Guarantee & Suretyship

Overview

Suretyship (cautionnement) is a contract by which a person, the surety (caution), undertakes toward a creditor to perform the obligation of the debtor if the debtor fails to satisfy it (art. 2333 CCQ). It is a personal security (surete personnelle) rather than a real security such as a hypothec (hypotheque), because the creditor gains the right to claim payment from a second patrimony rather than a preferential right over a specific asset. Suretyship was historically the first form of security, fell into relative disuse with the expansion of real securities, and has experienced a sustained resurgence over the past half-century owing to its ease of creation, absence of formalism, and effectiveness in the event of the principal debtor's insolvency. The 1994 Civil Code of Quebec introduced reforms designed to balance the protection of the surety with the continued efficacy of this guarantee. This article examines the nature, formation, effects, and extinction of suretyship under the CCQ.

Learning Objectives

After reading this article, you should be able to:

Define suretyship and distinguish it from a real security, a deposit of money, and an independent guarantee
Identify the accessory and subsidiary characteristics of suretyship and trace their consequences throughout the life of the contract
Classify suretyships by source (conventional, legal, judicial), extent (limited, unlimited), and modality (simple, solidary)
Apply the conditions of formation, including the express-consent rule at art. 2335 CCQ
Describe the creditor's duty of information and the prohibition on advance waivers at art. 2355 CCQ
Explain the surety's remedies before and after payment, including the benefits of discussion and division, and the exception of subrogation

Key Concepts and Definitions

Suretyship (cautionnement): a contract by which the surety undertakes to perform the debtor's obligation if the debtor defaults (art. 2333 CCQ).
Surety (caution): the person who assumes the accessory obligation.
Principal debtor (debiteur principal): the debtor whose obligation is guaranteed.
Benefit of discussion (benefice de discussion): the right of a surety to require the creditor to first proceed against the principal debtor's property before enforcing the suretyship (art. 2347 CCQ).
Benefit of division (benefice de division): the right of a surety, where there are several sureties, to require the creditor to reduce the action to the surety's share of the debt (art. 2349 CCQ).
Exception of subrogation (exception de subrogation): a defence by which the surety is released where the creditor, by its own act, renders subrogation impossible (art. 2365 CCQ).
Solidary suretyship (cautionnement solidaire): suretyship with a stipulation of solidarity, which eliminates the benefits of discussion and division (art. 2352 CCQ).
Sub-suretyship (certificateur de caution): a suretyship that itself guarantees the obligation of another surety (art. 2336 CCQ).

Nature and Characteristics of Suretyship

Accessory Contract

The purpose of suretyship is to guarantee the performance of another person's obligation. The surety is therefore an accessory debtor (debiteur accessoire), and the fate of the accessory obligation follows that of the principal obligation. This accessory character manifests at three stages:

Formation. The suretyship is valid only if the principal obligation is valid (art. 2340 CCQ), subject to two statutory exceptions (suretyship of an incapable person and suretyship of a natural obligation).
Extent. The surety's obligation may not exceed the principal obligation (art. 2341 CCQ).
Extinction. If the principal obligation is extinguished, the suretyship is extinguished by operation of accessory (art. 2353 CCQ).

Subsidiary Contract

The surety undertakes to perform the debtor's obligation only if the debtor fails to perform. Art. 2346 CCQ confirms this subsidiary character: the surety is bound to fulfil the obligation only on the debtor's default. In the relation between creditor and surety, subsidiarity gives rise to the benefit of discussion (art. 2347 CCQ). In the relation between the surety and the principal debtor, it generates a right of reimbursement after payment (art. 2356 CCQ).

Consensual Contract

Suretyship is formed by the mere agreement of the parties, without any required formalities, subject to rules of proof. Art. 2335 CCQ requires that the intention to bind oneself as surety be express; suretyship is never presumed. Doctrine and recent case law further require that the surety's consent be manifest, unequivocal, and certain, although use of the word "suretyship" is not mandatory. The principal debtor's consent is not required; a suretyship may exist even without the debtor's knowledge (art. 2336 CCQ).

