GUARANTEE (sometimes spelt “guarantie” or “guaranty”; an O. Fr. form of “warrant,” from the Teutonic word which appears in German as wahren, to defend or make safe and binding), a term more comprehensive and of higher import than either “warrant” or “security,” and designating either some international treaty whereby claims, rights or possessions are secured, or more commonly a mere private transaction, by means of which one person, to obtain some trust, confidence or credit for another, engages to be answerable for him.
In English law, a guarantee is a contract to answer for the payment of some debt, or the performance of some duty, by a third person who is primarily liable to such payment or performance. It is a collateral contract, which does not extinguish the original liability or obligation to which it is accessory, but on the contrary is itself rendered null and void should the latter fail, as without a principal there can be no accessory. The liabilities of a surety are in law dependent upon those of the principal debtor, and when the latter cease the former do so likewise (per Collins, L.J., in Stacey v. Hill, 1901, 1 K.B., at p. 666; see per Willes, J., in Bateson v. Gosling, 1871, L.R. 7 C.P., at p. 14), except in certain cases where the discharge of the principal debtor is by operation of law (see In re Fitzgeorge—ex parte Robson, 1905, 1 K.B. p. 462). If, therefore, persons wrongly suppose that a third person is liable to one of them, and a guarantee is given on that erroneous supposition, it is invalid ab initio, by virtue of the lex contractûs, because its foundation (which was that another was taken to be liable) has failed (per Willes, J., in Mountstephen v. Lakeman, L.R. 7 Q.B. p. 202). According to various existing codes civil, a suretyship, in respect of an obligation “non-valable,” is null and void save where the invalidity is the result of personal incapacity of the principal debtor (Codes Civil, France and Belgium, 2012; Spain, 1824; Portugal, 822; Italy, 1899; Holland, 1858; Lower Canada, 1932). In some countries, however, the mere personal incapacity of a son under age to borrow suffices to vitiate the guarantee of a loan made to him (Spain, 1824; Portugal, 822, s. 2, 1535, 1536). The Egyptian codes sanction guarantees expressly entered into “in view of debtor’s want of legal capacity” to contract a valid principal obligation (Egyptian Codes, Mixed Suits, 605; Native Tribunals, 496). The Portuguese code (art. 822, s. 1) retains the surety’s liability, in respect of an invalid principal obligation, until the latter has been legally rescinded.
The giver of a guarantee is called “the surety,” or “the guarantor”; the person to whom it is given “the creditor,” or “the guarantee”; while the person whose payment or performance is secured thereby is termed “the principal debtor,” or simply “the principal.” In America, but not apparently elsewhere, there is a recognized distinction between “a surety” and “a guarantor”; the former being usually bound with the principal, at the same time and on the same consideration, while the contract of the latter is his own separate undertaking, in which the principal does not join, and in respect of which he is not to be held liable, until due diligence has been exerted to compel the principal debtor to make good his default. There is no privity of contract between the surety and the principal debtor, for the surety contracts with the creditor, and they do not constitute in law one person, and are not jointly liable to the creditor (per Baron Parke in Bain v. Cooper, 1 Dowl. R. (N.S.) 11, 14).
No special phraseology is necessary to the formation of a guarantee; and what really distinguishes such a contract from one of insurance is not any essential difference between the two forms of words insurance and guarantee, but the substance of the contract entered into by the parties in each particular case (per Romer, L.J., in Seaton v. Heath—Seaton v. Burnand, 1899, 1 Q.B. 782, 792, C.A.; per Vaughan Williams, L.J., in In re Denton’s Estate Licenses Insurance Corporation and Guarantee Fund Ltd. v. Denton, 1904, 2 Ch., at p. 188; and see Dane v. Mortgage Insurance Corporation, 1894, 1 Q.B. 54 C.A.) In this connexion it may be mentioned that the different kinds of suretyships have been classified as follows: (1) Those in which there is an agreement to constitute, for a particular purpose, the relation of principal and surety, to which agreement the creditor thereby secured is a party; (2) those in which there is a similar agreement between the principal and surety only, to which the creditor is a stranger; and (3) those in which, without any such contract of suretyship, there is a primary and a secondary liability of two persons for one and the same debt, the debt being, as between the two, that of one of those persons only, and not equally of both, so that the other, if he should be compelled to pay it, would be entitled to reimbursement from the person by whom (as between the two) it ought to have been paid (per Earl of Selborne, L.C., in Duncan Fox and Co. v. North and South Wales Bank, 6 App. Cas., at p. 11). According to several codes civil sureties are made divisible into conventional, legal and judicial (Fr. and Bel., 2015, 2040 et seq.; Spain, 1823; Lower Canada, 1930), while the Spanish code further divides them into gratuitous and for valuable consideration (art. 1, 823).
