the case of a guarantee, one person would, for example, give an
undertaking to another that the price of certain goods will not increase for a
certain period, while the supplier of the goods would not be a party to this
undertaking.
b) In the case of an indemnity, one person would undertake to indemnify
another person against any damages which the latter might suffer, for
example as a result of the start of a new enterprise.
c) In the case of insurance against damage, an insurer would undertake to cover
the insured’s damage arising from a specific event.

 Suretyship also differs from a delegation of obligations where a debtor delegates his
liability to another person and is replaced as debtor by the latter. The creditor would
then have no right to recover against the delegator (original debtor) if the new
debtor fails to pay.
 A distinction must also be made between suretyship and cases where two or more
persons bind themselves jointly as co-debtors for the repayment of a specific debt.

 A potentially problematic situation occurs when a person binds himself as surety and
co-principal debtor.
 In such a case, the liability of a person who binds himself in these terms is still based
on the liability of a surety and not that of a normal co-debtor, but the effect of such a
 suretyship is that the defences of excussion and splitting of debts (as discussed
below) are usually waived by implication.
 The result of this that the surety and co-principal debtor is liable jointly and severally
with the principal debtor to the creditor when the principal debt becomes due and
payable.

 Neon and Cold Cathode Illuminations v Ephron –

When a person has bound himself only as surety and not as co-principal debtor too, he is
normally only liable after the principal debtor has been excussed. The fact that the surety can
be held liable as surety and co-principal debtor means that the creditor may elect to claim
against the principal debtor or the surety. Although such a surety may not rely on the defences
of excussion and splitting of debts in the case of cosureties, this situation is distinguished from
the normal co-debtor situation in that the surety who pays the principal debt in full under these
circumstances has a right of recourse for the repayment thereof against the principal debtor.
The surety who has taken a cession of the action will be able to elect whether he wishes to sue
the principal debtor in terms of the original claim or the ceded action.

FORMATION OF SURETYSHIP CONTRACT

 Suretyship comes into being by way of a suretyship contract between the principal
creditor and the surety. - This implies that all the requirements for the formation of a
contract should be complied with.
 In addition to the general principles, a suretyship which conflicts with the public
interest may be unlawful.
 It is, however, important to note that the principal debtor is usually not a party to the
suretyship contract and that he need not even be aware of the contract.
 The principal creditor (lender) will be able to rely on a suretyship even where a third
party induced the surety by fraud or misrepresentation to sign it.
 Note, however, that if the suretyship contract is concluded against the will of the
principal debtor, the surety will have no right of recourse against the principal debtor
after rendering performance to the principal creditor.

 No formalities for the conclusion of a valid suretyship contract were required by law,
but section 6 of the General Law Amendment Act 50 of 1956 presently requires the
terms of a suretyship contract to be in writing and signed by or on behalf of the
surety in order to be valid.
 A suretyship contract should therefore mention the identities of the principal
creditor and the surety, the name of the principal debtor, the nature of the secured
obligation, and the extent to which the debt is secured, and it must be signed by or
on behalf of the surety. [Sapirstein v Anglo African Shipping]
 Any amendments to contracts of suretyship must also comply with the formalities,
but it may be cancelled without complying with the prescribed formalities.
  Where a person signs an undertaking that also binds him as surety but denies such
liability afterwards, such a person carries the burden of proof that he was unaware of
the suretyship and therefore not liable as surety.
 Spouses married in community of property will, as a general rule, require the written
consent of the other spouse to act as surety, except where such a suretyship is
undertaken in the normal course of his career, trade or business.

 Sapirsten v Anglo African Shipping –

Must principal obligation be in existence when suretyship is entered into?
 A person may bind himself as surety for the principal obligation that may arise in future.
 S bound himself as surety in respect of X’s indebtedness to Anglo. Anglo sued S as surety
& S excepted to the claim. S argued suretyship was void because when suretyship was
entered into the principal debt had not yet come into existence.
 The court confirmed accessory nature of contract. However, the court held that it is not
a requirement that principal obligation exists at time suretyship is entered into.
Suretyship can be entered into in respect of obligation which is to exist in future.

 Fourlamel v Maddison –
Signing a blank suretyship contract:
 When suretyship was signed: name of co-surety did not appear; co-surety had not
signed; names of creditor and debtor did not appear.
 i.e. surety signed a “blank form”
 Court: did not comply with s 6 of Act
 Thus, the court held that the surety must sign a document which embodies all the
essential elements of a suretyship. Thus, a surety may not sign a suretyship contract
with blank spaces, where the essentials are complied with after he has signed.

 Jurgens v Volkskas Bank –

Identity of the parties not yet established:
 After surety signed, his secretary filled in the information and sent it back to creditor.
 The court held that as a general rule at common law a person sufficiently signed a
document if it is signed in his name and with his authority by someone else. Thus, an
agent may be appointed to subscribe the name of the principal to the memorandum of
association of a company, or to the instrument of dissolution of a building society and
such a signature is a sufficient compliance with the relevant statutory provisions.
 Thus, it was immaterial that whether the surety signed the document before or after the
completion of the material terms on his behalf either case the surety’s signature serves
to authenticate the contents of the document.

