A comparison between the primary and secondary nature of guarantees

Abstract

The use of guarantees as a form of security is a common instrument in the world of lending, construction and transfer of property and date back as far as BC. Although the concept has been around for many years, little progress has been made in developing legislation relating thereto. Contributing to this is the intricate manner in which some guarantee agreements are drafted and the common practice of referring to a guarantee as a suretyship and visa versa. This has been the root of confusion when it comes to the interpretation of the parties’ true intention. It might seem harmless to refer to a guarantee when suretyship is intended, however, it does hold severe consequences for the parties if their true intentions are not documented correctly. As will be discussed, the nature of a common law or primary guarantee, is autonomous whilst an agreement of suretyship is accessory in nature. The nature of a specific guarantee is key to the security it provides or obligation it creates. A common law guarantee is believed to provide a stronger form of security due to its primary nature compared to a suretyship agreement, being secondary in nature. The opposite can also be said, the obligation of a guarantor to perform in terms of a guarantee is more burdensome than the obligation of a surety in terms of a suretyship agreement. Cases such as Desert Rose, Shabangu and Lombard Insurance Company will show the important role that the primary and secondary nature of guarantees play when it comes to the enforcement of such agreement. This dissertation will therefore highlight the importance of knowing and understanding the nature of the agreement that is entered into as it may have some dire consequences at a later stage.