When Suretyship Turns into Debt: Important Rules for Guarantors

Agreeing to become a guarantor, many perceive it as friendly support or a formality. However, the law treats suretyship much more seriously. A guarantor assumes responsibility for fulfilling the debtor's obligations to the creditor and, in case of problems, can be held liable just like the debtor. Therefore, before signing the relevant documents, it is worth carefully assessing all possible risks and consequences.

What is a suretyship agreement

A suretyship agreement is a contract under which one person — the guarantor — undertakes an obligation to the creditor to guarantee the debtor's fulfillment of their duties. If the debtor fails to fulfill their obligations, responsibility to the creditor may be imposed on the guarantor.

Suretyship may cover the entire amount of the obligation or a part of it. At the same time, the guarantor can be either a single person or several persons simultaneously.

Thus, suretyship is an additional way to secure the fulfillment of the main property-related obligation. It arises based on a separate agreement between the creditor and the person who agrees to be responsible for the debtor. The limits of the guarantor's liability are determined not only by the terms of the suretyship agreement but also by the provisions of the main contract from which the debtor's obligations arise. This legal position is also upheld by the Grand Chamber of the Supreme Court in the ruling dated May 26, 2020, in case No. 910/13109/18.

Payment for guarantor's services

The guarantor has the right to payment for services provided to the debtor (Article 558 of the Code).

Legal consequences of breaching an obligation secured by suretyship

If the debtor breaches an obligation secured by suretyship, the debtor and the guarantor are liable to the creditor as joint debtors, unless the suretyship agreement establishes additional (subsidiary) liability of the guarantor.

The guarantor is liable to the creditor to the same extent as the debtor, including payment of the principal debt, interest, penalties, and compensation for damages, unless otherwise provided by the suretyship agreement.

Persons who have guaranteed the fulfillment of the same obligation of the debtor under one or several suretyship agreements are joint debtors and are jointly liable to the creditor unless otherwise provided by the suretyship agreement (Article 554 of the Code).

Rights and obligations of the guarantor upon receiving a claim

Upon receiving a claim from the creditor, the guarantor is obliged to notify the debtor about it, and in case of a lawsuit filed against the guarantor — to file a motion to involve the debtor in the case, reminds the Ministry of Justice. 

If the guarantor does not notify the debtor about the creditor's claim and fulfills the obligation himself, the debtor has the right to raise against the guarantor all objections that he had against the creditor's claim.

The guarantor has the right to raise objections against the creditor's claim that the debtor himself could have raised, provided these objections are not related to the debtor's person. The guarantor also has the right to raise these objections if the debtor refused them or acknowledged his debt (Article 555 of the Code).

Rights of the guarantor who fulfilled the obligation

After the guarantor fulfills the obligation secured by suretyship, the creditor must hand over documents confirming this debtor's obligation to him.

All rights of the creditor in this obligation, including those securing its fulfillment, pass to the guarantor who fulfilled the obligation secured by suretyship.

Each of several guarantors who fulfilled the obligation secured by suretyship receives the creditor's rights in proportion to the part of the obligation fulfilled by him (Article 556 of the Code).

Notification of the guarantor about the debtor's fulfillment of the obligation

The debtor who fulfilled the obligation secured by suretyship must immediately notify the guarantor about it.

The guarantor who fulfilled the obligation secured by suretyship, due to the debtor's failure to notify him about the fulfillment of his duty, has the right to recover unjustly received funds from the creditor or present a reverse claim to the debtor (Article 557 of the Code).

Termination of suretyship

According to Article 559 of the Code, suretyship terminates:

– Upon termination of the obligation secured by it.

Note that if the obligation changes without the guarantor's consent, resulting in an increased liability of the debtor, such guarantor is liable for the breach of the debtor's obligation only to the extent that existed before such change.

– If after the due date of the obligation, the creditor refused to accept proper performance offered by the debtor or guarantor.

– In case of transferring the debt to another person, if the guarantor did not agree to secure the fulfillment of the obligation by another debtor in the suretyship agreement or during the debt transfer.

– After the expiration of the suretyship term established by the suretyship agreement. If such term is not established, suretyship terminates upon full performance of the main obligation or if the creditor does not file a claim against the guarantor within three years from the due date (term) of the main obligation. If the due date (term) of the main obligation is not established or is set at the moment of presenting the claim, suretyship terminates if the creditor does not file a claim against the guarantor within three years from the date of the suretyship agreement. For obligations performed in parts, the suretyship term is calculated separately for each part of the obligation, starting from the completion of the term or the due date of the respective part of such obligation.

The liquidation of the debtor — a legal entity — does not terminate suretyship if, before the entry in the Unified State Register of Legal Entities, Individual Entrepreneurs, and Public Formations about the debtor's termination, the creditor filed a lawsuit against the guarantor due to the debtor's breach of obligation.

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