Guarantees vs Suretyships vs Demand Guarantees in South African Law [2026]

Three instruments, three legal regimes

“Guarantee”, “suretyship” and “demand guarantee” are used almost interchangeably in everyday business speech, and that loose usage causes real loss. The three are governed by entirely different legal rules, and the difference decides the most important practical questions you can ask of any security: when the giver has to pay, what defences they have, and whether the instrument is even valid.

• Suretyship — an accessory obligation. The surety promises to pay the principal debtor’s debt; the surety’s liability is parasitic on that debt and disappears if the debt is invalid, paid or extinguished. It must be in writing and signed.
• On-demand (performance) guarantee — a primary, autonomous obligation. The guarantor must pay on a conforming demand, irrespective of disputes under the underlying contract. The only escape is proof of fraud by the beneficiary.
• Credit guarantee (NCA s 8(5)) — a statutory label that catches a guarantee only where it backs a credit facility or credit transaction to which the National Credit Act applies. It is about regulatory reach, not about the common-law nature of the instrument.

The drafting lesson runs throughout this guide: decide which instrument you actually want, then make the document say so unambiguously. A court will read the words you used in their substance, not by the heading on the page.

Suretyship: the accessory obligation

A suretyship is the classic security of the credit world. The surety undertakes to the creditor that, if the principal debtor does not perform, the surety will. Its defining feature is that it is accessory: the surety’s obligation exists only to secure the principal debtor’s obligation, and therefore tracks it. If the principal debt is void, never came into existence, or is later discharged, the suretyship cannot stand on its own — there is nothing left to secure.

Our courts have long explained that accessory logic in the closely related field of security cessions. In Grobler v Oosthuizen the Supreme Court of Appeal worked through the “accessory nature” of a cession in securitatem debiti — without a principal debt the security cannot stand, “and it matters not whether the principal debt is extinguished or never existed at all”. The same dependence on a valid principal obligation is the hallmark of a true suretyship, and it is exactly what distinguishes it from the autonomous guarantee discussed below.

Two consequences flow from that accessory character: the surety can generally raise the principal debtor’s defences against the creditor, and because the surety’s obligation depends on the principal debt, an interruption or delay in the running of prescription against the principal debtor works against the surety too. The Supreme Court of Appeal settled the prescription point in Jans v Nedcor Bank:

That accessory character is precisely what a creditor who wants certainty of payment may try to escape — which is the whole reason the on-demand guarantee exists.

The formality that makes or breaks a suretyship: s 6

A suretyship is one of the few contracts in South African law that the legislature has subjected to a strict writing requirement. Section 6 of the General Law Amendment Act 50 of 1956 makes an oral suretyship void — not merely difficult to prove, but a legal nullity. The written document must embody the terms of the suretyship and be signed by or on behalf of the surety.

The practical consequence is unforgiving. A creditor who relies on an unsigned, incomplete or purely oral suretyship has no security at all. This is also why almost every commercial suretyship is signed “as surety and co-principal debtor” with an express renunciation of the benefits of excussion (the right to insist the creditor sue the principal debtor first) and division (the right of one of several co-sureties to be sued only for a proportionate share). Those renunciations make the surety directly and jointly liable — but they do not convert the suretyship into an autonomous instrument. It remains accessory to a valid principal debt.

The on-demand guarantee: a primary, autonomous obligation

An on-demand guarantee — variously called a performance guarantee, a call bond, or a demand guarantee — turns the accessory logic on its head. The guarantor does not promise to pay the debtor’s debt; it undertakes its own, primary obligation to pay the beneficiary on the occurrence of a stipulated event and a conforming demand, independently of the underlying contract. The leading South African authority is Lombard Insurance v Landmark, where Lombard had bound itself as principal debtor to pay the Academy on demand.

Two features of that holding do the work. First, the letter-of-credit analogy: like a bank’s irrevocable letter of credit, the guarantee stands apart from the deal it secures, so the guarantor pays first and the parties argue about the underlying contract afterwards. Second, the court emphasised that the guarantee’s reference to the underlying contract was “solely for the purpose of convenience” and was not intended to create an accessory obligation or suretyship — the very clause that tells a court which instrument it is reading.

The autonomy principle and its only escape hatch

Autonomy would be hollow if guarantors could routinely reopen the underlying contract. The recent decision in Set Square Developments v Power Guarantees (2025) restates the principle in the strongest terms: a guarantor cannot interrogate the validity or termination of the underlying agreement to resist payment, because doing so offends the autonomous and independent nature of the guarantee.