CONSEQUENCES OF SURETYSHIP
  In accordance with the accessory nature of suretyship, a surety is in principle entitled
to rely on any defence available to the principal debtor, except insofar as the defence
attaches to the person of the principal debtor in cases such as minority, insolvency or
protection in terms of a moratorium (defences in personam).
 Defences regarding the surety’s liability (defences in rem) relate to the validity or
enforceability of the principal obligation and are, in principle, available to the surety.
Examples of defences in rem are illegality, duress, misrepresentation, res judicata and
set-off.
 Like the principal debtor, the surety’s liability is also limited by the in duplum rule,
meaning that interest which accumulates while the debtor is in default can never be
more than the capital debt.

Benefits of Surety –

1. Benefit of excussion (beneficium excussion):

 The surety may insist that the principal creditor first demand performance
from the principal debtor before claiming performance from him.
 Reliance on this defence must be raised at the beginning of the proceedings
instituted against the surety, otherwise it lapses.
 If the surety relies on this defence, he is liable for the costs of excussion in the
event that the principal debt is not fully met by the principal debtor.
 The surety may waive the defence of excussion and in cases where he has
bound himself as co-principal debtor it is deemed that he has waived the
benefits of this defence.
 It is also possible for the surety to waive the benefits of this defence after
conclusion of the suretyship agreement.

2. Benefit of division (beneficium divisionis):

 This benefit is an exception to the rule that, if there is more than one surety,
they will be liable in solidum (each liable for the whole debt).
 Any individual surety who is then held liable by the principal creditor for the
full debt, may demand that the debt be divided pro rata among the different
sureties and that he should only be held liable for his pro rata share of the
debt.
 Sureties who are not liable, such as insolvents and minors, are not taken into
account for purposes of division while the stage at which the matter begins
(litis contestatio) is decisive in order to determine who can be held liable.
 Sureties may waive the benefits of the defence of division, and they are
deemed to do so where they bind themselves in solidum or as a co-principal
debtor.

3. Benefit of cession of actions (beneficium cedendarum actionum):

  The surety who has performed to the principal creditor may demand transfer
and cession of all securities and personal rights of the creditor as against the
debtor and co-sureties.
 The surety may even refuse payment to the creditor until such cession or
transfer is made.
 A cession of actions is not necessary for a surety to proceed against the
principal debtor or co-sureties, but it may be useful to obtain such a cession.
 A significant benefit of a cession of actions is that the surety may obtain other
rights of the creditor which he would otherwise not have obtained, such as
other security rights.
 Also, if the surety obtains such a cession, he will become the principal
debtor’s new creditor and can thus sue the debtor based on the principal
credit relationship (for instance the loan agreement).

4. Recourse against co-sureties:

 The surety who pays the full principal debt is entitled, by operation of law, to
claim a pro rata portion of the debt from each co-surety.
 Usually, no contractual relationship exists between co-sureties, which is
indicative of the fact that the right of recourse of the surety who has paid
more than his pro rata portion is based on unjustified enrichment, since he
released his co-sureties from their obligations when he paid the full debt.
 Co-sureties may agree on the manner and extent to which each will be liable.
In such a case the liability of each will be determined by the contractual
provision.
 Co-sureties may even be bound by separate suretyships and need not be
aware of each other.

5. Recourse against principal debtor:

 The surety who has fully satisfied the principal obligation is entitled, by
operation of law, to claim the amount of his performance from the principal
debtor.
 A surety has a notional right of recourse against the insolvent estate of a
principal debtor.
 When there is an express or tacit agreement concerning the suretyship
between the principal debtor and the surety, the basis of the right of recourse
is that of a contract of mandate.
 Where there is no such agreement, the surety’s claim is founded in
unauthorised administration.
 Where the suretyship is concluded against the will of the principal debtor, the
surety does not, in principle, have a right of recourse against the debtor and
will need to take cession of actions from the creditor before recovering his
expenses from the debtor.
TERMINATION OF SURETYSHIP
 The suretyship contract may also provide that the surety will be released in specific
circumstances, for example:
a) When the suretyship is to exist for a certain period of time only and that time
lapses.
b) When the original suretyship contract is, without the surety’s consent,
materially altered to the surety’s prejudice, and if this prejudice is the result
of the breach of some or other legal duty or obligation.
c) If the suretyship contract between the surety and the principal creditor is
terminated in any of the ordinary ways of terminating an obligation (for
example, performance, compromise or release) or prescription, the surety is
released even though the principal debt still exists.

THE IMPACT OF THE NATIONAL CREDIT ACT OF SURETYSHIP

 Credit agreements encompass credit transactions, credit facilities and credit
guarantees. (Section 8(1)).
 A credit guarantee is defined as an agreement whereby a person undertakes or
promises to satisfy upon demand any obligation of another in terms of a credit
facility or a credit transaction to which the Act applies (Section 8(5)).
 The common-law suretyship falls within the definition of a credit guarantee as
defined in the National Credit Act if the principal debt is subject to the Act.
 Therefore, if an agreement resorts under the definition of a credit facility or a credit
transaction and is otherwise subject to the Act, the Act may also apply to a
suretyship accessory thereto and to the same extent as to the primary debt.