Your child rents his first apartment and needs someone to guarantee the payment of rents. Your friend asks you to stand surety with his bank to guarantee the repayment of a loan.
By agreeing to sign a bond contract, what are your obligations? Me Lambert explains the basic concepts of suretyship and comments on the risks associated with it.
The concept of suretyship
What?
Let’s take a contract signed between a person who is obliged to make payments (debtor) to another person or institution (creditor). Sometimes the creditor will require additional security to ensure that it will be paid. This guarantee is also called a bond.
The suretyship is, according to article 2333 of the Civil Code of Québec, first and foremost a contract, giving rise to obligations on the part of a person (the surety) towards the creditor (e.g. financial institution, owner of an immovable, etc.), in the event of default by the debtor.
This type of contract is said to be ancillary, because it depends on the main contract (if it is not valid, the contract of guarantee is not valid either) and subsidiary, because it binds the obligation of the guarantor only when the debtor does not perform it. It is also often a membership contract, as it is usually prepared in advance and pre-printed, with little or no possibility of modifying it.
In addition, the guarantee may be legal if it results from a law, judicial if it comes from legal proceedings or conventional in other cases (for example, in the case of a bank loan).
When?
Suretyship is normally done to ensure payment, as in the case of the repayment of a loan.
On the other hand, it can also be done to guarantee the performance of a contract. For example, in the case of a construction contract, if the debtor refuses to do or complete the work, the surety will be required to do so.
Who?
The surety can be a natural person like you and me, or a legal person, like an insurance company. The bond can be done by more than one person. In these cases, the creditor can choose the guarantor from whom he will demand, for example, the repayment of a loan.
In addition, one bond may be bonded by another. That is to say, if John has vouched for Mary, nothing prevents Yves from returning, in turn, John’s surety.
The effects of the bond
Learn!
If you are the surety, you must read the surety contract carefully in order to fully understand the extent of your obligations. For example, the bond may be limited and you may only have to pay part of it.
It is important to note that the guarantor’s obligation cannot exceed the limits of the debtor’s commitment. As a surety, you undertake to ensure the performance of the debtor’s obligations, no more.
It is also possible that the creditor considers certain conduct or omissions to be defaults on the part of the debtor. For example, some financial institutions will require not only the up-to-date payment of the loan, but also a minimum amount of money in the debtor’s account at all times. If the balance is lower than this minimum, the debtor is considered to be in default of performance of his obligation and the guarantor will be called upon to act.
If you have any doubts about the debtor’s commitment, you can always ask questions of the creditor, who has an obligation to provide you with the relevant information about the extent of the obligation and the state of its performance.
The discharge of the debtor’s obligation by the guarantor
By signing the contract of guarantee, you undertake to fulfil the obligations towards the creditor on the part of the debtor when the latter is unable to do so himself. In addition to being able to cost you dearly, being a surety can be perceived as a debt, which can affect your ability to apply for loans.
If the debtor is in default and the creditor asks you to make the payment or perform the obligation, you can, in some cases, ask the court to order the creditor to attack the debtor’s assets before suing you. This is called a discussion benefit.
If the creditor chooses to sue you, but several people have acted as surety, you can ask the court to divide the debt among all the sureties. This is called a division benefit.
These two benefits cannot always be claimed, and you may have to pay the debtor’s debt in full. If this is the case, you can possibly try a refund action against the latter.
This article contains general information about surety contracts. The clauses and particularities of yours will be important in the event of a dispute. If you have any doubts, consult a lawyer before signing the contract.
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