Guarantee

GUARANTEE. In law, a guarantee is a contract to answer for the payment of some debt, or the performance of some duty, in the event of the failure of another person who is prima rily liable for such payment or performance. In order that there may be a contract of guarantee there must be a primary liability, present or future, of a principal debtor, and a promise made for valuable consideration by a third party (called the "surety" or "guarantor") to the creditor to discharge that liability if the principal debtor does not. The promise of the surety must be such that liability only arises in the event of the failure of the principal debtor to meet his obligations.

A contract of guarantee must be distinguished from a contract of indemnity. If A says to B, who is about to sell goods to C, "Let C have the goods; if he does not pay you, I will," this is an offer of a guarantee on the part of A. But if A says to B, "Let C have the goods ; I will see you paid," A's promise to pay is an original liability to indemnify B against any loss which he may incur in letting C have the goods, and not a promise to answer for C's debt. (Birkmyr v. Darnell, 1704, I Sm. L.C. 12th ed. p. 335) So "if a man says to another, `If you will at my re quest put your name to a bill of exchange, I will save you harm less', that is a contract of indemnity. It is not a responsibility for the debt of another. It amounts to a contract by one that, if the other will put himself in a certain situation, the first will indemnify him against the consequences" (per Pollock, C.B. in Batson v. King, 18J9, 4 H. & N. at p. 740). The distinction is important, for a contract of guarantee is not enforceable unless it is evidenced by some note or memorandum in writing, whereas no written note or memorandum of the agreement is required in the case of a contract of indemnity.

The common law requisites of a contract of guarantee in no way differ from those essential to the formation of any other contract. That is to say, they comprise the mutual consent of the parties, competency to contract, and, unless the guarantee be under seal, valuable consideration. The consideration may con sist of, some advantage given to, or conferred on, the principal debtor by the creditor at the surety's request, e.g., an advance of money to the principal debtor. Or it may take the form of a for bearance on the part of the creditor at the surety's request to sue the principal debtor. In some guarantees the consideration is given once for all, as where a third person guarantees that, in consideration of a lessor granting a lease, he will be answerable for the lessee paying the ent and performing the covenants; in other cases it is supplied from time to time, as where a guarantee is given to secure the balance of a running account at a banker's, or a balance of a running account for goods supplied. (See the judgment of Lush, L. J. in Lloyd's v. Harper, 1881, 16 Ch. D. at pp. 32o).

The statutory requisites of a contract of guarantee are pre scribed by s. 4 of the Statute of Frauds 1689 (29 Car. II. c. 3), which provides that "no action shall be brought whereby to charge the defendant upon any special promise to answer for the debt, default, or miscarriage of another person . . . unless the agree ment upon which such action shall be brought, or some memo randum or note thereof, shall be in writing and signed by the party to be charged therewith, or by some other person there unto lawfully authorized." A promise to give a guarantee is as much within the statute as the guarantee itself. But a promise to procure another person to sign a guarantee for the debt of another is not within the statute, though the guarantee would be. The statute does not invalidate a verbal contract of guarantee, but only renders it unenforceable by action. It may, therefore, be available in support of a defence to an action, and money paid under it cannot be recovered.

To satisfy s. 4 of the Statute of Frauds, the agreement, or the note or memorandum thereof, must set out all the material terms of the guarantee; it must name or unmistakably identify the parties thereto, and must also state the liability guaranteed and the time during which the guarantee is to continue. It is not necessary that the agreement, or memorandum, should con tain any statement of the consideration given to the surety in return for the guarantee (Mercantile Law Amendment Act 1856, s. 3) . The agreement, or memorandum, must be signed by the surety or by some duly authorized agent on his behalf. In the case of a joint and several guarantee all the sureties must sign the agreement or memorandum, otherwise none will be liable thereunder (National Provincial Bank of England v. Bracken bury, 1906, 22 T.L.R. 797).