Example. A representative of a corporation signs a credit application stating that the undersigned "guarantees payment of all purchases." Because the language does not unequivocally express an intention to stand as surety, the court may find that no personal suretyship was created. By contrast, if a separate signature line expressly identifies the representative as surety for the corporation's debts, a valid suretyship exists.

Whether a given suretyship is a contract of adhesion (contrat d'adhesion) under art. 1379 CCQ is determined on the facts. In Banque Manuvie du Canada c. Conlin, the Supreme Court of Canada observed that many, if not most, suretyships are entered into by way of adhesion contracts.

Classifications of Suretyship

Conventional, Legal, and Judicial Suretyship

Art. 2334 CCQ distinguishes three sources. A conventional suretyship is freely agreed upon by the creditor and the surety. A legal suretyship is required by statute, such as the suretyship demanded of permit-holders under the Consumer Protection Act. A judicial suretyship is ordered during judicial proceedings, for instance as security for costs (art. 492 CCP). It is common to substitute a deposit for a judicial suretyship (art. 2338 CCQ).

Limited and Unlimited Suretyship

An unlimited suretyship (cautionnement illimite) covers the principal obligation in its entirety, including accessories such as interest and costs (art. 2344 CCQ). A suretyship drafted in general terms is unlimited. A limited suretyship (cautionnement limite) restricts the surety's obligation to a stated amount or period. Unless otherwise agreed, a suretyship for part of the debt always applies to the balance (art. 2342 CCQ).

Simple and Solidary Suretyship

A simple suretyship preserves the surety's right to invoke the benefits of discussion and division. A solidary suretyship (cautionnement solidaire), governed by arts. 2352 CCQ and the rules on solidarity to the extent compatible with the nature of suretyship, eliminates both benefits. In practice, almost all commercial suretyships stipulate solidarity between the debtor and the surety and among co-sureties.

Plurality of Sureties and Sub-Suretyship

Where several persons stand as sureties for the same debtor and debt, each is liable for the whole (art. 2349 CCQ), subject to the benefit of division where it has not been excluded. A surety who pays has a recourse against the other sureties (art. 2360 CCQ). Sub-suretyship arises where a surety's own obligation is guaranteed by another surety, called the certificateur de caution (art. 2336 CCQ).

Conditions of Formation

The surety must possess the capacity to contract. Its engagement must be free of any defect of consent under arts. 1398 to 1409 CCQ. Failure to read the act containing the suretyship is treated as an inexcusable error under art. 1400 al. 2 CCQ, and the surety is not released absent special circumstances.

Solvency and Domicile

Art. 2337 CCQ requires the surety to have and maintain in Quebec sufficient property to respond for the object of the obligation and to be domiciled in Canada. If these conditions are not met, the principal debtor must furnish a replacement surety, unless the creditor specifically required a particular person.

Validity of the Principal Obligation

As an accessory contract, suretyship is valid only if the principal obligation is valid (art. 2340 CCQ). Two exceptions exist. First, a surety may guarantee the obligation of an incapable debtor, provided the surety was aware of the incapacity; the surety's recourse is limited to the debtor's enrichment (art. 2357 CCQ). Second, a suretyship may guarantee a natural obligation; the CCQ does not appear to require knowledge of the natural character of the obligation.

Object, Extent, and Interpretation

The object of suretyship is the prestation assumed by the surety: an obligation to pay a sum of money (repay a loan, a line of credit), an obligation to do (a performance bond for construction), or an obligation not to do (a fidelity bond in case of misappropriation).

The surety's obligation may never exceed that of the principal debtor, though it may be less onerous (arts. 2341, 2342 CCQ). An unlimited suretyship mirrors the entire principal obligation, including interest and costs (art. 2344 CCQ). A limited suretyship extends only to what was agreed (art. 2335 CCQ). Unless otherwise agreed, a suretyship for part of the debt applies to the balance.

