Surety and suretyship
There is suretyship if someone commits himself in respect of the creditor for the fulfilment of an obligation of a third party, the principal debtor. Think of a loan that is provided to A, while partner B warrants repayment of that loan as a surety. If the debtor fails to fulfil his payment obligations after being given notice of default, the creditor may call upon the surety. The surety is therefore not financially liable in his relationship to the principal debtor, but only provides the creditor with (additional) security. Suretyship has been arranged in Book 7 of the Dutch Civil Code. In the Dutch language, both “borgtocht” and “borgstelling” are used to refer to suretyship.
Security for the creditor
Suretyship is used, for example, when providing financing to a private limited company (Dutch BV) for which the financer wants additional security in case the BV fails to fulfil its repayment obligation. In that case, the financer may for example ask the director of the BV (or another third party) to stand surety for the repayment obligation.
Calling upon the surety
If a surety is called upon by a creditor for the performance of the obligation, the surety will have the same defences as the principal debtor. If the principal debtor has a sound legal argument for not performing or not performing in full (e.g. creditor’s default, suspension), the surety will also be able to rely on this argument.
Risks of suretyship
However, the risks for a surety remain considerable, As usually the surety does not have much influence on the debtor’s acts. If this party fails to perform and provides no opportunity for recovery either, the surety will be in trouble. For the private surety who does not act in the course of a profession or a business, statutory protective provisions apply. For example, the agreement of suretyship has be recorded in writing. In addition, the suretyship is only valid up to a specific maximum, expressed in monetary terms, and the suretyship agreement can be terminated at any time, with due observance of the applicable notice periods.
Consent from spouse required
A special condition for private suretyship is the consent requirement for spouses (Book 1, article 88 of the Dutch Civil Code). A suretyship is voidable if the surety has not obtained such consent from his or her spouse. This consent requirement only applies if the surety has entered into the suretyship agreement outside the normal conduct of his profession or business.
Difference with joint and several liability
Suretyship is sometimes confused with joint and several liability. In the case of joint and several liability, there is no suretyship but a joint debtor who has bound himself in addition to the other debtor(s). The creditor is entitled to full performance in respect of any of them (and therefore does not have to seek redress from the other debtor(s) first). The debtors have an internal obligation to contribute, meaning that the debtor who pays more than his share may claim the rest from the other debtor(s).