Suretyship vs Guarantee. What’s the difference?

02 May 2024 70
In this article, we look at two primary forms of security commonly found in financial transactions, namely suretyship agreements and guarantees, and explain the difference between these two forms of security. 

A suretyship and guarantee are concepts that are often used interchangeably given the perception that they are essentially the same. But that is not the case.

Typically, these forms of security find applications where money is borrowed and the resultant debt is to be secured through collateral security, with a surety or guarantee (or both) being typical forms of security demanded.

A suretyship can simplistically be defined as an accessory contract where a person (surety) undertakes to the creditor of another (principal debtor), that the principal debtor will perform his obligation to the creditor (eg. pay the debt) and that if the principal debtor fails to do so, then the surety will step in and perform it (ie. pay the debt). 

For a suretyship agreement therefore to be valid, there has to be a valid principal obligation between the debtor and the creditor. If the principal contract in terms of which the principal debt is created turns out to be invalid, the surety will not be required to honour his surety obligations, as the surety cannot take any more obligations on himself than that of the principal debtor. The surety essentially only accepts the risk of breach of contract by the principal debtor and will not be liable for any non-performance which flows from the invalidity or extinction of the principal obligation.

With a guarantee on the other hand a person (guarantor) undertakes as a self-standing principal obligation to indemnify the creditor (promisee) of another person on the happening of certain events. The guarantor’s obligation is therefore independent from that of the debtor, even if that is to indemnify the creditor for losses suffered as a result of a debtor’s non-performance, irrespective of the grounds therefore. If a creditor suffers losses when it transpires that the debtor’s principal contract to the creditor is invalid, the guarantor’s obligation remains in force and he will have to pay those losses, where a surety’s obligation falls away and he will not have to pay anything.

Although it may be easy to define and separate these concepts on paper, in practice it can often be difficult to distinguish them particularly when parties use language intended to describe a suretyship but such is in effect a guarantee or vice versa. When having to decide whether a contract is a suretyship or guarantee our courts will be required to interpret the contract looking at the language used, the context and purpose of the contract. 

In the matter of Standard Bank of South Africa Ltd v Wardkiss Property Holdings (Pty) Ltd (9324/22) [2023] ZAKZPHC 153, our High Court was confronted with a scenario where it had to establish whether a contract was a surety or a guarantee. In an interesting additional angle, the aspect of an electronically signed contract became a key aspect that would have a key impact on the case following the eventual determination by the court of whether the contract was a surety or a guarantee.

Standard Bank argued that the contract was a guarantee and therefore did not require an advanced electronic signature to have been used when signing for it to be valid. The Respondent (Wardkiss) however argued that the contract was a surety and that as the Electronic Communications and Transactions Act 25 of 2002 (“ECTA”) had not been complied with, the surety contract was invalid and the surety therefore was not bound by the contract. The Respondent’s argument of invalidity was based on the fact that section 6 of the General Law Amendment Act 50 of 1956 read with Section 13(1) of ECTA required an advanced electronic signature and not just an electronic signature in order for a surety contract to be valid. As this was not the case, the Respondent argued the contract was invalid. 

To determine whether the security provided amounted to a suretyship or a guarantee, the court had to interpret the contract by attributing meaning to the words used in the document, having regard to the context provided by reading the particular provision or provisions in the light of the document as a whole and the circumstances attendant upon its coming into existence. 

In its judgment, the court found that the document amounted to a guarantee and that it's wording clearly distinguished it from that of a suretyship agreement. As it was not necessary for the guarantee to be signed by way of an advanced electronic signature, as set out in section 13 of ECTA the guarantee was also held to be valid.

What can be taken from this judgment is the importance of establishing whether a party is signing a surety or a guarantee as different legal consequences may follow and as the above case has also shown, even different signing formalities may need to be adhered to. 

Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).