Suretyship (Modern Law)

From Max-EuP 2012

by Ulrich Drobnig

1. Type, economic function and legal structure

Suretyship constitutes one of several types of collateral securities. Like the independent guarantee (guarantee, independent) it is a personal security; in both cases a person is liable with all his assets if another person, the debtor, does not perform a specified obligation, the secured obligation, towards the creditor. By contrast, in case of a proprietary security the debtor’s liability with all his assets is reinforced by a security right for the creditor, which encumbers a specific asset of the debtor.

The economic function of all types of security is the same: the chance of obtaining credit as well as the terms under which it is extended—in particular the interest rate—are enhanced where the creditor obtains a guarantee by means of a collateral security which in case of the debtor’s default he may claim against the surety. Since a great deal of all economic activities is financed by credit, personal security is extremely important in practice in all economically developed countries and especially in Europe. For ‘professional’ sureties such as banks, insurance companies and specialized institutions for suretyships, or state and parastatal agencies for economic development, especially for export promotion, the assumption of suretyships is a branch of business and thus subject to a commission. This is usually quite different with regard to individuals, who also frequently grant suretyships, for instance members of a company—especially a company with limited liability—for securing company debts or relatives of the debtor who generally act out of solidarity and therefore without a reward. Consumers as sureties often enjoy special protection (see 4. below).

In any suretyship three contracts and the resulting obligations have to be distinguished: first, the ‘primary contract’ between creditor and debtor, from which the debtor’s obligation—almost always a pecuniary debt—arises, the so-called principal obligation; secondly, the contract of suretyship between creditor and surety, which obliges the latter, if an agreed event occurs—especially the debtor’s default—to perform the suretyship; and finally the contract between debtor and surety, which on the one hand obliges the surety to assume the suretyship and, if the agreed event occurs, especially upon the debtor’s default, to perform to the creditor instead of the debtor and, on the other hand, obliges the debtor to reimburse the surety if he is held liable. If the surety is a professional, the debtor is also obliged to pay a fee (the suretyship commission).

2. Legal sources

Almost all continental European countries have statutory provisions on suretyship which can be found, in particular, in the respective civil codes and which have mostly remained unchanged since their enactment. Only Switzerland in 1941 thoroughly adapted its provisions on suretyship in the revised law of obligations of 1912 (Swiss Code of Obligations (OR)) and especially enhanced the overall protection of the surety. In Scandinavia, only Finland has enacted a comprehensive modern law, completed on 23 March 1999. As regards the fundamental principles, there is a high degree of consensus. The unwritten Anglo-Irish common law also contains largely consistent rules. In the United States, the common law is summarized in the Restatement 3rd, Suretyship and Guaranty (1996) which merges these two branches into one instrument. For the continental European countries, the strong conformity of the provisions is predicated on the broad basis of the well-developed rules of Roman law, which however also had a certain impact on the unwritten Anglo-Irish law.

In the framework of the rules on personal security in the Common Frame of Reference (CFR) for European Contract Law the author has prepared rules for personal security on a comparative basis, which were published in 2007. They have been incorporated in the final version almost without modifications (Arts IV.G.-1:101–4:107 DCFR).

3. Main issues

a) Accessoriness of suretyship

The central legal issue regarding all types of personal security is the relationship between the secured obligation on the one hand and the security, ie the suretyship (or the independent guarantee) on the other. In this respect, suretyship and independent guarantee differ fundamentally (guarantee, independent). In contrast to the latter, the suretyship is accessory to the secured principal obligation. All legal systems in Europe agree on this principle (eg § 767 Bürgerliches Gesetzbuch (BGB); Arts 2289–2290 Code civil). In the DCFR, the accessoriness of the suretyship to the secured obligation even influenced the name of the institution: The suretyship is called ‘dependent personal security’ (Art IV.G.-1:101(a)). For any personal security it is presumed that it gives rise to a suretyship (and not to an independent guarantee), unless the creditor is able to show that the parties have agreed otherwise (Art IV.G-2:101(1)).

The accessoriness of the suretyship to the secured obligation implies in particular that the validity, extent and also the terms of the suretyship depend in principle on the validity, extent and terms of the secured obligation. This rule stated in the DCFR Art IV.G.-2:102 constitutes the most important characteristic of the principle of accessoriness. It reflects the legal situation in all Member States. Significant implications of this principle include the surety’s right to invoke all defences that are available to the debtor against the creditor. However, the surety may not exercise any rights of the debtor which would modify the latter’s legal relationship with the creditor; in particular, the surety cannot avoid the principal contract between debtor and creditor or set-off a counter-claim of the debtor against the creditor’s claim. Instead, in these cases the surety is entitled to refuse performance (Art IV.G.-2:103(1), (2), (4) and (5) DCFR). Modifications, especially attenuations of the principle of accessoriness may, however, be achieved by contractual agreement between the surety and creditor; in particular, the surety may modify the extent, duration or other terms of the suretyship to a level below that of the secured obligation.