In England the common-law requisites of a guarantee in no way differ from those essential to the formation of any other contract. That is to say, they comprise the mutual assent of two or more parties, competency to contract, and, unless the guarantee be under seal, valuable consideration. An offer to guarantee is not binding until it has been accepted, being revocable till then by the party making it. Unless, however, as sometimes happens, the offer contemplates an express acceptance, one may be implied, and it may be a question for a jury whether an offer of guarantee has in fact been accepted. Where the surety’s assent to a guarantee has been procured by fraud of the person to whom it is given, there is no binding contract. Such fraud may consist of suppression or concealment or misrepresentation. There is some conflict of authorities as to what facts must be spontaneously disclosed to the surety by the creditor, but it may be taken that the rule on the subject is less stringent than that governing insurances upon marine, life and other risks (The North British Insurance Co. v. Lloyd, 10 Exch. 523), though formerly this was denied (Owen v. Homan, 3 Mac. & G. 378, 397). Moreover, even where the contract relied upon is in the form of a policy guaranteeing the solvency of a surety for another’s debt, and is therefore governed by the doctrine of uberrima fides, only such facts as are really material to the risk undertaken need be spontaneously disclosed (Seaton v. Burnand—Burnand v. Seaton, 1900, A.C. 135). As regards the competency of the parties to enter into a contract of guarantee, this may be affected by insanity or intoxication of the surety, if known to the creditor, or by disability of any kind. The ordinary disabilities are those of infants and married women—now in England greatly mitigated as regards the latter by the Married Women’s Property Acts, 1870 to 1893, which enable a married woman to contract, as a feme sole, to the extent of her separate property. Every guarantee not under seal must according to English law have a consideration to support it, though the least spark of one suffices (per Wilmot, J., in Pillan v. van Mierop and Hopkins, 3 Burr., at p. 1666; Haigh v. Brooks, 10 A. & E. 309; Barrell v. Trussell, 4 Taunt. 117), which, as in other cases, may consist either of some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. In some guarantees the consideration is entire—as where, in consideration of a lease being granted, the surety becomes answerable for the performance of the covenants; in other cases it is fragmentary, i.e. 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 (per Lush, L.J., in Lloyd’s v. Harper, 16 Ch. Div., at p. 319). In the former case, the moment the lease is granted there is nothing more for the lessor to do, and such a guarantee as that of necessity runs on throughout the duration of the lease and is irrevocable. In the latter case, however, unless the guarantee stipulates to the contrary, the surety may at any time terminate his liability under the guarantee as to future advances, &c. The consideration for a guarantee must not be past or executed, but on the other hand it need not comprise a direct benefit or advantage to either the surety or the creditor, but may solely consist of anything done, or any promise made, for the benefit of the principal debtor. It is more frequently executory than concurrent, taking the form either of forbearance to sue the principal debtor, or of a future advance of money or supply of goods to him.
By the Indian Contract Act 1872, sect. 127, it is provided that the consideration for a guarantee may consist of anything done or any promise made for the benefit of the principal debtor by the creditor. Total failure of the consideration stipulated for by the party giving a guarantee will prevent its being enforced, as will also the existence of an illegal consideration. Though in all countries the mutual assent of two or more parties is essential to the formation of any contract (see e.g. Codes Civil, Fr. and Bel. 1108; Port. 643, 647 et seq.; Spain, 1258, 1261; Italy, 1104; Holl. 1356; Lower Canada, 984), a consideration is not everywhere regarded as a necessary element (see Pothier’s Law of Obligations, Evans’s edition, vol. ii. p. 19). Thus in Scotland a contract may be binding without a consideration to support it (Stair i. 10. 7).
