Surety
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Banking basics
A recap of a few things you’d think financial professionals ought to know
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An old word meaning a guarantee, or the provider of one (now more commonly known as a guarantor).
There are those who will tell you that a guarantor and a surety are different things, though when pressed to explain how, they will struggle.
For example, this, and I quote:
“The basic difference between the two is that a suretyship cannot exist without a principal obligation by a principal debtor, for example, the obligation to pay the bank, and a guarantee is an undertaking by a guarantor (you) to pay or fulfill an obligation to a creditor (bank) upon the occurrence of a certain event.”[1]
We are scarcely the wiser. How can a guarantee exist without a principal obligation (the thing being guaranteed) owed a principal debtor (the “obligor”) to a creditor (the “beneficiary”) by some other party (the “guarantor” or “surety”)?
No less an authority that Allen and Overy — yes, both of them — tell us[2] that in fact a suretyship is a type of guarantee — a weaker one — to unfavourably contrasted with a “demand” guarantee:
The differences between the two are important. With a suretyship guarantee, equity will intervene to protect a guarantor in some circumstances (for example, if the underlying contractual obligations which it has guaranteed have been increased without the guarantor’s consent). A surety’s obligations are also secondary: the beneficiary of the guarantee must first establish the main obligor’s liability and default. With a demand guarantee payment is only conditional on the beneficiary serving a demand in the required form (although this can be made conditional on an event happening). Normally, demand guarantees are not subject to the equitable defences that a suretyship guarantee is.