A suretyship agreement is defined as an agreement in terms of which a third party, namely the surety, undertakes liability towards a creditor for the proper performance of a portion of or the entire obligation of a debtor.
A valid principal obligation between the creditor and debtor is essential for the validity of a suretyship agreement. This is known as an accessory obligation. Therefore, if there is no principal obligation, then there is no suretyship agreement. It should be noted that the debtor’s obligation towards the creditor continues to exist notwithstanding the suretyship agreement.
It should be noted that the suretyship’s liability can never exceed that of the debtor.
However, the liability can be less than that of the debtor depending on the agreement. A valid principal debt must exist, either by way of payment of money or specific performance. The principal debt can in some instances be conditional, can be a future debt or it can be in respect of an unlimited sum of money.
There are three parties to a suretyship namely: the creditor; the principal debtor and the surety.
Each of the parties to the surety agreement has obligations and one of the creditor’s obligations is to do nothing in his/her dealings with the principal debtor and with the surety which would prejudice the suretyship agreement. The principal’s debtor is obliged to fulfil his/her contractual obligation towards the creditor. Should the surety in an event pay the creditor, the principal debtor is to reimburse the surety. The surety’s obligation is to indemnify the creditor should the debtor fail to fulfil his obligation.
A suretyship agreement is between the creditor and the surety and the common requirements of a contract must be complied with. It should be the intention of the parties to conclude a suretyship agreement. The principal debtor is not a party to the surety agreement and need not be aware of the conclusion of a surety agreement.