Suretyship is interpreted according to arts. 1425 to 1432 CCQ. Courts seek the common intention of the parties rather than the literal meaning (art. 1425 CCQ). Because the suretyship is frequently an adhesion contract, the surety may invoke art. 1432 CCQ for interpretation in its favour. Where a suretyship refers to an external clause, that clause must be brought to the surety's attention; otherwise it is null (art. 1435 CCQ). Arts. 1436 and 1437 CCQ governing illegible, incomprehensible, and abusive clauses also apply.

Effects of Suretyship Before Maturity

The Creditor's Duty of Information

Art. 2345 CCQ codifies a balanced obligation of information. The creditor must respond to the surety's requests for information regarding the content, modalities, and state of performance of the principal obligation. Questions must relate to the guaranteed obligation, not to the debtor's general state of indebtedness.

The Quebec Court of Appeal has outlined three conditions for release: (1) the surety made a request that the creditor refused or neglected to answer; (2) the omission caused prejudice; and (3) the surety was in a vulnerable informational position. Release is limited to the extent of the prejudice. Under art. 2355 CCQ, the surety may not waive this right in advance.

Beyond art. 2345 CCQ, case law recognizes a broader positive duty of information derived from the good faith obligation (arts. 6, 1375 CCQ) and from Banque Canadienne Nationale c. Soucisse and Banque de Montreal c. Bail. The creditor must disclose significant information that could be determinative for the surety, whether or not the surety asks. This duty is tempered by the surety's own obligation to exercise prudence.

The Obligation Not to Impair Future Subrogation

Under the rules of subrogation, the surety who pays the creditor is subrogated to the creditor's rights and securities (art. 1656 al. 3 CCQ). Before maturity, the surety's eventual right to subrogation is already protected: the creditor may not act so as to prevent future subrogation. Under art. 2355 CCQ, the surety cannot waive this right in advance.

The Surety's Pre-Payment Remedy

Art. 2359 CCQ grants the surety who gave its suretyship with the debtor's consent a remedy before payment when: the surety is sued; the debtor becomes insolvent; the debtor has suffered losses or committed faults substantially increasing the surety's risk; the debtor was obliged to release the surety within a certain time; or the creditor has extended the term without the surety's consent. The remedy consists of obtaining an order that the debtor provide security for its future reimbursement obligation.

Effects at Maturity

The creditor may sue the surety alone or together with the debtor (art. 2346 CCQ). The debtor's default is a precondition. If the debtor is forfeited of the benefit of the term, that forfeiture produces its effects against the surety (art. 2354 CCQ).

Benefit of Discussion

The benefit of discussion (benefice de discussion) allows the surety to require the creditor to execute against the principal debtor's property first (art. 2347 CCQ). Proceedings against the surety are suspended while the creditor obtains judgment against and seizes the debtor's assets. The surety must invoke this benefit, indicate the debtor's seizable property, and advance the costs of discussion (art. 2348 CCQ). If the creditor fails to proceed within the allotted time, it is liable, up to the value of the property indicated, for the debtor's subsequent insolvency (art. 2348 al. 2 CCQ). This benefit is unavailable to a solidary surety or one who has expressly renounced it (arts. 2347, 2352 CCQ).

Benefit of Division

Where several sureties guarantee the same debtor and the same debt, the benefit of division (benefice de division) permits the surety sued for the whole amount to request that the creditor reduce its action to the surety's share (art. 2349 CCQ). If a creditor voluntarily divides its action, it may not later reverse that division, even if insolvencies predated the division (art. 2351 CCQ). As with the benefit of discussion, solidarity or express renunciation eliminates this benefit.

Example. Four persons each agree to act as surety for a $24,000 debt. The creditor sues each for $6,000 separately. If one surety is insolvent, the creditor may not recover that share from the other three, because it has voluntarily divided its action.

