Does a Principal Obligation need to exist prior to the conclusion of a valid Suretyship

When a Credit Loan Agreement is entered into between a Creditor and Debtor, a Surety Agreement is often concluded.

A Surety Agreement involves three parties being the Creditor, the Principal Debtor and the Surety. The Surety is an individual that undertakes to bind him or herself as Co-Principal Debtor and to fulfil the obligations of the Principal Debtor, should he or she fail to meet them.

A Suretyship is an accessory obligation and a valid Principal Obligation should, in essence, exist between the Creditor and Principal Debtor.

However, what is the position when a Suretyship is concluded prior to the Principal Obligation? Or when a Suretyship is signed by the Surety prior to the Credit Loan Agreement, by the Principal Debtor?

The position will be briefly discussed within this article.

The current position in respect of Case Law

This position was confirmed in the case of GA Odendal v Structured Mezzanine Investments (482/13) 2014 ZA SCA where the argument on behalf of the Appellants was that the Principal Debt was not in existence at the time of the conclusion of the Suretyship.
The court confirmed that, “It is indeed so that a contract of Suretyship is accessory in the sense that it is of the essence of Suretyship that there be a valid Principal Obligation. The court however held that the fact that a Credit Loan Agreement had not yet been concluded between the Debtor and Creditor was, in itself, no barrier to the potential validity of the contract of Suretyship.”

The court also referred to the position as was pointed out by Corbett JA in Trust Bank of Africa Ltd v Frysch 1977 (3) SA 562 (A) at 584 G-H in that, “It is not essential that the Principal Obligation exists at the time when the Suretyship contract is entered into. A Suretyship may be contracted with reference to the Principal Obligation which is to come into existence in the future.”

<read more>

, , , , ,

No comments yet.

Leave a Reply

2 + 4 =