The promise of a del credere agent (q.v.) which binds him in consequence of the higher consideration he receives to make no sale on behalf of his principal except to persons who are solvent, and renders him liable for any loss that may result from the non fulfilment of his promise, is not within the statute, and need not be in writing, for, though such promise may terminate in a liabil ity to pay the debt of another, that is not the immediate object for which the consideration is given (Coutourier v. Hastie, 1852, 8 Exch. 4o, 56).

A contract of guarantee may be limited to a single transaction, or may cover a number of transactions extending over a period of time—as where a guarantee is given in respect of money to be advanced, or goods to be supplied, to the principal debtor—and remains a standing security until it is revoked either by act of the parties or by death of the surety. It is then called a continuing guarantee. A cause of action thereon arises in respect of each item of account (whether principal or interest) as soon as that item falls due and is unpaid, and, consequently, the Statute of Limitations begins to run in the guarantor's favour in respect of each item from that moment (Parr's Banking Co. Ltd. v. Yates, 1898, 2 Q. B. 46o).

Liability of Surety.

Bef ore the surety can be rendered liable on his guarantee, the principal debtor must have made default. When, however, this has occurred, the creditor, in the absence of express agreement to the contrary, may sue the surety, without even informing him of such default having taken place, or requiring him to pay, and before proceeding against the prin cipal debtor or resorting to securities for the debt received from the latter. The surety's liability is limited to the amount which he has undertaken to pay on default of the principal debtor. This amount may be equal to the sum due from the principal debtor, or it may be less than such sum. If the guarantee is one which the surety has entered into jointly with others, he is still liable to pay the whole amount he has agreed to pay on the debtor's default, unless the guarantee otherwise expressly pro vides. His right of contribution against his co-sureties may be a partial indemnity, but cannot, in the absence of agreement bind ing the creditor, compel the creditor to proceed against the other sureties. Should the surety become bankrupt, either before or of ter default has been made by the principal debtor, the creditor will have to prove against his estate. This right of proof is regulated by s. 3o of the Bankruptcy Act 1914, which is most comprehensive in its terms.

Rights of Surety Against Principal Debtor.—The surety can recover, with interest, from the principal debtor all money properly paid when due on account of the guarantee, provided of course that the guarantee was made with the principal debtor's consent. In the event of the principal debtor's bankruptcy, the surety can, if the creditor has not already proved in respect of the guaranteed debt, prove against the bankrupt's estate, not only in respect of payments made bef ore the bankruptcy of the principal debtor, but also, it seems, in respect of the contingent liability to pay under the guarantee. The surety is also entitled to enforce against the debtor the rights which the creditor enjoyed with respect to the debt in question. Moreover, a surety has the right before payment to compel the principal debtor to relieve him from his liability by paying off the debt, if the debt is actually due and the surety admits liability. In such a case it is not necessary to prove that the creditor has refused to sue the principal debtor (Ascherson v. Tredegar Dry Dock and Wharf Co. Ltd., loop, 2 Ch. 401).

Rights of Surety Against the Creditor.