The statutory requisites of a guarantee are, in England, prescribed by (1) the Statute of Frauds, which, with reference to guarantees, provides that “no action shall be brought whereby to charge the defendant upon any special promise to answer for the debt, default or miscarriages of another person, unless the agreement upon which such action shall be brought, or some memorandum or note thereof, shall be in writing and signed by the party to be charged therewith, or some other person thereunto by him lawfully authorized,” and (2) Lord Tenterden’s Act (9 Geo. IV. c. 14), which by § 6 enacts that “no action shall be brought whereby to charge any person upon or by reason of any representation or assurance made or given concerning or relating to the character, conduct, credit, ability, trade or dealings of any other person, to the intent or purpose that such other person may obtain credit, money or goods upon” (i.e. “upon credit,” see per Parke, B., in Lyde v. Barnard, 1 M. & W., at p. 104), “unless such representation or assurance be made in writing signed by the party to be charged therewith.” This latter enactment, which applies to incorporated companies as well as to individual persons (Hirst v. West Riding Union Banking Co., 1901, 2 K.B. 560 C.A.), was rendered necessary by an evasion of the 4th section of the Statute of Frauds, accomplished by treating the special promise to answer for another’s debt, default or miscarriage, when not in writing, as required by that section, as a false and fraudulent representation concerning another’s credit, solvency or honesty, in respect of which damages, as for a tort, were held to be recoverable (Pasley v. Freeman, 3 T.R. 51). In Scotland, where, it should be stated, a guarantee is called a “cautionary obligation,” similar enactments to those just specified are contained in § 6 of the Mercantile Law Amendment Act (Scotland) 1856, while in the Irish Statute of Frauds (7 Will. III. c. 12) there is a provision (§ 2) identical with that found in the English Statute of Frauds. In India a guarantee may be either oral or written (Indian Contract Act, § 126), while in the Australian colonies, Jamaica and Ceylon it must be in writing. The German code civil requires the surety’s promise to be verified by writing where he has not executed the principal obligation (art. 766), and the Portuguese code renders a guarantee provable by all the modes established by law for the proof of the principal contract (art. 826). According to most codes civil now in force a guarantee like any other contract can usually be made verbally in the presence of witnesses and in certain cases (where for instance considerable sums of money are involved) sous signature privée or else by judicial or notarial instrument (see Codes Civil, Fr. and Bel. 1341; Spain, 1244; Port. 2506, 2513; Italy, 1341 et seq.; Pothier’s Law of Obligations, Evans’s ed. i. 257; Burge on Suretyship, p. 19; van der Linden’s Institutes of Holland, p. 120); the French and Belgian Codes, moreover, provide that suretyship is not to be presumed but must always be expressed (art. 2015).
The Statute of Frauds does not invalidate a verbal guarantee, but 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. An indemnity is not a guarantee within the statute, unless it contemplates the primary liability of a third person. It need not, therefore, be in writing when it is a mere promise to become liable for a debt, whenever the person to whom the promise is made should become liable (Wildes v. Dudlow, L.R. 19 Eq. 198; per Vaughan Williams, L.J. in Harburg India-Rubber Co. v. Martin, 1902, 1 K.B. p. 786; Guild v. Conrad, 1894, 2 Q.B. 885 C.A.). Neither does the statute apply to the promise of a del credere agent, which binds him, in consideration of the higher commission he receives, to make no sales on behalf of his principal except to persons who are absolutely solvent, and renders him liable for any loss that may result from the non-fulfilment of his promise. A promise to give a guarantee is, however, within the statute, though not one to procure a guarantee.
