Legal obligations of a surety
Guarantor
ONE of the terms used in the security of debts is “guarantor”. A guarantor is someone who enters into a contract with a lender or a creditor to assume responsibility for the debt or obligation of another person, referred to as the principal borrower.
The guarantor agrees to repay the debt or obligations owed by the principal borrower if they default or are unable to meet their financial obligations. Essentially, a guarantor acts as a backup to the borrower in case they are unable to pay their debts or fulfil their obligations. Guarantors are typically required for loans, rental agreements and other contracts where the lender or creditor wants extra assurance that the borrower will fulfil their obligations.
Difference between surety and guarantor
The technical difference between the two is that a surety is usually a party to the original contract and signs on the original agreement, along with the principal debtor.
The consideration for the principal’s contract is the same as the surety’s; they are bound to the contract from the very start. They are also expected to know of the principal debtor’s default so that the creditor’s failure to inform them of it does not them of any liability.
On the other hand, a guarantor does not usually make an agreement with the creditor at the same time as the principal debtor does. It is a separate contract requiring different consideration. If the guarantor is not informed of the principal debtor’s default, they can claim discharge on the obligation to that extent. Simply put, a guarantor is an insurer of the debt and essentially guarantees that the debt will be paid one way or another.
Unlike a guarantor, a surety does not only insure the debt but can also be compelled to pay the loan in the first instance. There is no need to prove that the debtor has no ability to pay. In a true contract of guarantee, the guarantor binds himself/herself to the creditor to fulfil the obligation of the principal debtor in case he/she fails to do so. A guarantee is characterised by the benefit of excussion, where the creditor must first exhaust the entire property of the debtor and resort to all the legal remedies against the latter before collecting from the guarantor. If this benefit of excussion is waived, the guarantor is directly made liable, hence, the arrangement is not a guarantee but a suretyship.
Legal connotations of being a surety or guarantor
By agreeing to the terms of a suretyship guarantee agreement, one accepts to perform the debtor’s duties to the creditor if he/she is unable to do so on his/her own. Being a surety can not only cost you a lot of money, but it can also be seen as a debt, which might limit your capacity to apply for loans depending on the institution you are dealing with.
In the case of a guarantee, one can ask the court to require the creditor to go after the debtor’s assets before suing you if the latter is in default and the former asks you to make the payment or fulfil the obligation. This is referred to as a discussion benefit.
If the creditor chooses to sue you, but several people have acted as surety, you can ask the court to divide the debt among all the sureties. This is called a division benefit. However, these two benefits cannot always be claimed, and a guarantee pays the debtor’s debt in full. In this case, the guarantor can possibly try a refund action against the principal debtor.
The case of Munyuki Robert Armitage Chikwavira v George Musafare Mutonhora and James Sijabuliso Sibanda HC 1950/17 lays this principle clearly when it states: “Every guarantee has an implied promise by the principal debtor to indemnify the surety or guarantee. A guarantor who is called upon to satisfy a principal debtor’s debt is entitled to be reimbursed by the principal debtor.
“Before any payment is made by a guarantor in satisfaction of a debt owed by a principal debtor, no debt is owed by the principal debtor to the guarantor. A principal debtor is only required to reimburse a surety after he has paid his debt.”
Sureties and guarantors provide lenders and creditors with an added level of assurance that the borrower or obligor will fulfil their financial obligations. By providing financial backup and support, sureties and guarantors help reduce risk and increase the credibility of the borrower or obligor. However, becoming a surety or guarantor also comes with legal and financial liabilities, and it requires careful consideration and evaluation of risks before agreeing to take on such responsibilities.
Nevertheless, given the importance of having backup support in today’s fast-paced business environment, sureties and guarantors will remain a vital component of modern-day business agreements for a long time to come.
The material contained in this article is set out in good faith for general guidance in the spirit of raising legal awareness on topical interests that affect most people on a daily basis. They are not meant to create an attorney-client relationship or constitute solicitation. No liability can be accepted for loss or expense incurred as a result of relying in particular circumstances on statements made in the article. Laws and regulations are complex and liable to change, and readers should check the current position with the relevant authorities before making personal arrangements.