The surety, on payment of the debt, is entitled to the benefit of the securities in the hands of the creditor, whether he knew of them or not at the time of contracting; including all securities which the creditor may have acquired since the date of contracting ; and where, by the default or laches of the creditor, such securities have been lost or rendered otherwise unavailable, the surety is discharged pro tanto. If the surety is surety for part of the debt only, his rights to the securities also are but partial (Goodwin v. Gray, 1874, 22 W.R. 312). On this subject the Mercantile Law Amend ment Act 1856, s. 5, provides that "every person who, being surety for the debt of another, or being liable with another for any 'debt or duty, shall pay such debt or perform such duty, shall be entitled to have assigned to him, or to a trustee for him, every judgment, specialty, or other security which shall be held by the creditor in respect of such debt or duty, whether such judgment, specialty, or other security shall or shall not be deemed at law to have been satisfied by the payment of the debt or per formance of the duty, and such person shall be entitled to stand in the place of the creditor, and to use all the remedies, and if need be, and upon a proper indemnity, to use the name of the creditor in any action or other proceeding, at law or in equity, in order to obtain from the principal debtor, as the case may be, indemnification for the advances made and loss sustained by the person who shall have so paid such debt or performed such duty ; and such payment or performance so made by such surety shall not be pleadable in bar of any such action or other pro ceeding by him; provided always, that no co-surety, co-contractor, or co-debtor, shall be entitled to recover from any other co-surety, co-contractor, or co-debtor, by the means aforesaid, more than the just proportion to which, as between those parties themselves, such last-mentioned person shall be justly liable." Right of Surety Against Co-sureties.—A surety on pay ment of the debt, or more than his proportion, is entitled to con tribution from his co-sureties in respect of the excess. This right is not founded originally upon contract, but upon a principle of equity, though it is now established to be the foundation of an action. It exists whether the sureties are bound jointly, or jointly and severally, and whether they are bound by the same or differ ent instruments. If the principal debtor makes default, all must contribute equally, if each is a surety to an equal amount, and if not equally, then proportionately to the amount for which each is a surety (Ellesmere Brewery Co. v. Cooper and Others 1896, Q. B. 75). In counting the number of sureties for this purpose, those unable to pay are not reckoned. Thus where four sureties are jointly and severally bound in a surety bond, and one of them pays the amount of the bond, but one of the remaining three sureties is insolvent, the right of contribution against the two other sureties is for thirds, not for fourths, of the sum paid (per Lord Esher, M.R., ibid., at p. 8o). But a surety is not entitled to call upon his co-sureties for contribution until he has paid more than his proportion, either of the whole debt or of that part which remains unpaid, even though his co-sureties have not been required by the creditor to pay anything (Ex parte Snowdon, 188t, 17 Ch. D. 44) . And so where the debt guaranteed is pay able by instalments, a surety cannot call on his co-sureties to contribute until he has paid more than his proportion of the entire debt. The fact that he has paid more than his share of the instalments which have come due will not entitle him to contri bution (Stirling v. Burdett, 1911, 2 Ch. 418).

A surety against whom judgment has been obtained by the principal creditor for the full amount of the debt can, before paying the amount, maintain an action against his co-sureties to compel them to contribute towards the common liability, and where the principal creditor is a party to the action, the surety may obtain an order directing the co-sureties to pay their proportions to the creditor (W olmershausen v. Gullick, 1893, 2 Ch. 514).

The right of contribution is not the only right possessed by a surety against his co-sureties; he is also entitled to a share in every counter-security which his co-sureties may have obtained from the principal debtor, and such security must be brought into hotchpot, in order that the ultimate burden may be distributed between the sureties equally, even though the co-sureties con sented to become sureties only upon the terms of having the security (Steel v. Dixon, 1881, 17 Ch. D. 825).

Discharge of Surety.

The surety will be discharged on any of the grounds which suffice to terminate contracts in general, and also on the following which are peculiar to contracts of guarantee. In the case of a guarantee for the fidelity of a serv ant, the non-disclosure by the employer to the surety of the fact that the servant had previously been guilty of dishonesty in his employment will avoid the contract although such non-disclosure was not fraudulent (London General Omnibus Co. Ltd. v. Hollo way, 1912, 2 K.B. 72). On the other hand, in the case of a guarantee given to a banker to secure an overdraft, the mere non-disclosure by the banker to the surety of the fact that, at the time when he signed the bond, the customer was already indebted to the banker for the full amount of the credit and pay ment had been requested by the banker, will not avoid the con tract, for the bank cannot reasonably be taken as affirming, by mere silence respecting earlier dealings, the financial ability of the customer whom the surety is asked to guarantee (Hamilton v. Watson, 1845, 12 Cl. & F. 109). Fraud subsequent to the exe cution of the guarantee (as where, for example, the creditor connives at the principal debtor's default) will certainly dis charge the surety. Again, a material alteration made in the terms of the contract between the creditor and the principal debtor, without the assent of the surety, will discharge the surety, unless it is self-evident that the alteration cannot prejudice the surety; the surety himself being the judge as to the materiality of the alteration (Holme v. Brunskill, 1878, 3 Q.B.D. 495).