The general principles which determine what are guarantees within the Statute of Frauds, as deduced from a multitude of decided cases, are briefly as follows: (1) the primary liability of a third person must exist or be contemplated as the foundation of the contract (Birkmyr v. Darnell, 1 Sm. L.C. 11th ed. p. 299; Mountstephen v. Lakeman, L.R. 7 Q.B. 196; L.R. 7 H.L. 17); (2) the promise must be made to the creditor; (3) there must be an absence of all liability on the part of the surety independently of his express promise of guarantee; (4) the main object of the transaction between the parties to the guarantee must be the fulfilment of a third party’s obligation (see Harburg India-rubber Comb Co. v. Martin, 1902, 1 K.B. 778, 786); and (5) the contract entered into must not amount to a sale by the creditor to the promiser of a security for a debt or of the debt itself (see de Colyar’s Law of Guarantees and of Principal and Surety, 3rd ed. pp. 65-161, where these principles are discussed in detail by the light of decided cases there cited).
As regards the kind of note or memorandum of the guarantee that will satisfy the Statute of Frauds, it is now provided by § 3 of the Mercantile Law Amendment Act 1856, that “no special promise to be made, by any person after the passing of this act, to answer for the debt, default or miscarriage of another person, being in writing and signed by the party to be charged therewith, or some other person by him thereunto lawfully authorized, shall be deemed invalid to support an action, suit or other proceeding, to charge the person by whom such promise shall have been made, by reason only that the consideration for such promise does not appear in writing or by necessary inference from a written document.” Prior to this enactment, which is not retrospective in its operation, it was held in many cases that as the Statute of Frauds requires “the agreement” to be in writing, all parts thereof were required so to be, including the consideration moving to, as well as the promise by, the party to be charged (Wain v. Walters, 5 East, 10; Sounders v. Wakefield, 4 B. & Ald. 595). These decisions, however, proved to be burdensome to the mercantile community, especially in Scotland and the north of England, and ultimately led to the alteration of the law, so far as guarantees are concerned, by means of the enactment already specified. Any writing embodying the terms of the agreement between the parties, and signed by the party to be charged, is sufficient; and the idea of agreement need not be present to the mind of the person signing (per Lindley, L.J., in In re Hoyle—Hoyle v. Hoyle, 1893, 1 Ch., at p. 98). It is, however, necessary that the names of the contracting parties should appear somewhere in writing; that the party to be charged, or his agent, should sign the memorandum or note of agreement, or else should sign another paper referring thereto; and that, when the note or memorandum is made, a complete agreement shall exist. Moreover, the memorandum must have been made before action brought, though it need not be contemporaneous with the agreement itself. As regards the stamping of the memorandum or note of agreement, a guarantee cannot, in England, be given in evidence unless properly stamped (Stamp Act 1891). A guarantee for the payment of goods, however, requires no stamp, being within the exception contained in the first schedule of the act. Nor is it necessary to stamp a written representation or assurance as to character within 9 Geo. IV. c. 14, supra. If under seal, a guarantee requires sometimes an ad valorem stamp and sometimes a ten-shilling stamp; in other cases a sixpenny stamp generally suffices; and, on certain prescribed terms, the stamps can be affixed any time after execution (Stamp Act 1891, § 15, amended by § 15 of the Finance Act 1895).
