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Suretyship, do you know the pros and cons?

If you know an owner of a company, you are probably familiar with the term “suretyship”. Whether in construction or financing a business, you have surely been asked to provide a surety to guarantee that your company’s obligations are executed. What is the purpose of a suretyship and what are the rights and obligations of the surety?

Firstly, it is important to know that suretyship is a contract that gives a guarantee for a particular purpose to a creditor to execute the debtor’s obligation in case of default[1].  Theoretically, if the debtor is not in default, the creditor cannot force the surety to execute in his place.

Secondly, the suretyship cannot exceed the amount due by the debtor[2]. Therefore, if the borrower now owes 2 million dollars, the creditor will have to ask for the lesser of the amounts between the amount owed (2 million dollars) and the amount of the guarantee.

Of course, if the debtor defaults and the suretyship is invoked, the surety can then demand repayment by the debtor for the amount the surety paid the creditor. 

However, if a creditor has come to the decision to force the surety to execute his contract, it is important to understand that the chances that the surety will successfully recover the amount from the debtor are highly unlikely, depending on the debtor’s solvency.

It is also interesting to note that the creditor and surety do not need the debtor’s consent to contract a suretyship[3]. In this situation, the judicial recourse of the surety can only recover from the debtor what the debtor would have been bound to pay if there had been no suretyship, plus damages; however, it should be noted that costs subsequent to notice of the payment are payable by the debtor[4]

It is therefore important to read the suretyship contract carefully in order to understand what will be required from you, and in the case of creditors to ensure that the suretyship is valid.

[1] Art. 2333 C.c.Q.

[2] Art. 2341 C.c.Q.

[3] Art. 2336 C.c.Q.

[4] Art. 2356 C.c.Q.

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