Surety bonds are an efficient and cost-effective way to finance your security obligations. Surety Bonds carry the same obligations at law as a bank guarantee and are a widely accepted form of security by various entities and individuals. Surety bonds also provide security to the beneficiary if the contractor fails to meet their contractual obligations due to default, bankruptcy. We will be unpacking surety bonds in the Zimbabwean context in this week’s blog.
What is a surety bond?
In simple terms, a surety bond is a contract in terms of which one person (the surety) agrees with the creditor of another (the principal debtor) to perform the obligations due to such creditor by the principal debtor if and in so far as such principal debtor fails to do so. There are three parties to a suretyship namely: the creditor; the principal debtor and the surety. 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.
How does a surety bond work?
In simple terms, a surety bond requires the surety to pay a set amount of money to the creditor if a principal debtor fails to perform a contractual obligation. If the principal debtor fails to perform the act as promised, the surety is contractually liable for losses sustained and the creditor is the party who requires and often receives the benefit of the surety bond. In a surety bond, the surety doesn’t replace the principal debtor and doesn’t join him as co-debtor but such surety’s obligation arises only in the event of the principal debtor’s failure to perform. The debtor remains bound to the creditor for the principal obligation.
It must be noted that a Suretyship is not an independent obligation but is always accessory to a principal valid obligation; the surety’s obligation is accessory to the obligation of the principal debtor. A surety contract can only exist when the principal obligation is in existence. Though many suretyship contracts are concluded almost simultaneously with the creation of a principal obligation, a suretyship contract may be concluded for an already existing obligation as well as future obligations yet to be incurred, provided the obligation doesn’t arise until the principal obligation has come into existence.
What is renunciation of benefits in a suretyship?
A renunciation of the following benefits entitles the creditor to recover the full debt from the person who renounced these benefits and applies in situations where there is a debtor and a surety and/or co-or joint debtors. When the principal debt is due the creditor can approach either the debtor or the surety – it is not necessary to claim from the debtor before approaching the surety. The surety has defences available to him should this occur, they include;
- Benefit of excussion (beneficiumordinisseuexcussionis) – the surety may demand that the creditor proceed first with the debtor to obtain the payment, if necessary by execution upon his assets before turning to the surety for payment of the debtor that portion thereof as remains unpaid.
- Benefit of division (beneficiumdivisionis) – a co-surety who is liable in solidum(for the full amount) has the right to demand from the creditor that the debt be divided among all the co-sureties so that he be held liable for his pro-rata share only.
- Benefit of cession (beneficiumcedendarumactionum) – where there are two or more sureties in respect of one obligation. A co-surety who has paid the principal debt in full may demand that the creditor cedes to him all the rights and securities that such creditor has against the principal debtor and other sureties.
- Exceptio non-causadebiti- This is translated as “no cause for the debt”. The renunciation relieves the lender from having to prove that there was a just cause for the debt.
- Exceptio de errore calculi and revision of accounts –these two exceptions mean much the same thing. They are usually renounced when the obligation relates to any matter involving calculations. The debtor should satisfy himself that the amount has been correctly calculated.
- Exceptio non-numerataepecuniae- A lender is entitled to repayment of a loan only where it has been received by the borrower. Where the exception is renounced, the onus is on the borrower to show that he did not receive the money.
- Recourse against the principal debtor – an ex lege obligation is imposed upon the principal debtor to reimburse the surety to the amount of debt he has paid plus loss suffered or expenses reasonably incurred.
- Recourse against co-sureties – a surety who has paid the principal debt is ex lege entitled to claim proportionately from each co-surety his share of the debt
How does co-surety bond work?
Where two or more persons have bound themselves as sureties for the same Debtor and in respect of the same principle debt, they are termed co-sureties and are liable singuli in solidum. This means each Surety is bound for the total debt. Unless the Surety expressly waived the benefit of division, the aforementioned, does not mean that the Surety cannot demand from the Creditor that the debt be divided between the Sureties.
In conclusion, when drafting the Suretyship bond, it is essential for a party to consider whether the Surety will bind himself or herself in respect of all the obligations that may arise between the Creditor and the principal Debtor or only in respect of a specific obligation. It is also important to consider whether the Suretyship is unlimited or limited to a specific amount. If the Suretyship will be limited to a specific amount, it is important to specifically stipulate whether the amount that the Surety is liable for, includes interest and costs.
Disclaimer;
The information and opinions expressed above are for general information only. They are not intended to constitute legal or other professional advice.
Lex Amicus 