The liability incurred by a surety under his guarantee depends upon its terms, and is not necessarily co-extensive with that of the principal debtor. It is, however, obvious that as the surety’s obligation is merely accessory to that of Extent of surety’s liability. the principal it cannot as such exceed it (de Colyar, Law of Guarantees, 3rd ed. p. 233; Burge, Suretyship, p. 5). By the Roman law, if there were any such excess the surety’s obligation was rendered wholly void and not merely void pro tanto. By many existing codes civil, however, a guarantee which imposes on the surety a greater liability than that of the principal is not thereby invalidated, but the liability is merely reducible to that of the principal (Fr. and Bel. 2013; Port. 823; Spain, 1826; Italy, 1900; Holland, 1859; Lower Canada, 1933). By sec. 128 of the Indian Contract Act 1872 the liability of the surety is, unless otherwise provided by contract, coextensive with that of the principal. Where the liability of the surety is less extensive in amount than that of the principal debtor, difficult questions have arisen in England and America as to whether the surety is liable only for part of the debt equal to the limit of his liability, or, up to such limit, for the whole debt (Ellis v. Emmanuel, 1 Ex. Div. 157; Hobson v. Bass, 6 Ch. App. 792; Brandt, Suretyship, sec. 219). The surety cannot be made liable except for a loss sustained by reason of the default guaranteed against. Moreover, in the case of a joint and several guarantee by several sureties, unless all sign it none are liable thereunder (National Pro. Bk. of England v. Brackenbury, 1906, 22 Times L.R. 797). It was formerly considered in England to be the duty of the party taking a guarantee to see that it was couched in language enabling the party giving it to understand clearly to what extent he was binding himself (Nicholson v. Paget, 1 C. & M. 48, 52). This view, however, can no longer be sustained, it being now recognized that a guarantee, like any other contract, must, in cases of ambiguity, be construed against the party bound thereby and in favour of the party receiving it (Mayer v. Isaac, 6 M. & W. 605, 612; Wood v. Priestner, L.R. 2 Exch. 66, 71). The surety is not to be changed beyond the limits prescribed by his contract, which must be construed so as to give effect to what may fairly be inferred to have been the intention of the parties, from what they themselves have expressed in writing. In cases of doubtful import, recourse to parol evidence is permissible, to explain, but not to contradict, the written evidence of the guarantee. As a general rule, the surety is not liable if the principal debt cannot be enforced, because, as already explained, the obligation of the surety is merely accessory to that of the principal debtor. It has never been actually decided in England whether this rule holds good in cases where the principal debtor is an infant, and on that account is not liable to the creditor. Probably in such a case the surety might be held liable by estoppel (see Kimball v. Newell, 7 Hill (N.Y.) 116). When directors guarantee the performance by their company of a contract which is ultra vires, and therefore not binding on the latter, the directors’ suretyship liability is, nevertheless, enforceable against them (Yorkshire Railway Waggon Co. v. Maclure, 21 Ch. D. 309 C.A.).
It is not always easy to determine for how long a time liability under a guarantee endures. Sometimes a guarantee is limited to a single transaction, and is obviously intended to be security against one specific default only. On the other hand, it as often happens that it is not exhausted by one transaction on the faith of it, but extends to a series of transactions, and remains a standing security until it is revoked, either by the act of the parties or else by the death of the surety. It is then termed a continuing guarantee. No fixed rules of interpretation determine whether a guarantee is a continuing one or not, but each case must be judged on its individual merits; and frequently, in order to achieve a correct construction, it becomes necessary to examine the surrounding circumstances, which often reveal what was the subject-matter which the parties contemplated when the guarantee was given, and likewise what was the scope and object of the transaction between them. Most continuing guarantees are either ordinary mercantile securities, in respect of advances made or goods supplied to the principal debtor or else bonds for the good behaviour of persons in public or private offices or employments. With regard to the latter class of continuing guarantees, the surety’s liability is, generally speaking, revoked by any change in the constitution of the persons to or for whom the guarantee is given. On this subject it is now provided by section 18 of the Partnership Act 1890, which applies to Scotland as well as England, that “a continuing guarantee or cautionary obligation 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 to which, or of the firm in respect of the transactions of which the guaranty or obligation was given.” This section, like the enactment it replaces, namely, sec. 4 of the Mercantile Law Amendment Act 1856, is mainly declaratory of the English common law, as embodied in decided cases, which indicate that the changes in the persons to or for whom a guarantee is given may consist either of an increase in their number, of a diminution thereof caused by death or retirement from business, or of the incorporation or consolidation of the persons to whom the guarantee is given. In this connexion it may be stated that the Government Offices (Security) Act 1875, which has been amended by the Statute Law Revision Act 1883, contains certain provisions with regard to the acceptance by the heads of public departments of guarantees given by companies for the due performance of the duties of an office or employment in the public service, and enables the Commissioners of His Majesty’s Treasury to vary the character of any security, for good behaviour by public servants, given after the passing of the act.
