The Curia of Hungary has taken a decision on interpreting the statement of an absolute surety

The facts of the case are the following: the plaintiff and the first defendant concluded a contract of concession on the development and operation of a casino. Under the terms of the contract, the first defendant was obliged to file a report every half year on the status of the development until the beginning of the concession period. Contractual penalties would be imposed if the first defendant failed to perform its reporting obligation. The first defendant also had to provide a bank guarantee, collateral security, or a surety. The first defendant wished to fulfill its obligation by providing the statement of absolute surety from the second defendant. In the statement, the surety undertook to perform the ‘not contested’ and not performed obligations of the principal debtor. The plaintiff accepted the statement of surety without making any comment or objection to it.

The plaintiff demanded the payment of a penalty for late performance and non-performance from the first defendant, and due to its failure to perform its obligations, requested the second defendant to perform the obligation as surety. The defendants contested their payment obligation.

The plaintiff requested the court to order the defendants jointly and severally to pay the penalty for late performance and non-performance under the terms of the concession contract and the surety statement.

In its decision, the Curia first examined the possible interpretations of the statement of an absolute surety focusing on the term ‘not contested’.

The Curia declared that according to the applicable provisions of the Civil Code, in the event of a dispute, the parties shall, in light of the presumed intent of the person issuing the statement and the circumstances of the case, construe statements in accordance with the generally accepted meaning of the words.

The Curia stated that due to the term ‘not contested’, the obligation of the surety cannot be interpreted to cover all unperformed obligations relating to the secured claim.  Although not mentioned in the summary of the decision, it seems the Curia did not attach particular importance to the provision of the contract that required a suretyship covering every obligation of the principal debtor. The Curia emphasized that the plaintiff accepted the statement of surety, therefore the statement defines the liability of the surety.

The Curia also explained that although a surety statement of such content creates the possibility that the principal debtor may render the suretyship worthless by unfounded contest; this did not justify an extended interpretation of the statement. Irrespective whether the dispute is well-founded or not, the statement of surety was to be interpreted so that the surety had not assumed the obligation to perform the claims disputed by the principal debtor.

The Curia followed the principle applicable to guarantee statements when stating that the obligations of the guarantor are determined exclusively by the content of the statement. The main difference between a guarantee and a suretyship is that the former is an independent obligation and the latter is an accessory obligation. The accessory nature of the suretyship means that the obligation of a surety is linked to the obligation for which he has promised to answer, and the surety shall be entitled to raise the same objections that can be made by the debtor against the creditor. In case the principal debtor contests the claim, the surety may decide whether to perform the obligation or refuse the performance also contesting the claim.

The phrase in the statement of surety to perform not contested claims may have two different meanings. One possible interpretation is, that it is, in accordance with the accessory nature of suretyship, a confirmation that the surety does not waive his right to refuse performance if the principal debtor contests the claim. According to the other interpretation, this statement restricts the scope of the suretyship by automatically excluding any claim contested by the principal debtor. The difference is, that according to the first interpretation the surety is risking that in case of an unfounded contest the court will order him to perform his obligation and also to bear the legal consequences of default. Pursuant to the other interpretation the obligation of the surety does not cover the claims contested by the principal debtor regardless of whether the claim is unfounded or not. If the principal debtor contested the claim, it terminates the obligation of the surety regarding the contested amount even if the court determines the existence of the obligation and orders the principal debtor to perform.

It is not possible to determine which of the possible interpretations is correct without knowing the actual circumstances of the case. While the former interpretation may diminish the significance of the term “not contested” in the statement of the surety, the latter interpretation reduces the security function of the suretyship which does not meet the general purpose of suretyship and was not the intention of the contract requiring the suretyship either. It can be concluded that the Curia considered that the plaintiff accepted a surety which does not really serve as security. On the other hand the Curia did not take into account the accessory nature of suretyship and the possibility that the term 'not contested' does not restrict the content of the suretyship but refers only to the surety's right to effect objections.

The important message of the Curia’s decision is that the creditors should carefully examine the content of a surety statement. If the creditor fails to do this, it cannot expect the court to interpret the statement in question in a way that restores the security nature of the statement that does not comply with the provisions of the underlying contract or the security purpose of the suretyship.

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