The surety is usually signed on behalf of a company by a director or shareholder, and in some cases by a spouse or friend, in favor of a creditor. This ensures that if the company cannot fulfill its contractual duty to pay, then the creditor can approach the surety to demand payment on behalf of the company.
A surety is effectively a contract between the creditor and the surety itself and is generally drafted in such a way as to bind the surety for a specified amount and for an indefinite period in favor of the creditor.
The South African Contract Law allows contracting parties to do so on whatever terms they deem appropriate. This is known as contractual freedom, which means that the parties can contract on the terms of their choice with very little limitation, legally speaking, as long as the Bond document complies with certain legal formalities.
The surety must read the wording carefully and be equipped to understand it in order to request changes, as it is purposely designed in favor of the creditor.
As an example, a husband and wife married outside the community of ownership together buy a house that is in their name, but the bank requires the wife to sign a bond. A standard financial house surety agreement stipulates that the surety is signed for the debtor in his capacity as a debtor for past, future and current debts that he may incur, either as a debtor or as a surety for another debtor. Fast forward a few years, the house was sold and they were divorced. Start a business and borrow money from the same bank, signing a surety for the company, as is common practice. The company then gets into trouble and the bond contract that the wife signed 16 years ago regarding the house is still valid and, as such, is now bound by the bond that had no limits to the time or amount that the bank could claim.
How can I guarantee protection when signing a bond?
When it comes to signing a bond, you need to be very sure what you are signing up for. The consequences of signing a bond for a debt is that you can and will be responsible for paying the debt if the principal debtor does not, according to the terms of the bond agreement. And, just because you are unaware of the terms of a later contract, you cannot escape liability.
You have to protect yourself at all costs. The surety contract must be limited to a stipulated amount and in respect of a stipulated debt.
The cancellation of a deposit must be made in accordance with the agreement itself. Generally, once the debtor has fulfilled his duties under the settlement, the surety should be able to cancel the surety.
Keeping a record of all the collaterals you enter that you can update and verify regularly will go a long way to avoiding unnecessary liability.
It is important that you review the document with a fine-toothed comb before signing it and obtain independent legal advice if you are unsure of the consequences of certain terms.
Also, if you are signing an agreement as a director or member on behalf of a nearby business or corporation, be sure to examine the agreement because you could also be held personally liable.
Signing a bond does not have to be a life sentence. It is always advisable to seek legal advice to assess your potential liability on a surety bond and ensure that you do not enter into any agreements that could negatively affect you in the long run.
PJ Veldhuizen is MD of the specialized commercial law firm Gillan & Veldhuizen Inc