Giving time to the principal debtor without the surety's con sent will discharge the surety, and for this reason, because the creditor by giving time deprives the surety of his right to pay off the debt which he has guaranteed and to sue the principal debtor (Samuel v. Howarth, 1817, 3 Mer. 272). But to produce this result there must be a binding contract to extend the time for payment, not merely by a forbearance of the creditor to en force his rights, and the contract must be with the principal debtor. A contract with a stranger, or even with a co-surety, to give time to the principal debtor, will not prevent the surety dis charging the debt and pursuing his remedy over against the principal debtor, and will not discharge the surety from liability (Frazer v. Jordan, 1858, 8 E. & B. 303 ; Clarke v. Birley, 1889, 41 Ch. D. 422).

To the rule that time given to a principal debtor discharges a surety there is an important exception. A surety is not released by an agreement to give time to the debtor if the creditor expressly reserves his rights against the surety. The reasons why the reservation by the creditor of his rights against the surety does not release the latter are (i.) because it rebuts the implication that the surety was meant to be discharged, and (ii.) because it prevents the rights of the surety against the principal debtor be ing impaired, for the principal debtor, by consenting to the creditor reserving his rights, impliedly agrees that the surety shall have recourse against him, and he may, notwithstanding the agreement, pay the creditor and enforce his rights against the debtor (Kearsley v. Cole, 1847, 16 M. & W. 128, at p. 135). The rule also does not apply where time is given to the principal debtor after a judgment has been recovered by the creditor against both the principal debtor and the surety; the judgment creates a new liability in respect of which the judgment debtors are in the same position (in re a Debtor, 1913, 3 K.B. 1 1).

An absolute release of the principal debtor will discharge the surety. But a covenant not to sue the principal debtor, qualified by a reservation of rights against the surety, allows the surety to retain all his remedies against the principal debtor and will not discharge him from liability (Price v. Baker and Another, 24 L.J.Q.B. 130). A release by the creditor of one of two or more co-sureties will discharge all (Evans v. Brembridge, 1856, 25 L.J. Ch. 334). This is not so, however, if the sureties con tract severally (Ward v. National Bank of New Zealand, 1883, 8 App. .Cas. 755).

A surety is discharged if the creditor takes a new security from the principal debtor in lieu of the original one, or by his wilful neglect or default loses the securities which he holds, or deals with the securities in such a way as to deprive the surety of the means of recouping himself by them.

A guarantee, the consideration for which is given once for all (as where a third person guarantees that in consideration of the lessor granting a lease, he will be answerable for the lessee paying the rent), cannot be determined by the surety, and does not cease on his death (Lloyd's v. Harper, 1881, 16 Ch. D. 290). On the other hand, when the consideration for a guarantee is fragmentary, supplied from time to time, and therefore divisible (as where a guarantee is given to secure the balance of a running account at a banker's), the surety may at any time terminate the guarantee, and notice of death of the surety will put an end to his liability (Coulthart v. Clementson, 188o, 5 Q.B.D. 42). But the death of one of the co-sureties under a joint and several continuing guar antee does not by itself determine the future liability of the sur viving co-sureties (Beckett & Co. v. Addyman, 1882, 9 Q.B.D. 783) . A continuing guarantee given either to a firm or to a third person in respect of the transactions of a firm is, in the absence of agreement to the contrary, revoked as to, future transactions by any change in the constitution of the firm (Partnership Act, 189o, s. 18) . A surety who has executed a guarantee on the faith that another person will also become a surety is wholly discharged from liability if that other person refuses to do so, or for any other reason does not join in the guarantee (Evans v. Brembridge, 1853, 25 L.J. Ch. 334)• A discharge in bankruptcy of the prin cipal debtor, or the acceptance by his creditors of a composition or scheme, will not release from liability a person who was surety for his debts (Bankruptcy Act 1914, s. 28, subs. 4; s. 16, subs. 2o) .

