Nowadays, it is essential to be well-acquainted with suretyship agreements, as many creditors require a suretyship contract to be established alongside the main contract for which you intended to commit.
For example, it is not uncommon for a guarantee to be requested when purchasing a vehicle, signing a residential or commercial lease, or simply when contracting on behalf of your incorporated business.
Upon signing a suretyship agreement, a surety inherits obligations, but also rights. Among these rights, the surety specifically obtains the right to invoke the benefit of discussion and the benefit of division.
However, it is common for creditors to exclude the benefits of discussion and division by including an express waiver clause within the suretyship agreement itself.
Benefits associated with suretyship
But what are these benefits that most people waive without even knowing their extent?
The benefit of discussion
The benefit of discussion is a right conferred upon the sued surety, allowing them to require that the creditor first seize the assets of the principal debtor before pursuing them[1].
Imagine the scenario. You signed a suretyship agreement to guarantee payments for the purchase of your brother’s new vehicle. Your brother stops making payments, so the creditor claims the full sale price of the vehicle from him. Your brother has a job and assets; however, you have a house and more savings. The creditor could therefore decide to sue you instead of your brother to recover the entire debt, even though your brother is not insolvent.
The benefit of discussion protects against this type of recourse because, in such a scenario, you could force the creditor to first exercise their recourse against your brother’s assets before it is executed against you. Thus, the creditor must exhaust all actions against the principal debtor before suing a surety when the benefit of discussion applies.
The benefit of division
The benefit of division, for its part, requires the creditor to divide their action among the various solvent sureties and to reduce it to each one’s share. Once this division is made, it binds the creditor irrevocably and makes them responsible for the future insolvency of one or more of the sureties[2].
To return to the previous scenario, imagine now that your sister has also guaranteed the purchase of your brother’s vehicle and that she is solvent. However, the creditor sues you for the full amount due for the vehicle. Under the principle of division, you could force them to sue you for only half of the debt, given that your sister committed on the same terms as you and there are therefore two (2) sureties.
Note, however, that the benefit of division only applies when there is more than one surety and the sureties have not bound themselves solidarily, in which case the creditor may validly claim the entire debt from the surety of their choice.
Waiving the benefits
Even when one is aware of the benefits explained above, it is sometimes impossible not to waive them. Indeed, many companies use standard form contracts, so the contracting party does not truly have the opportunity to negotiate them. It is not uncommon for such contracts to specify a waiver of the benefits of discussion and division, as such a waiver is only valid if it is expressly stated.
While it may not always be possible to avoid waiving these principles, it is nonetheless important to know the rights we are giving up. This will prevent many unpleasant surprises in the long run.
References
[1] 2862-3718 Québec inc. v. Provost, C.S.M. No. 500-05-000997-930, April 16, 1993 (J.E. 93-904)
[2] Matériaux Bonhomme inc. v. 8272514 Canada inc. (Les Habitations Boizon), 2017 QCCQ 2586
Text: Mtre. Jean-François Vachon
