Legal framework for surety and personal guarantees soon to be updated

A legislative proposal was recently introduced to refresh the statutory provisions concerning personal security interests. The proposal is part of the broader reform of the Belgian Civil Code and forms the first part of Book 9 on “Securities”. The proposal was written by the recently deceased Professor Eric Dirix, one of the spiritual fathers of the new Belgian Civil Code and a titan of securities law. The titles on pledge, mortgage, retention of title, lien and privileges will follow in a later move. Of course, the proposal still needs to go through the legislative process and is therefore subject to amendments.

Five aspects of this legislative proposal are outlined below.

Codification of existing legal forms

Currently, the surety (“borgtocht”/“cautionnement”) is the only form of personal security that has a specific legal framework in the old Belgian Civil Code (Title XIV, articles 2011 to 2043octies). In practice, however, there are many more forms of personal security, such as guarantees, letters of comfort, and joint and several liability as a security. Jurisprudence and legal practice have recognised these forms for some time, but the new proposal now also pursues codification and a legal basis. In doing so, the proposal opts very much for continuity: the intention is clearly to leave considerable discretion to legal practice and not to cause a fundamental break with the past. This is in line with the functional and pragmatic role of securities law, which is part of the intellectual legacy of Eric Dirix.

Focus on contractual freedom

In a style that by now feels familiar, the proposal again opts for the greatest possible contractual freedom, and the new provisions consist very much of supplementary law. Indeed, unlike a pledge or mortgage, personal security does not constitute an exception to equality among creditors. Interference with the parties’ contractual freedom is therefore more difficult to justify. The main exception concerns the provisions on personal security provided by a consumer (see below).

Surety refreshed

The “accessory personal security” (i.e. a security dependent on a principal obligation) is refreshed, but again without shaking up the legal system. The current rules are largely adopted, yet there are some new elements here too. For instance, the presumption is introduced that a personal security is a surety. A proficient lawyer who has sometimes juggled with terms like “first demand surety” and “autonomous surety” must concede the distinction between the two terms. While the manner in which the contract is named is not decisive, in case of doubt, the court should opt for the suretyship that is more favourable to the guarantor (which, for example, may rely upon the exceptions deriving from the relationship between the debtor and the creditor). In addition, the validity of surety for “all sums” is also recognised, albeit under a new name, “surety for all claims”. Furthermore, the principle of subsidiarity of the guarantor is further clarified. It is clarified that the creditor must give prior notice to the principal debtor and that the guarantor must be notified thereof. Finally, the guarantor’s right of recourse after payment is also reformulated. Under the current rules, the guarantor has both its own right of recourse and a subrogatory right of recourse. In the proposal, the subrogatory right of recourse applies as a security mechanism for the guarantor’s own right of recourse.

Autonomous personal security

The guarantee is given a legal basis in Chapter 3 on “autonomous personal security”. Two provisions are of particular importance here. First, the proposal provides that the guarantor has a subrogatory right of recourse against the principal after payment (contrary to what is sometimes assumed in practice today). Secondly, it establishes that the guarantee is a personal right which is therefore not transferable (confirming what is assumed in practice today).

Personal security granted by a consumer

The provisions on personal guarantees granted by consumers (Chapter 4) replace the current regime of “free suretyship” (“kosteloze borgstelling”/“cautionnement à titre gratuit”). While these provisions are largely carried over, the protection for consumers is further strengthened. For instance, it is clarified that a consumer cannot provide an autonomous guarantee. In addition, a pre-contractual information obligation is established. Nevertheless, the proposal also seeks to achieve a balance. For example, the mention of “handwritten” is removed from the provisions governing the requirements for the contract (although this is without prejudice to the rules of Book 8 on evidence).