By contrast, in one central point the principle of accessoriness is restricted at the expense of the surety: during insolvency proceedings over the debtor’s assets the surety may not invoke the fact that the principal obligation was reduced or discharged (Art IV.G.-2:102(2) DCFR). This exception underlines the security function of the suretyship: it would be absurd if the suretyship failed in the very moment when the secured creditor requires it most, ie in case of reduction or discharge of the principal obligation in the debtor’s insolvency. The most important purpose of all types of security is to protect the creditor precisely against the negative impact of the debtor’s inability to pay (insolvency, cross-border; insolvency (corporate)).

b) The surety’s rank of liability

The second main issue concerning suretyship is the order in which the creditor may claim performance from the surety: should there be solidary liability of surety and debtor vis-à-vis the creditor? In this case, the creditor would be free to choose in which order and to what extent he would like to claim performance from either the debtor and/or the surety. The alternative, a subsidiary liability of the surety, means that the creditor is primarily required to demand performance from the debtor, including an attempt to enforce this demand, before he may turn to the surety.

In this respect, the European legal systems do not only differ among each other, but they often also distinguish between two types of surety: a stricter liability as co-debtor (solidary obligations) is applied to commercial sureties as compared to non-merchants. This distinction particularly favours sureties who are consumers. The modern legal systems in general tend towards a solidary liability of the surety (Art 1944(1) Codice civile).

If a merchant assumes a suretyship, he is solidarily liable in France, Belgium and Luxembourg as well as in Germany and Portugal; formerly, this was also true for Austria but in 2005 the liability of a commercial surety was attenuated to a subsidiary liability. In Spain, the Supreme Court’s decisions are inconsistent. In all countries that follow this strict system though, the parties are free to agree on a subsidiary liability of the surety.

The European DCFR also provides for solidary liability of the surety, yet it allows the parties to agree on a subsidiary liability of the surety (Art IV.G.-2:105 and 2:106); however, with regard to consumers only the latter, milder type of liability applies (Art IV.G.-4:105(b)).

c) Performance and execution of the suretyship

If the surety has performed all his obligations arising from the suretyship by payment to the secured creditor, the suretyship expires as between creditor and surety; yet usually the surety who has performed will be entitled to recourse against the debtor.

If, however, in addition to the surety, one or even several other security providers have granted security to the creditor, whether personal or proprietary security, according to the DCFR these security providers shall be solidarily liable towards the creditor (Art IV.G.-1:105 DCFR). If one surety out of several sureties has paid the entire amount of the suretyship to the creditor, he will first claim reimbursement from the other sureties. The details of this procedure are dealt with by Art IV.G.-1:106 DCFR, and in fact follow the general contractual rule of Art III.-4:107 DCFR. Ultimately, the possibility of recourse against the debtor himself remains. Often this claim will be futile because the debtor is insolvent; otherwise, no claims would have normally been raised against the surety. The rule on recourse is laid down by Art IV.G.-1:107 in conjunction with Art 2:113(1) and (3) DCFR. If the surety satisfies the creditor, the surety is subrogated to the creditor’s claim against the debtor, including potential personal or proprietary security, which (also) had secured the creditor’s claim covered by the suretyship.

4. Tendency: protection of consumer sureties

As was mentioned at the beginning (see 1. above), the suretyship is dangerous for the surety due to the fact that he will be liable for the suretyship obligation with all his assets. Since the protection by means of general principles of contract law, such as for instance, bona fides or public policy, is too vague and uncertain, the Member States have developed different methods, especially through case law but also partly through special statutes, in order to alleviate the risks for consumer sureties. In the DCFR, Book IV.G. lays down these protective rules in chap- ter 4.

Primary focus is on the pre-contractual information rights of the future surety. Article IV.G.-4:103 DCFR requires, in addition to an overall information advisement as to the general effect of the intended security, warnings about the special risks to which the future surety may be exposed according to the information accessible to the creditor about the financial situation of the debtor. If the creditor knows or must assume according to the circumstances that there is a significant risk for the future surety that, due to his closeness and relationship of trust and confidence towards the debtor, the future surety may not be acting freely or with adequate information, the creditor must ensure that the surety receives independent advice, eg from a consumer organization (consumers and consumer protection law). If adequate information or independent advice is not provided at least five days before the conclusion of the contract (contract (formation)), the consumer surety can withdraw his offer or avoid the contract within five days. If no information or independent advice is given, the surety may withdraw or avoid the contract at any time (Art IV.G.-4:103 DCFR).

