Many institutions and entities including small businesses providing credit, services or products, protect their financial exposure when entering into agreements with their clients, by implementing different forms of security, such as a guarantee or a suretyship agreement.

One should be quite clear regarding which form of security will be implemented, as they give rise to different forms of obligations. 

GUARANTEE:

Primary obligations, are created when entering into a guarantee, wherein one undertakes to pay or fulfil an obligation to the creditor of the transaction, upon the occurrence of a certain event[1]. The guarantee entails an irrevocable and unconditional guarantee by the guarantor, that the principal debtor will make due and punctual payment in terms of a debt owed to a creditor, failing which on demand the guarantor will settle the whole outstanding debt owed to the creditor as a primary obligation. 

The obligation is described as primary in nature, due to it not being dependant on the existence on any other agreement or obligation. A guarantee can objectively be seen as a stronger form of security, compared to a surety, as it establishes an independent liability for the principal obligation, and the guarantor cannot rely on the defence of excussion (to demand that the creditor seek payment from the principal debtor first) as a surety would be entitled to[2].

SURETY:

On the other hand, a surety gives rise to obligations which are accessory in nature, in that they are dependant on the existence (or the coming into existence) of a valid and effective principal obligation. A surety cannot exist where the underlying agreement to which it relates to is void or does not (and will never) exist[3]. Similarly, a surety will cease to exist where the principal debtor has fulfilled their obligations in terms of the principal agreement[4]. 

In lay man’s terms, a surety is a person or entity other than the principal debtor (a third party, as one cannot stand as surety for one’s own debt[5]), that binds themselves via written agreement, that if the principle debtor fails without lawful excuse to settle the outstanding debt owed to the creditor, they will be liable to settle the outstanding amount of debt owed to the creditor. A surety’s obligation is thus the same as the obligation of the principal debtor, and as such a surety cannot be liable for anything other than the principal debt[6]. 

LOOK OUT FOR:

The wording of the agreement  is paramount in determining whether such an agreement is one of guarantee or surety. Words such as ‘guarantee’ have been used in agreements which, in reality, constituted a suretyship. One needs to look at the obligation created by the agreement. If a guarantee is given conditional upon the breach of a separate contract or the default of a principal debtor, the obligations of such a guarantee would be accessory in nature, and thus such a guarantee would actually constitute a suretyship. However, if the guarantee is given as an absolute and unconditional promise, then the obligations arising from such a promise will be primary or principal in nature, and such a promise would constitute a true guarantee[7]. 

When entering into(or expecting debtors to enter into) a guarantee or a suretyship agreement, it is best to be certain of its provisions, and the intent behind the wording used. Look at the obligations it creates and be certain of one’s ability to comply with its’ provisions, as the obligations created by such an agreement are not easily evaded. It is the responsibility of the person signing such an agreement to ensure they know and understand what they are signing.  In the same token its your responsibility of you are the credit grantor, to ensure you protect your rights with the correct form of security.

Do not hesitate to contact our team to assist in drafting your suretyship agreements and guarantees in order to keep your business transactions safe and secured.

 

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[1] Drafting Suretyships – Important considerations: https://www.golegal.co.za/drafting-suretyship-creditors.

[2] THE CONTRACT OF “GUARANTEE” IN SOUTH AFRICAN LAW: https://www.bowmanslaw.com/insights/finance/the-contract-of-guarantee-in-south-african-law/

[3] Joubert The Law of South Africa 2nd Edition par 287 

[4] THE CONTRACT OF “GUARANTEE” IN SOUTH AFRICAN LAW: https://www.bowmanslaw.com/insights/finance/the-contract-of-guarantee-in-south-african-law/

[5] Joubert The Law of South Africa 2nd Edition par 284; Nedbank Ltd v Van Zyl [1990] 4 All SA 637 (A) 475 

 [6] Joubert The Law of South Africa 2nd Edition par 286

 [7] THE CONTRACT OF “GUARANTEE” IN SOUTH AFRICAN LAW https://www.bowmanslaw.com/insights/finance/the-contract-of-guarantee-in-south-african-law/