Suretyships in Commercial Contracts - What Every Business Should Know

Suretyship agreements are a common feature of commercial transactions in South Africa, offering businesses additional security when extending credit or entering into high-value agreements. However, the law imposes strict formal requirements for such agreements to be valid and enforceable. A failure to comply with these requirements can render a suretyship void even when the parties intended otherwise. This article outlines the legal framework governing suretyships under South African law and highlights key pitfalls to avoid. 

What Is a Suretyship? 

A suretyship is a contract whereby one person (the surety) undertakes to the creditor to fulfil the obligations of another (the principal debtor) if that person fails to do so. It is an accessory obligation, meaning it cannot exist independently of the principal obligation. 

Legal Framework: 

The General Law Amendment Act 50 of 1956, Section 6 provides: “No contract of suretyship entered into after the commencement of this Act shall be valid unless the terms thereof are embodied in a written document signed by or on behalf of the surety.”1  

This means that for a suretyship to be legally binding, the following requirements must be met: 

1. The suretyship must be in writing. 

2. It must contain all the material terms of the agreement. 

3. The surety must sign it, or someone authorized to sign it on the surety’s behalf. 

Notably, the Act does not require the creditor or principal debtor to sign the document, only the surety. 

Consequences of Non-compliance 

If any of these formalities are not satisfied, the suretyship is void and unenforceable, regardless of the parties’ intentions. South African courts have confirmed this on numerous occasions. 

The court emphasized that Section 6 is aimed at providing certainty and protecting sureties from unrecorded obligations. 

Other common Pitfalls: 

• Blank or incomplete documents: A suretyship signed before essential terms (such as the amount or the identity of the principal debtor) is inserted may be invalid. 

• Unauthorized signatories: A person signing on behalf of a company or trust must have the necessary authority. If they do not, the suretyship is void. 

• Incorrect party names: Even minor errors in naming the surety or principal debtor can lead to legal disputes. 

• Ambiguous or conflicting terms: If the document is unclear or inconsistent with other related agreements, it may be deemed unenforceable. 

Practical Guidance for Businesses 

To ensure your suretyships are enforceable: 

• Use clearly drafted, standalone suretyship agreements. 

• Verify the identity and authority of the person signing as surety. 

• Ensure that all material terms are completed in writing before signature. 

• Obtain legal advice before relying on non-standard forms or informal arrangements. 

Conclusion         

While suretyships are a valuable tool for risk management in commercial contracts, they require careful attention to legal formality. South African courts take a strict approach to compliance, and a seemingly minor omission can lead to significant financial consequences. Businesses should, therefore, approach suretyship agreements with caution and always ensure that the requirements of the General Law Amendment Act are fully met. 

For further assistance, consult an attorney at SchoemanLaw is recommended.   

Anastacia Willemse | SchoemanLaw Inc   

Candidate Attorney: Commercial law 

https://schoemanlaw.co.za/our-services/commercial-law/ 

https://schoemanlaw.co.za/our-services/contract-drafting/