Principal and Surety

• Author: Jeffrey Lehman, Shirelle Phelps

Page 84

A contractual relationship whereby one party—the surety—agrees to pay the principal's debt or perform his or her obligation in case of the principal's default.

The principal is the debtor—the person who is obligated to a creditor. The surety is the accommodation party—a third person who becomes responsible for the payment of the obligation if the principal is unable to pay or perform. The principal remains primarily liable, whereas the surety is secondarily liable. The creditor—the person to whom the obligation is owed—can enforce payment or performance by the principal or by the surety if the principal defaults. The creditor must always first seek payment from the principal before approaching the surety. If the surety must fulfill the obligation, then he can seek recovery from the principal after satisfying the creditor. An example of a principal and surety relationship occurs when a minor purchases a car on credit and has a parent act as a surety to guarantee payment of the car loan.

A suretyship arises from an agreement. The parties must be competent; there must be an offer and acceptance; and valid consideration is necessary. The parties must openly assent to the contract so that all the parties are known to each other. The surety must be identified as such so that the creditor will not hold that person primarily liable. If the face of the contract indicates a suretyship, the creditor receives sufficient notice of the three-party arrangement.

No special form of contract is needed to create a principal and surety relationship. The agreement can be consummated by written correspondence or be in the form of a bond. No particular language is needed to identify the relationship, since courts will...