Prejudice to a surety will only release the surety from liability if the prejudice is the result of a breach of a legal duty or obligation owed by the creditor. The primary sources of a creditor’s duties and obligations are the principal agreement and the suretyship. If the prejudice complained of results from conduct falling within the terms of the principal agreement or the deed of suretyship, the surety could not rely upon such prejudice in order to escape liability.
In Dominick v Nedbank Limited, the Supreme Court of Appeal held that Nedbank was entitled under the principal contract to apply set-off. Nedbank’s failure to apply set-off did not constitute a breach of the principal agreement or the suretyships and therefore the sureties could not rely upon Nedbank’s failure to apply set-off against the principal debtor, in order to escape liability. The suretyships covered future debts and gave Nedbank the right to determine the extent, nature and duration of the principal debtor’s banking facilities. The extension of the principal debtor’s overdraft facilities was lawful conduct by Nedbank.
This case illustrates how difficult it is for a surety to escape liability on the basis of prejudicial conduct by the creditor.
