Guarantee or a suretyship?

Did you sign a guarantee or a suretyship?

In a recent judgment the court – in addition to determining whether a security document entitled “Guarantee” was, in fact, a guarantee, or a suretyship – provided clarity on the signing requirements for a guarantee.

Please note that the judgment may still be taken on appeal and the Supreme Court of Appeal might have a different view.

The background facts

The respondent executed a document which appeared to be a guarantee in favour of the applicant for the “due, punctual and full payment of all the debts which the group has or may have in the future.” The document was signed electronically by Palmer, but it did not contain an advanced electronic signature.

Section 13 of the ECTA makes provision for two types of electronic signatures, namely an advanced electronic signature and an electronic signature. An advanced electronic signature is required where a signature is required by law.

Guarantee or a suretyship – the legal principles involved

The court referred to Caney’s: The Law of Suretyship in South Africa, where the differences between a guarantee and a suretyship are discussed in some detail.

A guarantor’s obligation, which is independent from that of the debtor, is to indemnify the creditor in respect of losses suffered through the debtor’s non-performance. A surety, on the other hand, is only liable for losses resulting from the debtor’s breach of contract. In other words, if the creditor suffers losses due to an invalid contract, the guarantor is still obliged to pay those losses, but a surety’s obligation falls away.

A surety undertakes that the debtor will pay its debts when they are due, and that only if they fail to do so, the surety will pay the debtor’s debts. A guarantor, however, undertakes to pay upon the occurrence of a certain event and does not undertake that such event will not occur.

Analysis

The respondent undertook, as a principal and independent obligation, the due, punctual, and full payment of the debts:

• This undertaking was not merely an ancillary obligation, as would be the case in respect of a suretyship.
• The “Guarantee” would be effective regardless of the validity or enforceability of the company’s debts.
• There was also no provision that the respondent would only be liable to perform if the company failed to do so, which would fall squarely within the accessory nature of a suretyship.

Summary

This case provides clarity on the approach that the courts will follow in determining whether the security provided by a person is a suretyship or a guarantee, and makes it clear that, should such security be a guarantee, it does not have to be signed in wet ink or by way of an advanced electronic signature.