Surety Agreement
Purpose- A “Surety Agreement” means an agreement between a creditor and a surety for the purpose of secure repayment of another person’s debt.
- A “Surety Obligation” means an obligation owed by the surety arising out of a Surety Agreement under which the surety is obliged to discharge the debt if the original debtor is in default (Article 428-(1) of the Civil Act).
Scope of Security- The creditor and the surety may agree on the scope of security (i.e. Surety Obligation) in the Surety Agreement. However, unless a contrary intention is expressed, the obligation of the surety shall include the principal sum of debt, interest accrued on the principal sum, any damages payable to the creditor, and any other charges incidental to the principal debt (Article 429(1) of the Civil Act).
· For the purpose of securing the execution of the surety’s obligation, the creditor and the surety may agree on liquidated damages and any other damages in relation to surety’s obligations (Article 429(2) of the Civil Act).
Requirements for a Surety- If a debtor is obliged to furnish a surety, such surety shall be the person who has full capacity and is financially solvent to repay the debt (Article 431(1) of the Civil Act).
- If the surety becomes unable to repay the debt, the creditor may request for a replacement of such surety (Article 431(2) of the Civil Act).
※ Notwithstanding the above, if the creditor has designated the surety, the requirements for full capacity and solvency referred to in paragraph above shall not be applicable (Article 431(3) of the Civil Act).
- The debtor may be exempted from an obligation to furnish a surety by providing other reasonable security in lieu thereof (Article 432 of the Civil Act).
Effect of Change in Principal Debtor’s Obligation- Regardless of any cause, the surety’s obligation ceases to exist if the principal debt becomes extinct.
· For example, in a case where a principal debt became extinct after the limitation period, the Supreme Court held that the surety’s obligation also ceased to exist by reason of its appendant nature even though the limitation period was to be suspended (Supreme Court Decision, May 14, 2002, 2000 Da 62476).
- If the loan is assigned to a third party, the creditor’s right against the surety shall also be assigned to the third party.
· In order for the creditor to defend the surety’s claim that the assignment was invalid, it is sufficient for the creditor to prepare defense against the principal debtor (Article 450 of the Civil Act). It is not necessary for the creditor to give notice to the surety, regarding assignment or to receive the surety’s consent (Supreme Court Decision, October 26, 2001, 2000 Da 61435).
- The limitation period for claiming against the principal debtor shall also apply and be effective as to the surety (Article 440 of the Civil Act).
· However, any expiration of the limitation period for the surety’s obligation shall not affect to the limitation period regarding the principal debt obligation (Supreme Court Decision, May 14, 2002, 2000 Da 62476).
Surety’s Right to be Indemnified- If a surety discharges his or her obligation, he or she may exercise the surety’s ‘Right to be Indemnified’ against the principal debtor. (Note: the ‘Right to be Indemnified’ means a right to claim by the persons who have discharged debt on behalf of the debtor.)
- If a surety who has become such surety at the request of principal debtor (hereinafter referred to as the “Fiduciary Surety”) repays without any default at his or her own expense, such surety shall have a right to be indemnified (Article 441(1) of the Civil Act).
· If part of the principal debt is extinguished, the “Fiduciary Surety” shall have the right to be indemnified to such an extent.
· The extent of the Fiduciary Surety’s Right to be Indemnified shall include statutory interest accrued as from the date when the principal debt was extinguished and other damages including unavoidable costs incurred therefrom (Articles 441(2) and 425(2) of the Civil Act).
· In principle, a Fiduciary Surety shall be entitled to exercise his or her Right to be Indemnified, after the Fiduciary Surety has repaid the principal debt at his or her own expense (Article 441(1) of the Civil Act).
※ Exceptional circumstances where a Fiduciary Surety may exercise his or her Right to be Indemnified, before the Fiduciary Surety repays the principal debt (Article 442(1) of the Civil Act).
1. In the case where the surety, without his or her negligence, is held to indemnify the creditor by judgment
2. In the case where the principal debtor is declared bankrupt and where the creditor does not participate in the bankruptcy of estate
3. In the case where the period of repayment due was not specified in a Surety Agreement and where the maximum period cannot be ascertained, but when a fixed five years have elapsed after the conclusion of the Surety Agreement.
4. In the case when the repayment is due
· If an advance/follow-up notice of exemption was not given to the principal debtor, the surety’s right to exercise his or her Right to be Indemnified may be limited.
√ In the case where a surety has, without notifying the principal debtor in advance, but executed or otherwise discharged the principal debt at his or her own expense, and where the principal debtor had a defense available against the creditor, such defense shall be successful against the surety, whereas if the available defense is a set-off, the principal debtor’s claim which would have been extinguished by the set-off shall be transferred to the surety (Article 445(1) of the Civil Act).
√ In the case where a surety has not notified the principal debtor that he or she had performed the obligation or otherwise procured at his or her own expense a discharge, and the principal debtor has in good faith effected performance to the creditor or otherwise procured a discharge for value, the principal debtor may treat his or her act of discharge as being effective (Article 445(2) of the Civil Act).
※ In this circumstance, the surety may not exercise his or her Right to be Indemnified, but merely claim for unjust enrichment against the creditor.
- In the case where a person who has become a surety without any request of the principal debtor, has performed the repayment obligation or has otherwise, at his or her own expense, procured the discharge of the principal debt, the surety shall have a Right to be Indemnified against the principal debtor to the extent that the principal debtor was enriched as of the time of discharge (Article 444(1) of the Civil Act).
· Accordingly, any statutory interest accrued or damages incurred after the date of discharge of the principal debt shall not be within the scope of the Right to be Indemnified.
- In the case where a person who has become a surety without any request or approval of the principal debtor, has performed the repayment obligation or has otherwise, at his or her own expense, procured the discharge of the principal debt, the surety shall have a Right to be Indemnified against the principal debtor only to the extent that the principal debtor is still being enriched (Article 444(2) of the Civil Act).
Surety Agreement- A Surety Agreement may be entered into at the same time when an Agreement for Consumer Cash Loan is concluded, but the former may later be entered into separately from the latter.
- You may refer to a template for a Surety Agreement at <Korea Legal Aid Corporation's website-legal information-legal template>.