Guarantee or Suretyship?

By Wessel Robertson | Director

Why the Distinction Affects Enforcement

Commercial agreements often include supporting obligations intended to improve a creditor’s prospects of recovery if the principal debtor defaults. These may be described as guarantees, suretyships, undertakings or acknowledgments of liability.

The terminology is not always used consistently. This can create difficulty when enforcement becomes necessary, particularly where a party’s liability depends on whether the obligation is primary or accessory.

A document that appears to provide security may not operate in the way the parties expected. For creditors, this can weaken recovery. For signatories, it can create exposure that was not properly understood at the time of signature.

The legal distinction between a guarantee and a suretyship

In commercial practice, the terms “guarantee” and “suretyship” are often, mistakenly, used interchangeably.

A suretyship creates an accessory obligation. The surety’s liability depends on the existence and enforceability of the principal debt. If the underlying obligation falls away or is successfully challenged, the suretyship may fall with it.

A guarantee, if properly structured, can create a primary obligation. In that case, the guarantor’s liability may stand independently of the principal debtor’s obligations.

The distinction affects when a creditor can act, what must be proved and which defences may be raised.

The wording and structure of the agreement

Courts have consistently confirmed that the wording and structure of an agreement determine its legal effect, rather than the label attached to it.

In Trust Bank of Africa Ltd v Frysch, the court emphasised the accessory nature of suretyship and the link between the surety’s liability and the principal obligation. In Kilburn v Estate Kilburn, the court considered the substance of the undertaking in determining the nature of the obligation created.

The document must therefore be read as a whole to determine whether it creates a primary or secondary obligation.

Common sources of uncertainty

Uncertainty often arises in the following circumstances:

• Acknowledgments of debt and settlement agreements. Additional parties sign without a clear indication of whether they assume primary or secondary liability.
• Director and shareholder involvement. Individuals sign in support of a company’s obligations without appreciating the extent of their exposure.
• Template-driven agreements. Standard clauses are used without being tailored to the commercial intention of the parties.
• Enforcement proceedings. Creditors proceed on the assumption that the supporting obligation is strong, only to face defences that delay or weaken recovery.

In each instance, the issue is not simply whether a document exists. The more important question is what obligation the document creates.

Drafting and enforcement considerations

A properly structured agreement should deal clearly with:

• Whether the obligation is intended to be primary or accessory
• How liability is triggered and whether demand is required
• The relationship between the supporting obligation and the principal debt
• The availability or exclusion of common-law defences
• The sequence of enforcement against different parties

Clarity on these aspects reduces the risk of disputes and strengthens the enforceability of the arrangement.

Practical Implications and Next Steps

Security arrangements are often treated as a formality at the point of contracting. In reality, they are tested when enforcement becomes necessary.

Where the wording is unclear, enforcement may become protracted and uncertain. Creditors may find themselves litigating issues that could have been resolved at the drafting stage. Signatories may face exposure beyond what they anticipated.

A careful review of the structure and wording of these obligations, before signature, is a more reliable way to protect commercial interests.

If you are entering into an agreement that includes a guarantee, suretyship or any form of supporting obligation, it is worth ensuring that the structure reflects your intended position.

The Commercial team at Fairbridges can assist in reviewing, drafting, and enforcing these arrangements so that they provide the level of protection expected when it matters most.