The Statutes of Limitation bar the right of action against a surety after 20 years if the guarantee was under seal; and in the case of other guarantees, after six years from the date of the accrual of the cause of action, that is to say from the date on which the creditor might have sued the surety. Where, by the express terms of the guarantee, the surety is only liable to pay after demand, time does not begin to run until after demand to pay has been made upon him.

See Sir S. A. T. Rowlatt, Law of Principal and Surety (end ed., i926) ; T. Hewitson, Suretyship, its Origin and History (1927).

(C. GA.) There have been repeated efforts by American courts and legal writers to distinguish a surety from a guarantor; the efforts have failed, since hardly two of them find the same line of distinction; hence, in the United States as in England the two terms are sub stantially synonymous. But in some American States the memo randum of a contract of guarantee still requires to state the con sideration, if the contract is to be enforceable. Furthermore, laches in the creditor's dealing with any security he may hold, to be sufficient in American law to discharge the creditor's claim against the surety, must either involve affirmative action, or must consist in failing to take simple, standard, business-like precau tions : such as recording a mortgage, or so presenting a negotiable note as to keep the endorsers from being discharged. But mere failure to enforce the security before it depreciates in value will not in the United States be considered such laches, the judicial view being that the surety's remedy is to pay off the debt and then realize on the security himself. It is hard to see .ihy the surety should be forced thus to strain his resources ; it is equally hard to reconcile the harshness against the surety of this rule with the extreme leniency found in discharging him by reason merely of extension of time to the principal. The two lines of precedent grew up separately, and did not come into contact until both were set. Two other divergences from the English law as stated above need notice : the periods of the Statute of Limitations differ among the American States; and the fact that a surety stipulated that a co-surety be procured, or other condition be fulfilled, will not, commonly, discharge him as against a creditor who has relied upon surety's signature without notice of stipulation or condition.

Corporate Suretyship.

In the United States a great and growing part of suretyship business is now in the hands of profes sional surety companies, which write surety bonds for a premium calculated on loss-expectancies, and which in cases involving any considerable risk take measures to assure themselves of indem nity, in advance of loss. In the case of such "compensated sure ties" the courts have tended distinctly to tighten up the law in favour of the creditor, so that the older tendency to construe the contract narrowly, and employ every possible loophole to let the surety out, is now limited to the cases out of which it originally grew : those of the friend or family member who has lent his credit, without compensation, in an individual case. Hence the bonds of surety companies are approaching, in law as in social function, policies of insurance. They are perhaps of peculiar im portance in the field of guaranteeing the fidelity of trusted em ployes or of public officers (where the check-up system of the bonding companies goes some distance toward anticipatory pre vention of frauds) and in that of contracts for building and public works. It should be noted that these bonding companies are not, like most corporations, without charter power to enter into bind ing contracts of suretyship; also that the larger modern business corporations are now commonly being given charter power to become surety at least for their own subsidiaries. Hence guar anteed bonds are becoming familiar in the market. To be distin guished from suretyship, in law though not in function, is the growing practice among bankers of accepting negotiable paper (see BILL OF EXCHANGE) on behalf of their customers for a commission; this is not in strictness suretyship, not only because the customer's obligation in all probability ceases when the bank er's is given, but because, in any event, the customer's liability must be conditional on prior dishonour by the banker.

Bail Bonds.

A field of suretyship, finally, which deserves special mention because of the abuses encountered in practice, is that of the bail bonds given to secure the supposedly temporary release of persons charged with crime. The bail is forfeited if the accused disappears; this is supposed to force the bondsman to keep a constant eye on the accused. But the practice of allowing professional bondsmen to sign bonds totalling far in excess of their available assets, together with the difficulty of getting suit prosecuted against such as are politically influential, has made this phase of suretyship a serious hindrance to convictions.

See Arnold, "Suretyship and Guaranty" (1927), Missouri Crime Survey, Part V. (1926). (K. N. L.)