Apart from this core provision, further precautionary measures are provided for: contrary to a decision of the ECJ (ECJ Case C-45/96 –Dietzinger [1998] ECR I‑1199) the directive on doorstep transactions is also to be applied to the conclusion of suretyship contracts where only the surety is a consumer, ie even if the debtor is not a consumer (Art II.-5:201 (1) DCFR). The contract of suretyship must be in written form and must be signed by the surety, otherwise it is void (Art IV.G.-4:104 DCFR). A suretyship without a maximum amount is regarded as a suretyship limited to the amount of the debtor’s secured obligation at the time of the conclusion of the suretyship (Art IV.G.-4:105(a) in conjunction with Art 2:102(3) DCFR).

If the debtor consents, the creditor has to inform the surety annually about the amount of the principal obligation as well as the ancillary obligations—in particular the accrued interest (Art IV.G.-4:106 DCFR). Finally, the consumer surety who has provided a suretyship for more than three years may limit his effects after the expiration of three years with a notice period of three months. This rule, however, does not apply if the security is restricted to cover specific obligations, eg obligations arising from a lease contract. By virtue of a time limit, the suretyship is limited to secure obligations which are due upon the expiration of the time limit (Art IV.G.-4:107 in conjunction with Art IV.G.-2:109 DCFR).

5. Suretyship-related personal securities

Since the suretyship, as a risk transaction for the surety, enjoys special protection by means of protective rules, particularly in favour of consumer sureties, the parties may attempt to elude these protective rules through the specific drafting of their contract. Typical evasive transactions are especially the co-debtorship for security purposes and the comfort letter.

In case of a co-debtorship for security purposes, a second person assumes an obligation towards the creditor jointly with the creditor’s ‘true’ debtor for the same amount as well as on the same terms as the original (main) debtor; yet in truth, this obligation is intended to serve only as a security for the obligation of the first debtor. The courts base the distinction between a genuine co-debtorship and a disguised suretyship on different criteria. It is particularly helpful to look at the parties’ interests, especially in those cases where a spouse of a merchant—who is actually interested in the credit—or family members assume the co-debtorship towards the creditor even though they hold neither shares of the ‘main debtor’s’ company nor have any interests of a different nature of their own. In such cases the courts in different Member States have often regarded the ‘pretended’ co-debtor as a mere security provider, thus solely as a surety. A co-debtorship for security purposes is considered a personal security and according to the proposed European rules is subject to certain rules on suretyship, in particular those rules that intend to protect the consumer surety (Art IV.G.-1:106 DCFR).

A comfort letter is another recent phenomenon in personal security law. A genuine, ie legally relevant, security only exists in case of a so-called ‘binding’ comfort letter. By contrast, ‘non-binding’ comfort letters are mostly drafted very vaguely and are therefore non-committal declarations to be willing to vouch for another person’s debts. Non-binding as well as binding comfort letters are issued to a creditor typically in commercial practice, for instance by the parent company in support of a subsidiary or by members (or the sole shareholder) of a company for the benefit of a company. Only binding comfort letters are legally binding. According to their reason and purpose they can be understood as the undertaking of an obligation to indemnify the creditor, provided the debtor does not perform his obligation towards the creditor. Generally speaking, the legal classification of a binding comfort letter is still open. Article IV.G.-2:201(2) DCFR treats the comfort letter as a suretyship.


Hans-Georg Graf Lambsdorff and Bernd Skora, Handbuch des Bürgschaftsrechts (1994); Restatement of the Law (Third) Suretyship and Guaranty (1996); James O’Donovan and John Phillips, The Modern Contract of Guarantee, English Edition (2003); Aurelia Colombi Ciacchi (ed), Protection of Non-Professional Sureties in Europe: Formal and Substantive Disparity (2007); Ulrich Drobnig, ‘Personal Security’ (2007) 4 Principles of European Law; Geraldine Andrews and Richard Millet, Law of Guarantees (5th edn, 2008); Philippe Simler, Cautionnement, Garanties Autonomes, Garanties Indemnitaires (4th edn, 2008); Ángel Carrasco Perera, ‘The DCFR—Guarantee and Personal Security Contracts’ [2008] ERCL 389; Jan Schürnbrand, ‘Das Recht der Personalsicherheiten im Entwurf des Gemeinsamen Referenzrahmens’ (2009) WM 873; Christian Förster, Die Fusion von Bürgschaft und Garantie (2010); Almudena de la Mata Muñoz, Typical Personal Security Rights in the EU (2010), 253.

Retrieved from Suretyship (Modern Law) – Max-EuP 2012 on 27 January 2022.

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