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Have you ever listened, with pity and confusion, to a friend or relative telling you that their house is about to be sold because they happened to “signed a document” at some bank when one of their relatives was applying for a loan? 

Lawyers are often approached by clients lamenting that they accompanied a relative to a lender to apply for a loan. On arrival, they were asked to sign a “certain document” whose meaning they never bothered to dwell on. 

Now, their house or car is going to be sold because the relative failed to repay the loan. Frequently, the problematic document is a suretyship agreement.  The Covid-19 induced lockdown is over and you are free to resume your usual economic pursuits. 

There has never been a better time to approach lenders to finance your egg layers, mabhero (second hand clothes), or Brazilian human-hair business. 

Lenders will finance your exciting venture but seek to minimise their exposure by requesting some form of security.  

A common mechanism employed to secure performance of a borrower’s obligations is a suretyship agreement. It is not uncommon for the surety to pledge movable or immovable property as collateral. 

There is nothing inherently evil about the suretyship agreement. It is a worthwhile legal device.  To the lender — it is a vital mechanism for minimising loss in the event of default. To the entrepreneur — it is an essential tool for the facilitation of commercial initiative. 

For the broader economy, the importance of the availability of credit and its function in creating investment and jobs cannot be overemphasised. 

For the surety, however, the consequences of guaranteeing the performance of another’s obligations are potentially disastrous. It is, therefore, critical for would-be sureties to fully comprehend the meaning of a suretyship agreement and the obligations that arise from it. 

In the case of Ellse v. Johnson SC 49/17, the Supreme Court of  Zimbabwe defined a suretyship agreement as an accessory agreement between the surety and the creditor of the principal debtor in terms of which the surety makes himself liable to the creditor for the proper discharge by the debtor of his duties to the creditor. 

In the old South African case of Orkin Lingerie Co. (Pty) Ltd v Melamed & Hurwitz 1963 (1) SA 324 (W) at 326 G-H Justice Trollip, commenting on the definition of a suretyship agreement, said: “Various definitions of suretyship have from time to time been given. 

“They are collected in Wessels on Contract 2nd ed, paras, 3774, 3785 to 3793, and Caney on Suretyship, pp 11, 17 and 18. I think that, having regard to them, a contract of suretyship in relation to a money debt can be said to be one whereby a person (the surety) agrees with the creditor that, as accessory to the debtor’s primary liability, he too will be liable for that debt. The essence of suretyship is the existence of the principal obligation of the debtor to which that of the surety becomes accessory.”   

It is clear, therefore, that a suretyship agreement can only be concluded if there is an underlying agreement between the creditor and principal debtor. 

It is an additional or supplementary agreement to the original agreement between the creditor and principal debtor. Therefore, there are two separate agreements; one concluded between the creditor and principal debtor and another between the creditor and the surety. 

Your cross-border trader relative, Aunty Bhero, who wishes to borrow money from a lender is the debtor or principal debtor. The financier availing funds, Boss Shark, is the creditor. You — Tom Mbinga, the dutiful relative assuring the lender that Aunty Bhero will repay the loan, and undertaking to repay the loan yourself if she fails, are the surety or co-principal debtor. 

The most important take-away here is that the surety agrees to make itself liable to the creditor for the principal debtor’s debt. Becoming a surety, therefore, is an undertaking laden with risk. 

People frequently stand surety for the debts of their loved ones. In such cases, the decision to assume risk is guided more by emotion than by reason. The emotional bond at play clouds judgment and people plunge headlong into what has been jokingly defined as “emotionally transmitted debt”. 

In other instances, employers have been known to pressure employees into standing as sureties for the employer’s obligations in circumstances where the employee often ends up saddled with crippling joint liability with the employer.  

In my personal experience, the majority of cases involve principal debtors who induce friends and relatives to bind themselves as sureties either by misrepresenting the true import of the agreement or through material non-disclosure. 

For example, I have come across unsophisticated sureties who were told that they were merely signing the document as witnesses. In other cases, the principal debtor conceals the full extent of his indebtedness.  

It is crucial for would-be sureties to understand the essence of the suretyship agreement before signing it. The courts will not sympathise with sureties who bemoan the fact that they never read the deed of suretyship before signing it. 

Those who sign legal agreements are warned to be aware of their content. The caveat subscriptor rule sets out that a party is taken to be bound by the ordinary meaning and effect of the words which appear above its signature, for the other party is entitled to assume that he has signified his assent to the contents of the document.  Therefore, it is important to read the deed of suretyship or, better yet, seek legal advice before signing it. 

In the case of FBC Bank Ltd v Dunleth Enterprises (Pvt) Ltd HH 568/14, a surety attempted to dodge liability on the basis that when she signed the suretyship agreement the principal amount advanced to the principal debtor was not stated in the agreement. 

The space where the principal amount was supposed to be stated had been left blank. She further argued that she had only undertaken liability for a maximum amount of US$ 150 000,00 not the US$685 000-00 claimed by the Plaintiff. The High Court rejected this argument. Justice Zhou held that when a party to an agreement signs it in blank and leaves it to the other party to complete the rest, then they cannot turn around and claim that they are not bound by the terms of the agreement. 

Applying the caveat subscriptor principle, the Court held that the only defences available in the circumstances are the normal defences available to any other signatory. 

According to R. H. Christie, The Law of Contract in South Africa 3rd Ed at page 197, those defences are misrepresentation, fraud, illegality, duress, undue influence and mistake. In the circumstances, the court concluded that the surety should be taken to be bound by the terms of the agreement which she signed.  

Any other approach, according to Justice Zhou, would be inconsistent with the dictates of modern commercial convenience. On appeal, the Supreme Court upheld Justice Zhou’s position. 

Do not sign a suretyship agreement without a proper comprehension of its content. By signing, you automatically agree to the conditions stated within it, regardless of your failure to read and/or understand the agreement.

 Jacob Mutevedzi is a commercial lawyer and a commercial arbitration practitioner contactable on [email protected]/Tweeter: @jmutevedzi-ADR. He writes in his personal capacity.