Before 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 principal debtor or resorting to securities for the debt received from the latter. In those countries where the municipal law is based on the Roman civil law, sureties usually possess the right (which may, however, be renounced by them) originally conferred by the Roman law, of compelling the creditor to insist on the goods, &c. (if any) of the principal debtor being first “discussed,” i.e. appraised and sold, and appropriated to the liquidation of the debt guaranteed (see Codes Civil, Fr. and Bel. 2021 et seq.; Spain, 1830, 1831; Port. 830; Germany, 771, 772, 773; Holland, 1868; Italy, 1907; Lower Canada, 1941–1942; Egypt [mixed suits] 612; ibid. [native tribunals] 502), before having recourse to the sureties. This right, according to a great American jurist (Chancellor Kent in Hayes v. Ward, 4 Johns. New York, Ch. Cas. p. 132), “accords with a common sense of justice and the natural equity of mankind.” In England this right has never been fully recognized. Neither does it prevail in America nor, since the passing of the Mercantile Law Amendment Act (Scotland) 1856, s. 8, is it any longer available in Scotland where, prior to the last-named enactment, the benefit of discussion, as it is termed, existed. In England, however, before any demand for payment has been made by the creditor on the surety, the latter can, as soon as the principal debtor has made default, compel the creditor, on giving him an indemnity against costs and expenses, to sue the principal debtor if the latter be solvent and able to pay (per A. L. Smith, L.J., in Rouse v. Bradford Banking Company, 1894, 2 Ch. 75; per Lord Eldon in Wright v. Simpson, 6 Ves., at p. 733), and a similar remedy is also open to the surety in America (see Brandt on Suretyship, par. 205, p. 290) though in neither of these countries nor in Scotland can one of several sureties, when sued for the whole guaranteed debt by the creditor, compel the latter to divide his claim amongst all the solvent sureties, and reduce it to the share and proportion of each surety. However, this beneficium divisionis, as it is called in Roman law, is recognized by many existing codes (Fr. and Bel. 2025-2027; Spain, 1837; Portugal, 835-836; Germany, 426; Holland, 1873-1874; Italy, 1911-1912; Lower Canada, 1946; Egypt [mixed suits], 615,616).
The usual mode in England of enforcing liability under a guarantee is by action in the High Court or in the county court. It is also permissible for the creditor to obtain redress by means of a set-off or counter-claim, in an action brought against him by the surety. On the other hand, the surety may now, in any court in which the action on the guarantee is pending, avail himself of any set-off which may exist between the principal debtor and the creditor. Moreover, if one of several sureties for the same debt is sued by the creditor or his guarantee, he can, by means of a proceeding termed a third-party notice, claim contribution from his co-surety towards the common liability. Independent proof of the surety’s liability under his guarantee must always be given at the trial; as the creditor cannot rely either on admissions made by the principal debtor, or on a judgment or award obtained against him (Ex parte Young In re Kitchin, 17 Ch. Div. 668). Should the surety become bankrupt either before or after default has been made by the principal debtor, the creditor will have to prove against his estate. This right of proof is now in England regulated by the 37th section of the Bankruptcy Act, 1883, which is most comprehensive in its terms.