Defences Available to the Surety

Art. 2353 CCQ allows the surety to raise any defence belonging to the principal debtor, except those purely personal to the debtor (such as a bankruptcy discharge). Available defences include payment, novation, prescription, compensation (art. 1679 CCQ), and confusion (art. 1684 CCQ). The surety may also raise its own personal defences: a defect of consent in the suretyship itself, remission of the suretyship, or compensation between the creditor and the surety. The surety may not raise the debtor's incapacity if the surety undertook its engagement with knowledge of that incapacity (art. 2340 CCQ). While art. 2353 CCQ permits waiver of certain defences by the terms of the engagement, advance waiver of the right to information and the benefit of subrogation is absolutely prohibited (art. 2355 CCQ).

The Surety's Rights After Payment

Recourse Against the Principal Debtor

The surety who pays the creditor acquires a reimbursement recourse based on legal subrogation (art. 1656 al. 3 CCQ) and, depending on the circumstances, on mandate or management of the business of another (gestion d'affaires). The extent varies:

Surety who undertook with the debtor's consent (art. 2356 al. 1 CCQ): reimbursement of the full amount in capital, interest, and costs, plus interest from the date of payment, plus damages for any prejudice suffered.
Surety who undertook without the debtor's knowledge (art. 2356 al. 2 CCQ): reimbursement limited to what was useful to the debtor, with interest running from formal demand only and no additional damages.
Surety of an incapable person (art. 2357 CCQ): recourse limited to the debtor's enrichment.

Art. 2358 CCQ denies the reimbursement recourse in two situations: (1) the surety paid without notifying the debtor, who then paid a second time in ignorance; (2) the surety paid when the debtor could have raised a defence extinguishing the debt. In both cases, the surety retains an action in repetition (repetition de l'indu) against the creditor. The creditor's claim takes priority over the surety's on partial payment (art. 1658 CCQ).

Recourse Against Co-Sureties

A surety who has paid the whole debt has a recourse against the other sureties for their respective shares (art. 2360 CCQ). Each co-surety is liable only for its share; if one is insolvent, that share is distributed among the others.

Extinction of Suretyship

Suretyship may be extinguished by accessory (because the principal obligation is extinguished) or by principal (because a cause specific to the suretyship operates while the principal obligation survives).

Exception of Subrogation

Art. 2365 CCQ provides that the surety is released where the creditor, by its own act, renders subrogation impossible. Three conditions apply:

The surety lost a preferential right (a hypothec, a ranking, a right against co-sureties).
The loss results from an act or omission of the creditor (releasing a hypothec without adequate consideration, failing to register a hypothec, failing to contest an erroneous collocation).
The loss caused prejudice. The majority case law holds that the surety need not prove the exact extent; it suffices to show the subrogatory recourse existed.

Release operates up to the extent of the prejudice. Art. 2355 CCQ prohibits advance waiver, though post-event waiver is permitted. Art. 1531 CCQ extends the exception of subrogation to solidary debtors.

Death, Notice of Cancellation, and End of Functions

Death of the surety (arts. 2361, 2364 CCQ). The heirs are liable for debts arising before the surety's death but not for debts arising afterward. This rule is of public order.

Notice of cancellation (arts. 2362, 2364 CCQ). Where the suretyship covers future or indeterminate debts, or runs for an indeterminate period, the surety may cancel by giving sufficient prior notice to the debtor, creditor, and other sureties. This right arises after three years. Cancellation operates for the future only.

End of functions (arts. 2363, 2364 CCQ). A suretyship attached to particular functions ends when those functions cease. In Epiciers unis Metro-Richelieu Inc., division "Econogros" c. Collin, the Supreme Court held that art. 2363 CCQ protects the surety and applies to all suretyships attached to the surety's functions. The burden of proof rests on the surety. Art. 2363 CCQ is not of public order and may be excluded by agreement.

