Article by Phiwokuhle Ncanywa

Associate


In this article we discuss suretyships and guarantees as forms of security.

A right of security is auxiliary to the obligation which it secures, as the security's existence depends upon the underlying agreement. If the underlying agreement is terminated or is invalid/void, then the right of security will also terminate or be invalid.

Suretyships

A suretyship is a contract between a creditor, a principal debtor and a third party (the “surety”) binding himself in part or in whole on behalf of the principal debtor to the creditor. The contractual undertaking by the surety is accessory to the main contract (between the creditor and the principal debtor) and to be enforceable there must be a valid principal debt. It is an undertaking that the obligation of the principal debtor will be discharged, and if not, that the creditor will be indemnified (the creditor can claim compensation from the surety).

Even though the surety binds himself as co-principal debtor, that does not make him liable to the creditor in any capacity other than that of a surety. The surety does not become a party to the main contract between the creditor and the principal debtor.

It must be understood that the addition of the words ‘co-principal debtor’ does not transform the suretyship agreement into any contract other than one of suretyship. The surety does not become a co-debtor with the principal debtor, nor does he become a co-debtor with any of the co-sureties and co-principal debtors, unless they have agreed to that effect.

The suretyship agreement must be in writing to be valid and will be terminated only when the principal obligations are extinguished, or when the surety has performed in terms of the obligation between himself and the creditor.

Is a suretyship affected by extinctive prescription?

Prescription begins to run when the debt in question is due, that is, when it is owing and payable. The surety undertakes to pay the debt of the principal debtor so long as that debt exists in law and has not in fact been paid by the debtor. If the debt is extinguished by prescription, the surety is discharged. But if the debt is kept alive, so that prescription does not run, the surety's obligation continues to exist, because his obligation and that of the principal debtor relate to the same debt or performance.

It is important to then understand that interruption of prescription in respect of a principal debtor serves to interrupt prescription in respect of a surety. However, interruption of prescription in respect of a surety does not serve to interrupt prescription in respect of a principal debtor.

Guarantees

Unlike the suretyship contract, a guarantee contract is not an accessory obligation and creates a primary liability. A guarantee contract imposes a principal liability on the guarantor in that if the guarantor fails to honor the guarantee, he will be liable for breach of contract, as the guarantee contract exists independently of the underlying principal obligation by the principal debtor to the creditor.

When the agreed terms and conditions are met the guarantee is triggered and can be demanded from the guarantor who is obliged to perform his obligations in full.

In contrast to a suretyship agreement, in a guarantee contract the guarantor does not undertake that the principal debtor will first perform his obligations and only if he fails to do so will the guarantor be liable. The obligations created by a guarantee contract do not depend on another debt to exist and are not conditional on the default or breach of the principal debtor.

If the guarantee is conditional on the default or breach of the principal debtor then the contract is not a guarantee contract, as the obligation to pay is dependent on the principal debtor first breaching the principal contract with the creditor. Accordingly, if the guarantee contract is one that is conditional upon the breach or default of the principal debtor, then it will be accessory in its form and nature and is not a guarantee but rather a form of suretyship agreement.

A guarantee is discharged when there is full performance by the guarantor of his obligations.

Conclusion

The guarantee contract is often the stronger form of security in comparison to a suretyship agreement as the obligations of the guarantee contract are principal in nature and the guarantor does not have the same defenses which may be available to a surety in a suretyship agreement.

For any further information on this topic or for any assistance in respect of forms of security please contact us on 041 396 9237.

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