The service of a summons on one surety does not interrupt the running of prescription in favour of a co-surety. Although the surety undertakes to be liable if the principal debtor does not pay the debt, the surety does not become a co-debtor with the principal debtor, nor does the surety become a co-debtor with any of the co-sureties, unless they have agreed to that effect. A surety does not undertake independent liability as a principal debtor. The use of the words ‘co-principal debtor’ does not transform the contract into anything other than a suretyship.
In Liberty Group Ltd v Illman, an insurer entered into a broking agreement with ECE Financial Holdings, in terms of which ECE was to act as an intermediary for the insurer’s products. As compensation for its services ECE would be paid commission on premiums received by the insurer. This commission was paid in advance by the insurer before receiving any premiums. Eight individuals signed separate but identical suretyships in which they bound themselves as sureties and co-principal debtors for payment to the insurer of all money which ECE owed to the insurer.
The agreement between the insurer and ECE was terminated. On 22 September 2011, the insurer issued summons against all the sureties for the repayment of the commission. On 29 September 2011 the summons was served on one of the sureties, Mr September. The summons was only served on the defendant (another surety) five years later. The defendant alleged that the claim had prescribed. In response, the insurer alleged that service of the summons on Mr September within the prescription period interrupted the running of prescription in favour of ECE and all sureties who had bound themselves as co-principal debtors, including the defendant.
The Supreme Court of Appeal rejected this argument, and found that the defendant was not a co-debtor. The fact that the surety had bound himself as a co-principal debtor does not mean that the surety assumes the obligation to discharge the principal debtor’s obligation. The surety merely undertakes that the principal debtor will discharge the obligation, and if not, the creditor will be indemnified by the surety. This obligation is accessory in nature.
The meaning of the term ‘surety and co-principal debtor’ is widely misunderstood and this case is a welcome reminder.