A person liable as a surety for another under a guarantee possesses various rights against him, against the person to whom the guarantee is given, and also against those who may have become co-sureties in respect of the Rights of sureties. same debt, default or miscarriage. As regards the surety’s rights against the principal debtor, the latter may, where the guarantee was made with his consent but not otherwise (see Hodgson v. Shaw, 3 Myl. & K. at p. 190), after he has made default, be compelled by the surety to exonerate him from liability by payment of the guaranteed debt (per Sir W. Grant, M.R., in Antrobus v. Davidson, 3 Meriv. 569, 579; per Lindley, L.J., in Johnston v. Salvage Association, 19 Q.B.D. 460, 461; and see Wolmershausen v. Gullick, 1893, 2 Ch. 514). The moment, moreover, the surety has himself paid any portion of the guaranteed debt, he is entitled to rank as a creditor for the amount so paid, and to compel repayment thereof. In the event of the principal debtor’s bankruptcy, the surety can in England, 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 before the bankruptcy of the principal debtor, but also, it seems, in respect of the contingent liability to pay under the guarantee (see Ex parte Delmar re Herepath, 1889, 38 W.R. 752), while if the creditor has already proved, the surety who has paid the guaranteed debt has a right to all dividends received by the creditor from the bankrupt in respect thereof, and to stand in the creditor’s place as to future dividends. This right is, however, often waived by the guarantee stipulating that, until the creditor has received full payment of all sums over and above the guaranteed debt, due to him from the principal debtor, the surety shall not participate in any dividends distributed from the bankrupt’s estate amongst his creditors. As regards the rights of the surety against the creditor, they are in England exercisable even by one who in the first instance was a principal debtor, but has since become a surety, by arrangement with his creditor, duly notified to the creditor, though not even sanctioned by him. This was decided by the House of Lords in the case of Rouse v. The Bradford Banking Co., 1894, A.C. 586, removing a doubt created by the previous case of Swire v. Redman, 1 Q.B.D. 536, which must now be treated as overruled. The surety’s principal right against the creditor entitles him, after payment of the guaranteed debt, to the benefit of all securities, whether known to him (the surety) or not, which the creditor held against the principal debtor; and where, by default or laches of the creditor, such securities have been lost, or rendered otherwise unavailable, the surety is discharged pro tanto. This right, which is not in abeyance till the surety is called on to pay (Dixon v. Steel, 1901, 2 Ch. 602), extends to all securities, whether satisfied or not, given before or after the contract of suretyship was entered into. On this subject the Mercantile Law Amendment Act, 1856, § 5, provides that “every person who being surety for the debt or duty 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 performance 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, or any co-surety, co-contractor, or co-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 proceeding 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.” This enactment is so far retrospective that it applies to a contract made before the act, where the breach thereof, and the payment by the surety, have taken place subsequently. The right of the surety to be subrogated, on payment by him of the guaranteed debt, to all the rights of the creditor against the principal debtor is recognized in America (Tobin v. Kirk, 80 New York S.C.R. 229), and many other countries (Codes Civil, Fr. and Bel. 2029; Spain, 1839; Port. 839; Germany, 774; Holland, 1877; Italy, 1916; Lower Canada, 2959; Egypt [mixed suits], 617; ibid. [native tribunals], 505).
As regards the rights of the surety against a co-surety, he is entitled to contribution from him in respect of their common liability. This particular right is not the result of any contract, but is derived from a general equity, on the ground of equality of burden and benefit, and exists whether the sureties be bound jointly, or jointly and severally, and by the same, or different, instruments. There is, however, no right of contribution where each surety is severally bound for a given portion only of the guaranteed debt; nor in the case of a surety for a surety; (see In re Denton’s Estate, 1904, 2 Ch. 178 C.A.); nor where a person becomes a surety jointly with another and at the latter’s request. Contribution may be enforced, either before payment, or as soon as the surety has paid more than his share of the common debt (Wolmershausen v. Gullick, 1803, 2 Ch. 514); and the amount recoverable is now always regulated by the number of solvent sureties, though formerly this rule only prevailed in equity. In the event of the bankruptcy of a surety, proof can be made against his estate by a co-surety for any excess over the latter’s contributive share. The right of contribution is not the only right possessed by co-sureties against each other, but they are also entitled to the benefit of all securities which have been taken by any one of them as an indemnity against the liability incurred for the principal debtor. The Roman law did not recognize the right of contribution amongst sureties. It is, however, sanctioned by many existing codes (Fr. and Bel. 2033; Germany, 426, 474; Italy, 1920; Holland, 1881; Spain, 1844; Port. 845; Lower Canada, 1955; Egypt [mixed suits], 618, ibid. [native tribunals], 506), and also by the Indian Contract Act 1872, ss. 146-147.
