Also known as: secondary obligations · secondary duty
Written by attorneys · grounded in primary & secondary sources — see below
A contractual duty by which one party promises to answer for the debt or default of another. The duty arises when a secondary obligor agrees to perform only if the principal obligor fails to do so. The obligation is ancillary to an underlying primary duty and is enforceable by the obligee upon the principal's nonperformance.
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Skyline Construction agrees to supply materials to Stonehaven Properties on credit. Spectrum Financial signs a separate writing promising to pay any unpaid invoices if Stonehaven defaults. When Stonehaven fails to pay, Skyline's right to collect from Spectrum qualifies as an account because it arises from a secondary obligation incurred by Spectrum.
Republic National Bank issues an instrument that functions as a guaranty for Northwest National Bank's loan to a borrower. When the borrower defaults, the instrument creates a secondary obligation rather than an independent primary duty. Northwest may enforce the guaranty only after the borrower fails to perform, confirming the ancillary nature of the bank's undertaking.
A secondary obligation requires the obligee to look first to the principal obligor and becomes enforceable only upon the principal's default. A primary obligation imposes direct liability on the promisor without regard to the principal's performance. The distinction determines whether the statute of frauds applies to the promise.
Supporting sources
The exception applies when the promisor's leading object is to obtain a direct pecuniary or business benefit for itself rather than to guarantee another's debt. Courts examine the promisor's stated motive and the economic reality of the transaction. If the exception applies, the oral promise becomes enforceable despite the absence of a writing.
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A secondary obligor who performs may seek reimbursement from the principal obligor and may be subrogated to the obligee's rights against the principal. The right of exoneration may also be available if the principal was given notice of the secondary obligation. These remedies allocate the ultimate cost of performance to the principal obligor.
Supporting sources
A secondary obligation that supports payment or performance of an account, chattel paper, or other enumerated collateral is a supporting obligation. The secured party automatically perfects its interest in the supporting obligation when it perfects in the underlying collateral. This rule extends the secured party's protection to guaranties and similar undertakings.
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