Page 26 - Q&A 2019/2020

Surety and guarantee. Birds of the same
feather, or not?

January 2019

“My wife and I are the shareholders of our family company. We need to buy
a delivery truck for the business and have talked to our bankers who will
provide vehicle finance, provided my wife and I, in our personal capacities,
bind ourselves as surety and also provide a guarantee for the payment of the
debt. What is the difference between a surety and guarantee or is it the same
thing?” Commercial

Although both are forms of security for a principal obligation (the payment of
your vehicle finance loan), there is definitely a difference between these two
forms of security.

A surety will exist where a person (you) enters into an agreement with a creditor
(the bank) to stand surety (be bound) for the payment of an obligation by
a principal debtor (your company). Should the principal debtor fail to fulfil its
obligations towards the creditor (i.e. the company does not pay the debt to
the bank) then you (the surety) will be held liable to fulfil the obligation of the
principal debtor towards the creditor (i.e. you will be required to make good the
debt of your company to the bank).

A surety is accessory in nature, which means it cannot exist without a principal
obligation, for example the obligation to pay the bank the finance debt for
the vehicle purchased by the company. A creditor can therefore only claim
performance of the obligation from the surety (you) to the extent that the
principal debtor (your company) fails to perform. The obligation to pay or fulfil
the obligation under a surety is also only created when the surety is validly
called upon by the creditor.

A surety is discharged (terminates) when the principal obligation is extinguished
either due to performance by the principal debtor or due to impossibility of
performance or invalidity of the debt or when the surety agreement is terminated
in accordance with its terms, irrespective of whether the principal obligation has
been extinguished or not. A surety agreement must also be in writing in order
to be valid.

A guarantee on the other hand is an undertaking by a guarantor (you) to pay
or fulfil an obligation to a creditor (bank) upon the occurrence of a certain
event. In the case of an independent guarantee the obligation of the guarantor
to pay is principal in nature and exists independent of an underlying obligation
or the existence of any other debt.

Such a guarantee can be demanded once the agreed conditions of such
guarantee have been met. Once it has been determined that the conditions

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