CHAPTER 10

SURETYSHIP AND GUARANTEE

Nature and Formation of the Contract.

The contract of suretyship or guarantee is an engagement to be answerable for another person, either for his debt or that he will perform some act. A guarantee may be given for the carrying out of practically any act, and it does not apply exclusively to mercantile matters. The more usual forms, however, are those connected with commercial transactions and are such as to secure the fidelity of an employee. The other person must, as a rule, be under a legal obligation to pay the debt or perform the act, and the undertaking of the surety or guarantor is only collateral.

There would be an exception to the rule that the other person must be under a legal obligation to pay, however, in the case of a person guaranteeing the debt of an infant, for where a person purports to become surety for one who is under disability, it does not prevent the "surety from becoming liable to the creditor providing there is absence of fraud or misrepresentation. In such case as this, it is not necessary that the promise to pay should be in writing, because, being a promise to pay whether the other person becomes liable or not, it is not, strictly speaking, a promise to answer for the default of another. If the infant has been supplied with "necessaries," however, it is probable that the ordinary rule would apply.

In other cases, that is, of persons not under disability, Section 4 of the Statute of Frauds will apply. (b) This enacts that no action can be brought to charge a person upon any special promise to answer for the debt, default or miscarriage of another person, unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing signed by the party to be charged or his agent. In other words, it is one of those contracts which are unenforceable unless evidenced by writing, that is to say, a verbal guarantee cannot be sued upon. What (b) See ante, p. 16.

is a sufficient memorandum to satisfy the statute has already been considered, (c) but it should be noted that, by the Mercantile Law Amendment Act, 1856, a guarantee is valid without the consideration appearing on its face, although, of course, the consideration must exist unless the written instrument is under seal, and the memorandum must be complete in every other respect.

Where there is a promise to pay the debt of another, and such promise is only incidental to a larger transaction, the agreement does not fall within the statute; for example, A buys goods subject to a lien, and, upon a verbal promise to pay off the incumbrance, he obtains delivery of the goods from B. The promise is valid although not in writing. Similarly, in the case where the object is to free goods from incumbrance and not merely to pay the debt of another, and in the case of the employment of a del credere agent, no writing is required.

Guarantees and Indemnities.

It was decided in the leading case of Birkmyr v. Darnell (1704), that a promise to answer for the debt, default or miscarriage of another, for which that other person remains liable, is within the statute and must, therefore, be in writing; but, if that other person does not remain primarily liable, it is an indemnity and not a guarantee, and need not be in writing. So that if A and B go into a shop and A says to the shopkeeper " Supply B with a hat and if he does not pay for it I will," B remains liable to pay, and A's promise is collateral to B's liability and the agreement is, therefore, within the statute. If, however, A had said, Supply a hat to B and I will be answerable," B is not necessarily liable to pay, for A may have meant that he would pay in any event. It is often difficult to decide as to the real intention. It is always a question of fact, to be governed by the circumstances; but if A had intended that he would pay in any event, i.e., he entered into a contract of indemnity, then the agreement need not be in writing. Thus, in Sutton v. Grey (1894), the plaintiffs, A. B. & Co., a firm of stockbrokers, agreed orally with D that they would transact business on the Stock Exchange and be answerable for any customers D might introduce, and it was agreed further that D should receive half the commission and be liable for half of any losses incurred thereby. Plaintiffs incurred a loss by the default of a customer introduced by D and they sought to recover half of it from D. It was held that the promise was the ulterior consequence only of the above agreement, the main object of which was to regulate the terms of employment, and the contract being therefore one of indem(c) See ante, pp. 17-19.

nity, the Statute of Frauds did not apply. Similarly, in Guild v. Conrad (1894), A had orally promised B that if B would accept certain bills for a firm in which A's son was a partner, he, A, would provide the funds to meet the bills. It was held that A was liable, as the promise was to indemnify B against the liability incurred in accepting the bills and was independent of the question whether the firm which was primarily liable made default or not. A careful comparison should be made with the facts in the case of Harburg Indiarubber Comb Co. v. Marten (1902); C, who was a director and shareholder in a company, orally promised certain judgment creditors that he would indorse bills for the amount of the debt due by the company. It was held that the promise was not of indemnity, but a promise to answer for the debt of another, i.e., a guarantee, within Section 4 of the Statute of Frauds, and the fact that C had an interest as shareholder in freeing the goods from threatened execution, he having no legal interest in or charge upon the goods, did not take the case outside the section; therefore, that as the promise was not in writing, plaintiff could not recover.

The contract of guarantee necessarily involves that there should be also another contract, one party, i.e., the creditor, being common to both contracts. Therefore, the contract of guarantee is not really such where the contract is not made with the creditor. Further, the guarantor or surety must not be in any way liable except to the extent that liability arises from his express promise.

There are, therefore, three parties required to a guarantee— debtor, creditor and surety; whereas a contract of indemnity needs only two, promisor and promisee. A guarantee must be in writing, while an indemnity may be oral.