The discharge of a surety from liability under his guarantee may be accomplished in various ways, he being regarded, especially in England and America, as a “favoured debtor” (per Turner, L.J., in Wheatley v. Bastow, 7 De G. M. & G. 279, 280; per Earl of Selborne, L.C., in In re Sherry—London and County Banking Co. v. Terry, 25 Ch. D., at p. 703; and see Brandt on Suretyship, secs. 79, 80). Thus, fraud subsequent to the execution of the guarantee (as where, for example, the creditor connives at the principal debtor’s default) will certainly discharge the surety. Again, a material alteration made by the creditor in the instrument of guarantee after its execution may also have this effect. The most prolific ground of discharge, however, is usually traceable to causes originating in the creditor’s laches or conduct, the governing principle being that if the creditor violates any rights which the surety possessed when he entered into the suretyship, even though the damage be nominal only, the guarantee cannot be enforced. On this subject it suffices to state that the surety’s discharge may be accomplished (1) by a variation of the terms of the contract between the creditor and the principal debtor, or of that subsisting between the creditor and the surety (see Rickaby v. Lewis, 22 T.L.R. 130); (2) by the creditor taking a new security from the principal debtor in lieu of the original one; (3) by the creditor discharging the principal debtor from liability; (4) by the creditor binding himself to give time to the principal debtor for payment of the guaranteed debt; or (5) by loss of securities received by the creditor in respect of the guaranteed debt.
In this connexion it may be stated in general terms that whatever extinguishes the principal obligation necessarily determines that of the surety (which is accessory thereto), not only in England but elsewhere also (Codes Civil, Fr. and Bel. 2034, 2038; Spain, 1847; Port. 848; Lower Canada, 1956; 1960; Egypt [mixed suits], 622, ibid. [native tribunals], 509; Indian Contract Act 1872, sec. 134), and that, by most of the codes civil now in force, the surety is discharged by laches or conduct of the creditor inconsistent with the surety’s rights (see Fr. and Bel. 2037; Spain, 1852; Port. 853; Germany, 776; Italy, 1928; Egypt [mixed suits], 623), though it may be mentioned that the rule prevailing in England, Scotland, America and India which releases the surety from liability where the creditor, by binding contract with the principal, extends without the surety’s consent the time for fulfilling the principal obligation, while recognized by two existing codes civil (Spain, 1851; Port. 852), is rejected by the majority of them (Fr. and Bel. 2039; Holland, 1887; Italy, 1930; Lower Canada, 1961; Egypt [mixed suits], 613; ib. [native tribunals], 503); (and see Morice, English and Dutch Law, p. 96; van der Linden, Institutes of Holland, pp. 120-121). A revocation of the contract of suretyship by act of the parties, or in certain cases by the death of the surety, may also operate to discharge the surety. The death of a surety does not per se determine the guarantee, but, save where from its nature the guarantee is irrevocable by the surety himself, it can be revoked by express notice after his death, or, it would appear, by the creditor becoming affected with constructive notice thereof; except where, under the testator’s will, the executor has the option of continuing the guarantee, in which case the executor should, it seems, specifically withdraw the guarantee in order to determine it. Where one of a number of joint and several sureties dies, the future liability of the survivors under the guarantee continues, at all events until it has been determined by express notice. Moreover, when three persons joined in a guarantee to a bank, and their liability thereunder was not expressed to be several, it was held that the death of one surety did not determine the liability of the survivors. In such a case, however, the estate of the deceased surety would be relieved from liability.
The Statutes of Limitation bar the right of action on guarantees under seal after twenty years, and on other guarantees after six years, from the date when the creditor might have sued the surety.
Authorities.—De Colyar, Law of Guarantees and of Principal and Surety (3rd ed., 1897); American edition, by J. A. Morgan (1875); Throop, Validity of Verbal Agreements; Fell, Guarantees (2nd ed.); Theobald, Law of Principal and Surety; Brandt, Law of Suretyships and Guarantee; article by de Colyar in Journal of Comparative Legislation (1905), on “Suretyship from the Standpoint of Comparative Jurisprudence.” (H. A. de C.)