Legal Concepts of Security and Suretyship

Introduction

• A creditor seeks security to safeguard against a debtor's default.
• There are two types of security:
  • Personal security: Guarantees payment through contractual obligations by a third party (e.g., suretyship).
  • Real security: Bonds assets as collateral, granting the creditor a real right over the specific thing to ensure payment (e.g., mortgages, pledges, liens).

Suretyship

• Definition: A contract where a surety agrees to fulfill the debtor's obligations if the debtor fails to pay.
• Parties:
  • Creditor: The person/entity owed the money.
  • Surety: The third party who agrees to pay the debt.
  • Principal Debtor: The person/entity who owes the debt.
• Key Considerations:
  • The suretyship contract is separate from the main loan but is an accessory to it.
  • The suretyship contract terminates when the principal debt terminates.
  • The surety is liable only for the portion the debtor fails to pay, their liability cannot exceed the principal debtor's.
  • The surety can use the principal debtor's defenses against the creditor, except for personal defenses like the creditor being a minor.

Formation of a Suretyship Contract

• Agreement: The creditor and surety must reach consensus on all terms of the agreement, the principal debtor is not involved.
• Formality: The contract must be in writing and signed by both parties to be valid.
• Material Terms: The names of the surety, creditor, and principal debtor, the nature of the debt, and the debt amount must be included.
• Void Contract: A contract with blank spaces or missing terms is void.
• Oral Variation: A contract of suretyship cannot be amended orally.

Rights of Parties to a Suretyship Contract

• Creditor:
  • Claim payment: Has the right to claim from the surety, the right arises when the principal debtor defaults.
  • Cession: Can transfer their right to claim payment to a third party.
• Surety:
  • Limited Liability: Cannot be held liable for more than the contractual amount.
  • Principal Debtor's Defenses: Can use any available defenses of the principal debtor.
  • Special Rights and Benefits:
    • Excussion: Can demand the creditor to pursue the principal debtor first.
    • Division: Can require the creditor to sue all co-sureties for their proportionate share of the debt.
    • Cession: Can request the creditor to cede their right to claim the debt from the principal debtor after the surety pays the debt.

Termination of a Suretyship Contract

• Extinction of Principal Debt: The suretyship contract terminates.
• Payment Refusal: Payment made or offered by the debtor and unreasonably refused by the creditor.
• Material Alterations: Modifications to the original debt without the surety's consent.
• Principal Debtor Discharge: The creditor releases the principal debtor from the debt.
• Creditor Delay: The creditor unreasonably delays collecting the debt, leading to the debtor being unable to pay.
• Time Lapsed: The surety is bound for a specified time, or the contract allows the surety to terminate with notice.

Other Forms of Security: Real Securities

• Mortgages: An agreement to register a limited real right on immovable property as security for a debt.
  • Parties:
    • Mortgagee: The creditor.
    • Mortgagor: The debtor.
  • Formation: Requires agreement and registration at the Deeds Office, both parties must intend to create a mortgage, and the mortgagor is the legal owner of the property.
  • Impact: The creditor does not become the owner, but receives a right over the immovable property, the debtor retains the right to use and enjoy the property.
  • Benefits:
    • The creditor can sell the property by Court order to recover the debt if the debtor defaults.
• Pledges: A limited real right over the debtor's movable property serving as security for a debt.
  • Parties:
    • Pledgee: The creditor.
    • Pledgor: The debtor.
  • Formation: Can be oral or written, involves the debtor delivering the pledged movable property to the creditor.
    • Impact: The pledgor (debtor) remains the owner of the property, the pledgee (creditor) cannot use or enjoy the property, but must take care of it while in their possession.
  • Default: The pledgee may sell the property to recover what is owed to them if the debtor fails to fulfill their obligations.

This quiz covers the fundamental concepts of security in legal agreements, focusing on personal and real security types. It delves into the definitions and parties involved in suretyship, along with key considerations of related contracts. Enhance your understanding of creditor-debtor relationships through this engaging quiz.