| br!ghtshark |

Like death and taxes, it is one of life’s certainties that debtors will default on credit repayments. The most common way to minimize this financial risk is to have debtors sign personal sureties – holding them liable should their companies indeed default. But how sure are you that your surety will hold up?

At the end of 2004 the Supreme Court of Appeal delivered a judgment in regard to surety clauses incorporated into credit applications. This case has recently lead to a number of cases in which persons who signed surety for a company’s debt in their personal capacity now attempt to side-step the surety.In the case before the Appeals court a businessman signed a credit application form on behalf of a company and in the process bound himself in his personal capacity as surety for the company’s debts. In the specific incident the businessman signed directly under a clause wherein it was stated in capital letters that the businessman bound himself as surety and co-principal debtor (see extract annexed hereto).

The specific document the businessman signed was headed “CREDIT APPLICATION FORM” – this the court found to be misleading and one of the grounds on which the businessman could not held responsible as surety.

Furthermore the businessman was only required to sign the form once where it was indicated that the businessman was signing on behalf of the company and not also a second time in his personal capacity as surety. Although a single signature would have had legal effect the court found that this increased the chances of the businessman to be misled when signing the form.

The court also took the words “I, the undersigned ………. in my capacity as ……… of the debtor” at the start of the declaration to add to the possibility that the businessman was under the wrong impression that he did bind himself in his personal capacity.

In the last instance the court found that, even though the clause whereby the businessman bound himself as surety was in capital letters, the specific clause was preceded by two other clauses which were also printed in capital letters and that this diminished the emphasis on the surety-clause. The surety-clause also forms part of a block of three clauses and the court found that this further detracts from the emphasis on the surety-clause.

On basis of the above the court found that, even though the businessman had had ample time to examine the document and failed to do so, the said businessman could not be held liable in terms of the said surety.

It would therefore be wise of businesses to adapt their current credit application forms, especially if the credit application form and surety is normally presented in a single document, so as to take this finding of the Supreme Court of Appeal into account.

POINTERS FOR UPDATING CREDIT APPLICATION FORMS:

1) Consider having separate forms for Credit Applications and for Personal Sureties.

2) Clearly mark the document not only as “CREDIT APPLICATION FORM” but as a “CREDIT APPLICATION FORM AND PERSONAL SURETY”

3) Have the signatory sign the document twice with clear indication that he/she is signing in two separate capacities – one as duly authorized representative of the company and one as surety in his personal capacity.

4) Clearly mark one of the signatures “SIGNED AS SURETY”

5) Draw attention to the surety-clause by putting it in bold, highlighting it and isolating the clause from the other clauses.

6) If the form encompasses terms and conditions on the reverse of the form, ensure that these terms are pointed out and explained to the signatory. It might even be prudent to have a third-party witness and confirm that the terms (and in specific the surety-clause) had been pointed out to the signatory.