The Nature and Function of Security
Suppose that I want you to lend me money. If you agree to do that, you are taking a risk. All may go well — I may repay you in accordance with our agreement — but it cannot be guaranteed.
I may run off with the money. I may have some financial crisis that prevents me paying my debts. The longer the term of the loan is, the greater the risk. A right in security is a means of protecting your position. Equally, it is in my interest to be able to offer security, because it will mean that I am more likely to be able to persuade you to lend to me, and the reduced risk to you is likely to mean that I will be able to get better terms. Justinian says therefore that a right in security ‘benefits both parties, the debtor because it helps him get credit more easily, and the creditor because it helps him give credit safely'.[1608]The basic idea of a right in security is that it gives the creditor an alternative source from which payment[1609] can be obtained.[1610] This alternative source can be one of two things. First, the debtor may agree that some item of his or her propÂerty can be used in security for the debt. This is known as a real security, because it gives the creditor a real right in an item of property. Second, the debtor may find a third party willing to guarantee payment of the debt. The idea here is that, if the debtor fails to pay, the creditor can look to the third party for payment. This is known as a personal security.[1611]
Where a right in security exists, the creditor thus has two rights: the personal right against the debtor, entitling the creditor to payment; and the right in security, which gives the creditor an alternative means of getting payment. The right in security is ancillary to the main obligation. In other words, a right in security has to secure something.
It cannot exist on its own, as a freestanding right.[1612] Its purpose is to secure performance of the main obligation, and if the main obligation is extinguished then the right in security is extinguished as well. For example, supÂpose that you lend me a sum of money, and to secure the loan I grant you a right in security. If I repay the loan, that extinguishes the debt, and the right in security falls as well.[1613] The same is not true in reverse, however. While the security depends for its existence on the main obligation, the main obligation can survive without the security. If the security is extinguished for reasons unconnected with the main obligation, the main obligation will survive intact.[1614] For example, suppose that the security that I grant you is a real security over some item of my property. If the property is destroyed, the security right will be extinguished. After all, if the essence of a security right is that it gives the creditor alternative recourse to get payment, the security cannot survive if the means of that alternative recourse is destroyed. The main obligation will survive, however, so I will still owe you the money.B.