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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
necessary to use the name of the creditor in any proceedings. But if he is a co-surety, although he may exercise his rights against the debtor or co-sureties equally, he cannot compel his co-sureties to pay more than the proportion which as between themselves they are justly liable to pay. The right exists even though at the time of entering into the contract the surety did not know of the existence of such securities.
If the creditor has any priority, that too passes to the surety. For example, it was held in In re Lord Churchill (1888) that a surety who has paid a debt due to the Crown is entitled to the Crown's priority over other creditors.
Against Co-sureties. If he has paid the whole amount under the guarantee, he is entitled to contribution from his co-sureties. All sureties must contribute equally, if bound for equal amounts, whether by the same or different instruments. But if not liable for equal amounts they must contribute in proportion to the amount for which each is liable. It was held in Ellesmere Brewery Co. v. Cooper (1896) that any sureties unable to pay are not counted as sureties for the purpose of assessing the contribution, herein differing from the rule that the surety remains liable even though bankrupt. A surety who has paid money under the guarantee cannot recover from his co-sureties until he has paid more than his just proportion of the debt. Thus, if A and B are co-sureties with liability under the contract of guarantee limited to £1,000, and on the principal debtor defaulting A pays the sum of £550, the amount demanded by the creditor, which was half the amount due, he would not be able to recover a contribution from B of £275, although of course it would be otherwise had the £550 been the whole amount due under the bond. It was held in Steel v. Dixon (1881) that a co-surety is entitled to call upon any of the other co-sureties for a share of any securities which they may have obtained, and that such securities must be brought into "hotchpot," i.e., be pooled, in order to divide the loss equally among the co-sureties.
DISCHARGE OF THE SURETY
Any grounds sufficient to render void or discharge an ordinary contract, is sufficient to terminate a contract of guarantee.
These grounds are:
By operation of law.
They have already been discussed under the heading of CONTRACTS-See Chapter 1.
In addition, the following acts, in the absence of special agreement, operate as a discharge of the surety. These rules are the result of a variety of legal decisions, to most of which it is unnecessary to refer in detail
Innocent non-disclosure of a material fact, e.g., previous dishonesty of a servant, in the case of a guarantee for the fidelity of the servant.
Fraud or misrepresentation in inducing the surety to agree to undertake the liability.
Non-execution of guarantee. If an intended co-surety does not execute the guarantee.
Failure of the consideration, that is, where the obligation is never incurred by the proposed debtor.
Death of the surety does not act automatically as revocation of a continuing guarantee; but, if notice of the death be given to the holder of the guarantee, the surety's estate will not be liable for any future advances. But if the consideration has been given once for all, as, for example, for admission as an underwriter at Lloyd's, death does not release the surety's estate from future liability. On a joint and several continuing guarantee the co-sureties are not released by the death of one surety.
The absolute discharge of the principal discharges the surety. But under the Bankruptcy Act, 1914, the discharge in bankruptcy of the debtor or the acceptance of an arrangement by his creditors do not operate to discharge the surety. (d)
If the debtor and creditor enter into a covenant that the latter will not sue the former, as usually he is entitled to do, and if there is a reservation as regards the surety, e.g., that he shall not be released, then the surety is not released.
Any material alteration in the terms of the contract between the creditor and the debtor without the consent of the surety. The law on this was expounded by COTTON L.J, in Holme v. Brunskill (1878) as follows:-"The true rule, in my opinion, is that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, he is discharged although in cases where it is without inquiry evident that the alteration (d) See post, p. 323.
is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the court will not, in an action against the surety, go into an inquiry as to the effect of the alteration."
Alteration of the instrument of guarantee by an intended cosurety. The effect of this rule may be illustrated by the case of Ellesmere Brewery Co. v. Cooper, cited above, where four persons executed a joint and several contract of guarantee, whereby the liability of two of the sureties was limited to £25 each, and of the other two to £50 each. One of the latter sureties, who was the last to execute it, added to his signature the words " £25 only " and handed the instrument to the creditor, who made no objection. The principal debtor defaulted and on an action by the creditor to recover from the sureties it was held that the terms of the contract had been materially altered and that, therefore, the first three sureties were discharged from any liability thereunder.
A binding agreement between the creditor and debtor to give time to the principal debtor discharges the surety. But the surety is not released by such an agreement if the creditor expressly reserves his rights against the surety. And a mere voluntary giving of time will not discharge the surety. Moreover, if the creditor has obtained judgment against the principal debtor and the surety, even a binding agreement to give time to the principal debtor does not release the surety, for he is a surety no longer but bound by the new liability, viz., the judgment.
Merger. If the creditor accepts from the debtor a new security in lieu of the original security and of such kind as to operate by way of merger of the old security.
Connivance. If the creditor connives at the default of the principal debtor.
The laches, i.e., undue delay, of the creditor; if the creditor fails to take proceedings against the surety within the time fixed by the Statute of Limitations. But a mere forbearance for a short time will not discharge the surety.
Fidelity Guarantees. In fidelity guarantees, unless otherwise agreed, the surety is discharged on the duties of the office, or appointment of the person guaranteed, suffering material alteration. Further, if the employer discovers an act of dishonesty of the employee guaranteed he must inform the surety of the fact and the surety is then entitled to terminate the guarantee.