The single exception is fraud. The guarantor escapes only by proving that the beneficiary’s demand was fraudulent — a defence that, as the SCA stressed, “falls within a narrow compass” and must be established on the facts; mere error, misunderstanding or a weak underlying claim is not enough, and the party alleging fraud bears the onus. In Set Square the court also declined an invitation to recognise a broader “unconscionability” exception, holding the guarantor must pay “without interrogation of the contractual disputes between the beneficiary and the contractor”.

Drafting the difference: the clause 3.1 disclaimer

What turned both Lombard and Set Square on the autonomy side of the line was a single clause. In Set Square all three guarantees carried the now-standard wording that reference to the underlying contract is for convenience only and creates no accessory obligation or suretyship. If you want a true on-demand instrument, this is the clause to include — verbatim.

A well-drafted on-demand guarantee will also state precisely what counts as a conforming demand (for example, a written statement of default delivered within a stated period), cap the amount, and make clear that the guarantor’s obligation is to pay money, not to perform the underlying work. Get those mechanics right and the instrument becomes, in the SCA’s phrase, a liquid document on which the beneficiary can obtain swift judgment.

Credit guarantees under the National Credit Act (s 8(5))

The National Credit Act adds a third, statutory category. Section 8(1) lists the species of credit agreement, and a credit guarantee is one of them:

The definition of a credit guarantee is in s 8(5) — and the closing words are everything. Whether a suretyship or guarantee is itself caught by the NCA depends not on its own form but on whether the underlying credit agreement is one to which the Act applies:

So the analysis is two-step. First ask whether the underlying obligation is a credit facility or credit transaction to which the NCA applies. Only if it is can the security be a credit guarantee — in which case the Act’s protections (and the duty to register as a credit provider, now at a nil (R0) threshold) come into play. If the underlying agreement is excluded, the guarantee is governed purely by the common law of suretyship or demand guarantees.

Substance over form: The Profit Hub v Zuwon

The firm’s anchor authority shows the whole framework in motion. In The Profit Hub (Pty) Ltd v Zuwon Consultants (Pty) Ltd the Supreme Court of Appeal had to decide whether an invoice-“discounting”/factoring arrangement — backed by a written suretyship in which Mr Ndawonde bound himself “as surety and co-principal debtor” — was a purchase of debt or a loan, and whether the NCA applied. The starting point was the characterisation discipline that governs every credit and security document:

Applying that triad — the unitary text-context-purpose method of Natal Joint Municipal Pension Fund v Endumeni Municipality — the court found the deal was a loan dressed as a discount, with the cession of debts serving as security for repayment rather than a sale. The presence of a suretyship pointed the same way:

Crucially, holding the deal a loan did not make the NCA apply. The court found there was “no credit facility granted to Zuwon, and no autonomy to decide from time to time how to make use of this facility” — the draw-down autonomy that the case law treats as the essence of a credit facility. The two commercial archetypes of a credit facility were explained in JMV Textiles, which the SCA relied on:

And in any event the Act did not apply, because the consumer was a juristic person and the agreements were large agreements above the relevant thresholds. The lesson for security drafting is direct: had the underlying loan been one “to which this Act applies”, the suretyship behind it might well have been a credit guarantee under s 8(5), pulling the lender into the NCA. Because the loan was excluded, the suretyship was governed by the ordinary common law — and Mr Ndawonde, as surety and co-principal debtor, remained jointly and severally liable for the company’s debt.

A practical checklist for finance and security documents

Before you choose, draft or sign a guarantee or suretyship, work through these questions in order:

1. Which instrument do you actually want? Accessory security that follows the debt (suretyship), or autonomous “pay first, argue later” security (on-demand guarantee)? The choice drives everything below.
2. If a suretyship, comply with s 6. Reduce all essential terms to a written document, signed by or on behalf of the surety. An oral or incomplete suretyship is void.
3. If an on-demand guarantee, disclaim the accessory link. Include the clause that reference to the underlying contract is for convenience only and creates no accessory obligation or suretyship, and specify exactly what a conforming demand looks like.
4. Test the underlying debt against the NCA. Is it a credit facility or credit transaction to which the Act applies? If yes, the security may be a credit guarantee under s 8(5), and the lender may need to register. If the loan is excluded (e.g. a R1 000 000 juristic person, or a large agreement), the common law governs.
5. Mind the penalties and interest. Default and penalty charges in the secured deal are subject to the Conventional Penalties Act 15 of 1962, which lets a court reduce a penalty that is “out of proportion to the prejudice suffered by the creditor” (s 3); and mora interest runs at the prescribed rate unless otherwise agreed.
6. Don’t let the label do the work. A court reads the document by its substance on the Endumeni triad. Name the instrument correctly and make its operative terms match the name.

Receivables-financed lending often layers a cession of book debts over a suretyship, exactly as in Profit Hub. If you are structuring or signing such a deal — or unsure whether your “guarantee” is really an accessory suretyship — book a consultation before you sign.