Voluntary Acceptance and Taking in Payment

The voluntary acceptance of property in payment (dation en paiement) under art. 1799 CCQ extinguishes both the principal obligation and the suretyship (art. 2366 CCQ). The taking in payment (prise en paiement) under art. 2782 CCQ produces the same result: the debt and the suretyship are extinguished, and the creditor is denied subrogation.

Good Faith as a Limit on the Creditor

The obligation to act in good faith (bonne foi) under art. 1375 CCQ has produced the most significant judicial development in suretyship law. In Banque Canadienne Nationale c. Soucisse, the Supreme Court of Canada established that the creditor owes the surety a duty of good faith in realizing securities. Where the creditor sells hypothecated property at a grossly insufficient price and then sues the surety for the unpaid balance, the surety may raise the creditor's breach as a defence (fin de non-recevoir). Since the CCQ prohibits advance waiver of the benefit of subrogation, many situations formerly addressed through good faith are now covered by art. 2365 CCQ. Good faith retains an independent role where the impugned conduct falls outside that provision, such as the failure to perform a contractual obligation to insure or the failure to disclose material information.

Practice Checklist

Glossary

Benefit of discussion (benefice de discussion): right of the surety to require the creditor to execute against the principal debtor's property first (art. 2347 CCQ).
Benefit of division (benefice de division): right of a surety sued for the whole to require the creditor to reduce the action to the surety's share (art. 2349 CCQ).
Cautionnement: suretyship; the contract of guarantee governed by arts. 2333 to 2366 CCQ.
Caution: surety; the accessory debtor who guarantees the principal debtor's obligation.
Certificateur de caution: sub-surety; a surety of a surety (art. 2336 CCQ).
Dation en paiement: giving in payment; voluntary transfer of property by the debtor to the creditor in satisfaction of the debt (art. 1799 CCQ).
Exception of subrogation (exception de subrogation): defence available to the surety where the creditor has, by its act, rendered subrogation impossible (art. 2365 CCQ).
Fin de non-recevoir: a bar to the creditor's action founded on the creditor's breach of good faith.
Gestion d'affaires: management of the business of another; the basis of the surety's reimbursement recourse when it acted without the debtor's knowledge.
Independent guarantee (garantie independante): an autonomous undertaking to pay, unaffected by defences arising from the underlying transaction; distinct from suretyship.
Prise en paiement: taking in payment; a hypothecary right by which the creditor takes ownership of the charged property in satisfaction of the debt (art. 2782 CCQ).
Solidary suretyship (cautionnement solidaire): suretyship with a stipulation of solidarity, eliminating the benefits of discussion and division (art. 2352 CCQ).
Subrogation: the transfer of the creditor's rights and securities to the surety who has paid (art. 1656 al. 3 CCQ).
Surety (caution): the contracting party who guarantees the principal debtor's obligation.

References

Civil Code of Quebec (CCQ), arts. 2333 to 2366 (suretyship), arts. 1375, 1379, 1425 to 1437 (obligations), arts. 1651, 1656, 1658 (subrogation), arts. 2660 to 2782 (hypothecs and hypothecary rights).
Code of Civil Procedure (CCP), arts. 169, 170, 184, 188, 189, 492.
Banque Canadienne Nationale c. Soucisse, [1981] 2 SCR 339.
Banque de Montreal c. Bail Ltee, [1992] 2 SCR 554.
Banque Manuvie du Canada c. Conlin, [1996] 3 SCR 415.
Epiciers unis Metro-Richelieu Inc., division "Econogros" c. Collin, [2004] 3 SCR 257.
Consumer Protection Act, CQLR c P-40.1.

Disclaimer

This article is provided for educational purposes only and does not constitute legal advice. The content is based on Quebec civil law as expressed in the Civil Code of Quebec and selected judicial authorities. For advice on a specific legal situation, consult a qualified Quebec legal professional.

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