Suretyship – One Signature That May Become a Financial Burden for Years
“It is just a formality” – this is precisely how most of the biggest mistakes related to suretyship begin. A suretyship agreement signed at the request of a friend, family member, or business partner is often perceived as an expression of goodwill; however, from a legal perspective, it is far more than that. A surety assumes a real and often very significant financial responsibility, which may result in an obligation to pay thousands or even millions of Georgian Lari.
In practice, numerous disputes arise precisely because the surety does not fully understand the extent of the obligation being assumed. Therefore, before signing a suretyship agreement, it is essential to understand what this legal institution means, what risks are associated with it, and how your own interests can be protected.
According to the Civil Code of Georgia, a suretyship is an agreement under which the surety undertakes an obligation before the creditor to be liable for the performance of the obligation of a third party – the principal debtor.
Simply put, if the principal debtor fails to perform the obligation, the creditor may demand satisfaction from the surety. For this reason, suretyship is one of the most commonly used means of securing the performance of obligations in banking, as well as in private and commercial relationships.
Why Is Suretyship Risky?
Many people believe that the surety is included in the agreement only “formally” and that, in reality, the obligation rests solely with the debtor. In fact, in many cases, the creditor is entitled to assert a claim against the surety as well.
This means that if the principal debtor fails to repay the loan or does not fulfil the contractual obligation, the surety may be held liable for:
- Payment of the principal amount;
- Accrued interest;
- Contractual penalties;
- Court costs;
- Additional expenses related to enforcement proceedings.
Ultimately, what appears to be a “friendly favour” may even result in the loss of personal assets.
The Most Common Mistakes
In practice, sureties frequently make several significant mistakes.
The first mistake is signing the agreement without reading it. People often rely solely on the explanations provided by a bank representative or the principal debtor and do not review the document themselves.
The second mistake is failing to understand the scope of liability. Under certain agreements, the surety is liable not only for the principal amount but also for all additional claims, including interest and contractual penalties.
The third mistake is assuming that the suretyship automatically terminates as soon as the debtor repays part of the loan. In reality, the duration of the suretyship and the grounds for its termination are determined by both the agreement itself and the applicable law.
What Should You Verify Before Signing?
Before signing a suretyship agreement, you should pay particular attention to several important matters.
First and foremost, it is essential to know precisely which obligation you are securing. It is equally important to review the principal agreement, as it describes the very obligation to which your liability will apply.
You should also pay attention to:
- The duration of the suretyship;
- The maximum amount of liability;
- Whether the obligation may be increased without your additional consent;
- The circumstances under which the suretyship terminates;
- Whether the agreement contains any additional provisions that may be unfavourable to you.
What Happens After the Debt Has Been Paid?
If the surety has fulfilled the obligation owed to the creditor, this does not mean that the amount paid has been permanently lost.
In accordance with the principles of Georgian civil law, the surety acquires the right to seek reimbursement of the amount paid from the principal debtor. In practice, however, this is not always straightforward. If the debtor is insolvent, has no assets, or those assets are already encumbered by the claims of other creditors, recovering the funds may become considerably more difficult for the surety.
Therefore, before entering into a suretyship agreement, it is important to assess not only your personal trust in the debtor but also the debtor’s actual financial condition.
Why Is Legal Advice Essential?
A significant number of suretyship agreements are drafted in a standard form; however, this does not mean that every provision is fair or tailored to protect your interests. A seemingly insignificant clause may have decisive importance in determining long-term financial liability.
The involvement of an experienced lawyer enables you to:
- Assess legal risks in advance;
- Negotiate and amend unfavourable contractual provisions;
- Avoid unforeseen financial obligations;
- Effectively protect your interests before the court, where necessary.
The lawyers at KH&PARTNERS will assist you in identifying legal risks and protecting your interests at every stage of negotiations and court proceedings.
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