The court in Firstrand Bank Limited v Barreiro reconfirmed that there is no general ‘prejudice principle’ which holds that a debtor or surety is released from their obligations to a creditor if the creditor does anything that prejudices them. The court reiterated that a surety can be released, either wholly or in part, from their obligations only if the prejudice caused by the creditor was the result of a breach of a legal duty or obligation. Therefore, there is no general prohibition on a creditor acting in a manner that may cause prejudice to a surety.
In Barriero, two of the three members of a close corporation signed a written suretyship in favour of a bank, as security for a credit facility provided to the close corporation. In addition, a general covering mortgage bond over the two sureties’ immovable property provided security for all amounts owing by the sureties including under the suretyship. Thus, when the close corporation defaulted, the bank proceeded against the sureties’ immovable property.
As the value of the immovable property was not sufficient to discharge the amounts owing under the credit facility, the bank subsequently proceeded against the two sureties for the outstanding balance. In defence, the sureties argued that the bank’s failure to obtain security from the third member of the close corporation prejudiced them. This prejudice was based on the fact that the sureties’ liability to the bank under the suretyship would have been less if the bank had procured the additional security from the third member of the close corporation. The sureties argued that this prejudice would cause the two sureties to be released from their suretyship.
The court rejected this argument and held that there is no general ‘prejudice principle’ which holds that a creditor may do nothing in its dealings with a principle debtor or surety which prejudices them, thereby allowing the full release of such debtor or surety. The court reaffirmed that a surety can be released, either wholly or in part, from their obligations only if the prejudice caused by the creditor to the surety was the result of a breach of a legal duty or obligation.
The bank had no obligation or legal duty to obtain additional security from the third member of the close corporation. Any prejudice suffered by the sureties was one which they undertook to suffer when they entered into the suretyship agreement. The sureties were thus held liable for the outstanding balance on the credit facility.