Offer and acceptance is necessary in the case of a guarantee as in other branches of the law of contract. A guarantee is not binding on the guarantor unless his offer to be surety has been accepted by the person to whom offered. On the other hand, if the other party requested the guarantor to be surety, then the latter's letter acceding to the request is sufficient to bind him.

LIABILITY OF THE SURETY

The contract itself determines the amount of the surety's liability. This amount may be a specified sum payable as liquidated damages, or it may depend on the circumstances of the principal contract to which the guarantee is collateral; but in any case it cannot exceed that for which he has undertaken to be answerable. If the debtor is liable to pay interest after date of non-payment, then the surety is liable for that also. The

liability of the surety in other respects, too, will depend upon the contract he has entered into; and such contract will, as a rule, specify the conditions under which he may be sued on default of the principal debtor. In the absence of any other agreement, the surety may be sued immediately default is made by the principal debtor, even without the principal debtor first being sued or any notice being given to or demand being made upon the surety. Further, if the surety has guaranteed to be liable jointly with others he can, in the absence of contrary provision, be sued for the whole amount undertaken to be paid by the joint guarantors. He can proceed against his co-sureties for what it may be worth, but he must himself first pay the principal debt. A surety remains liable even though he has been adjudged bankrupt, and the creditor could prove against his estate.

If it is sought to make a surety liable, a judgment against the principal debtor is not judgment against the surety; it is not evidence against him, and he is not bound by any admissions made by the debtor. Entirely fresh proceedings must be instituted against the surety, who is permitted to raise any defence which was not raised at the hearing of the action against the principal debtor.

Continuing Guarantee. It is sometimes a difficult matter to decide whether the guarantee is intended to be confined to a single transaction or whether it is a continuing guarantee," that is, one covering transactions over an extended period until expressly revoked. Such a question cannot be settled by reference to decided cases, for they are not clearly distinguishable. Each case must, therefore, be decided by the words of the instrument and the presumed intention of the parties. For example, in Allnutt v. Ashenden (1843), A owed B a certain account for wines which amounted to less than £100. C gave a guarantee to the effect: "I hereby guarantee A's account with B for wines to the amount of £100." This was held to be a guarantee of the existing account only. Again, where an Insurance Company gives a Fidelity Guarantee during the continuance of employment by a firm of an employee, e.g., a cashier, this is a continuing guarantee of a clearly distinguishable character. On the other hand, in Wood v. Priestner (1867), D owed money to E for coals and wished to buy some more. His father, therefore, gave a guarantee to the effect: "I hereby hold myself responsible as a guarantee to E in consideration of the credit given to my son for coal supplied, for the sum of £100 and in default of my son's payment of any account due, I bind myself to pay E whatever may be owing to an amount not exceeding £100." This was held to be a continuing guarantee.

It is provided by Section 18 of the Partnership Act, 1890, that if a person gives a continuing guarantee to a firm, or to a third person for a firm it is, unless otherwise expressly or impliedly agreed, revoked as to future transaction by any change in the firm. It should be noted, too, that one partner cannot bind the firm by undertaking to act as surety unless he is authorized to do so on its behalf.

RIGHTS OF THE SURETY

The surety is entitled to be made acquainted with all material facts to enable him to decide whether or not he will enter into the contract, and there must be neither fraudulent concealment nor wilful misrepresentation; yet, by the decision in Seaton v. Burnand (1900), there is no duty to make disclosures as in the class of contracts uberrimæ fidei. But it was held, in the case of National Provincial Bank of England v. Glenusk (1913), that the rule as to non-disclosure does not apply to a bank guarantee. Equally the creditor, in the case of a continuing guarantee, must not conceal any facts subsequently transpiring by reason of which the surety might avoid the contract.

The surety is a "favoured debtor" in that his liability must be strictly proved, and the mere fact that the principal debtor has become liable is not in itself sufficient to establish the surety's liability. He may be freed from all liability by the negligence of the creditor, or by any alteration of terms of the guarantee or of his liability without his assent. Similarly, when called upon to pay, he may exercise any right of set-off that he may have.

Rights of Surety on paying debt.-When the surety has been obliged to pay the debt, he has the following rights

Against the Debtor. He may recover from the debtor all money properly paid when due on account of the guarantee, together with interest thereon; and, if he has reasonably incurred any costs in disputing the creditor's claim, he may recover these also. In addition, he has the right, before payment, if the debt is due, to compel the principal debtor to relieve him from liability

Against the Creditor. On paying the debt of the principal debtor the doctrine of Subrogation enters in and the surety is entitled, under the provisions of the Mercantile Law Amendment Act, 1856 (already referred to), to have assigned to him, or a trustee for him, every judgment or other security held by the creditor, notwithstanding that at law such may be deemed satisfied by his payment or performance, and he is entitled to stand in the place of the creditor, and if