Abstract

THE FORMULATION "SURETY AND CO-PRINCIPAL DEBTOR" CONTAINS A CONTRADICTIO IN TERMINIS WITH CONSEQUENCES In many a suretyship agreement the formulation is found that a person binds himself "as surety and co-principal debtor". It is submitted that, notwithstanding the commonly held belief that the legal construction described by this formulation entails nothing more than a mere suretyship, far-reaching consequences are attached to the formulation and that the legal content of it is far removed from that of a normal suretyship. It is inherent to the nature of suretyship as an accessory relationship that nobody can stand surety for his own primary liability as debtor. This is the position regardless of whether the person is described as the sole debtor or as co-principal debtor. This contradiction is discussed with reference to the historical sources of the divergent constructions entailed in this conglomerate formulation as well as references to some of the comparable legal systems founded on the same underlying legal principles as the South African common law. While a suretyship agreement per definition always entails an accessory relationship and in principle the surety’s liability is only a subsidiary liability (although this latter principle may be altered by agreement), the liability of a co-principal debtor is neither accessory nor subsidiary. In the case of co-principal debtors there is only one liability ie the performance due to the creditor under that agreement, albeit by more than one debtor. If fulfilled, that claim to performance is settled and cannot be ceded to the person who paid. In contrast, the surety when called upon to perform is settling his own accessory liability and not that of the principal debtor and is consequently subrogated to the rights of the creditor, ie he thus has the same rights as those of the creditor and he can sue the principal debtor to exercise those rights and may claim the still outstanding performance from the principal debtor. Where extinctive prescription is at stake, the outcome differs significantly depending on whether the accessory and subsidiary liability of a surety is additionally secured by a mortgage bond over the surety’s immovable property or if it is a single debt that is extinguished by prescription after the lapse of the default three-year prescription period. Taking the above into account and reflecting on the formulation of Boshoff J in Business Buying & Investment Co Ltd v Linaae, where he stated that "[a] person who signs as surety and co-principal debtor is both a surety and debtor. As far as the creditor is concerned he is a co-debtor; his obligation is co-equal in extent with that of the principal debtor and is thus of the same scope and nature as that of the principal debtor …. He does not, however, lose his character of surety and is, for example, entitled to the beneficium cedendarum actionum and to found a defence against the claim of the creditor on any act done by the latter which prejudices the surety in the exercise of that beneficium …. As far as the debtor is concerned he is a surety and has a right of recourse against him" (1959 (3) SA 93 (T) 95H-96A), the reasoning remains convincing. However, the well-known decisions of the court of appeal in Neon and Cold Cathode Illuminations (Pty) Ltd v Ephron (1978 (1) SA 463 (A) 471D), where it was stated that "[a]lthough respondent bound himself, not only as surety, but also as co-principal debtor with Benam, that did not render him liable to appellant in any capacity other than that of a surety who has renounced the benefits ordinarily available to a surety against the creditor", and in Kilroe-Daley v Barclays National Bank Ltd (1984 (4) SA 609 (A) 623G), where it was stated that "[i]t follows from what has been said above that a surety and co-principal debtor does not undertake a separate independent liability as a principal debtor; the addition of the words, ‘co-principal debtor’, does not transform his contract into any contract other than one of suretyship … The appellant executed a mortgage bond. In so doing she did not enter into a contract separate from her contract of suretyship; she merely furnished security for her indebtedness", still do not detract from the reasoning of Boshoff J quoted above. This reasoning was reconfirmed in Millman NNO v Masterbond Participation Bond Trust Managers (Pty) Ltd (Under Curatorship) (1997 (1) SA 113 (C) 122E-F): "As appears from a later passage in Union Government v Van der Merwe (supra at 322) which has already been quoted above, the learned Judge points out that a surety who signs as co-principal debtor incurs a greater obligation than that of a surety simpliciter: it is ‘co-equal in extent with that of the principal debtor: or otherwise expressed, that his obligation shall be of the same scope and nature as that of the principal debtor’." See also the formulation in Consolidated Textile Mills Ltd v Weiniger (1961 (3) SA 335 (O) 338C): "As a co-principal debtor the defendant’s liability is co-equal in extent with that of the principal debtor … and the defendant can be sued for any debt incurred by the company to plaintiff in respect of goods supplied, as soon as that debt becomes due. It will not even be necessary to excuss the company before suing the defendant, and subsequent liquidation of the company can in no way affect this right to sue." It is thus clear that the reasoning of some of the lower court decisions are more in line with legal principles than that of the court of appeal and clearly the court of appeal’s reasoning has not found its way into all subsequent decisions of the lower courts. It is thus submitted that legal certainty will be enhanced if the apex court unambiguously clarifies the consequences attached to the oft-used inherently contradictory formulation of contracts of suretyship and urges the credit community to refrain from using the ambiguous terminology in contracts that tends to obscure the true liability of such a co-principal debtor. If this is not done, it may be prudent for the legislature to consider codifying this aspect of the law of personal security along the lines of the latest codification by the Belgian legislature.