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CHAPTER XV

GUARANTY AND SURETYSHIP

255. Definitions.-The contract of guaranty (or warranty or guarantee, as it is sometimes written) arises out of the promise of one person to answer for the debt or default of another. The promisor is called the guarantor and the promisee the guarantee. The debtor on whose account the contract is made is called the principal. The difference between a surety and a guarantor has sometimes been tersely expressed in this way: A surety undertakes to pay if the principal does not, the guarantor undertakes to pay if the principal cannot. By this is meant that the surety is directly liable to the creditor to see that the debt is paid. He is usually bound in the same instrument that creates the original debt, and is sued in the same action with the principal.

The contract of guaranty is collateral to the main agreement and usually places a liability on the guarantor only after the actual default by the principal and some proceeding by the guarantee to recover on the principal debt. Where the contract of guaranty is fully expressed and the conditions upon which the guarantor's obligations are to arise are fully set forth, the courts will rule accordingly. But where the conditions are to be implied, the courts of the various jurisdictions apply different rules, some holding that no obligation is created till the guarantor is notified of his principal's default, and some holding otherwise.

256. Kinds of guaranty.-There are various forms of contracts of guaranty, each containing some distinct condition on which alone the guarantor is to become liable.

A guaranty of payment imposes a liability on the guarantor to pay if the principal does not. A guaranty of collection conditions the guarantor's liability on the creditor's inability to collect from the principal. A continuing guaranty is one in which the guarantor makes himself liable for the principal's obligations in transactions covering a period of time. Usually the period of time is named in the contract as is also the maximum amount of liability which the guarantor is willing to assume. Where there is any doubt as to the nature of a contract of guaranty it is usually held that the parties contemplated it to cover the single transaction in view at the time.

EXAMPLES

268. A guaranty of payment may read as follows:

"I, James Hamilton, do hereby guaranty the payment of the within account between William C. Morse and The Consolidated Printing Company, said account being due and payable July 1, 1910.

"JAMES HAMILTON." 269. A guaranty of collection is sometimes worded as follows:

"The collection of the above account is guaranteed by "JAMES HAMILTON."

270. The following is a not unusual form of continuing guaranty:

"The undersigned hereby guarantees to the payment of all sums, not exceeding $25, for board and lodging furnished to Wm. C. Morse on or before the first day of January, 1911. "JAMES HAMILTON."

257. Statute of frauds.-The statute of frauds provides that a promise to answer for the debt, default or miscarriage of another must be signed by the party to be charged. An oral guaranty, therefore, is unenforcible. Contracts of indemnity, to which there are but two parties, and contracts in which the debtor assumes the liability, though he has directed the benefit for which the debt arises to be bestowed on some third person, should not be confused with contracts of guaranty, for the former two need not be in writing.

EXAMPLES

271. A says to B, "If you will exchange lots with me and move your house from your lot to mine, I will pay the expenses and guarantee you against any loss by accident." B accepts. This is a mere contract of indemnity, notwithstanding the use of the word guarantee.

272. A says to X, “Let B have a pair of shoes and I will pay for them." Though the benefit moves to B, the contract is a simple one of sale between A and X, and A is liable on the oral promise.

258. Consideration.-A contract of guaranty like all other contracts must contain the element of consideration. But where the principal contract and the guaranty are made at the same time the same consideration will support both. Where the guaranty precedes the principal contract the act of the creditor in giving credit to the principal is sufficient consideration for the guarantor's promise to be responsible. Where the principal contract has first been executed by the creditor a subsequent guaranty must be founded on a wholly separate consideration.

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EXAMPLES

273. "We, A as principal, and B as guarantor of the payment of his account, hereby purchase from X Company and the said X Company hereby sells to the said A ten Acme Lawn Mowers No. 7, at $5 each, due sixty days from delivery. A. B.” In this contract the same consideration supports the promises of the principal and of the guarantor.

274. "We hereby guaranty the payment of all moneys advanced to A not exceeding One Hundred Dollars before June 1, 1910.

B. and C."

In the above contract the promise of B and C is supported by the creditor's acts in making advances to A.

275. "A being indebted to B in the sum of $175 now due and payable, I, the undersigned, in consideration of the said B's promise to extend the time for payment of said $175 two months from the date hereof, do hereby guarantee the collection of said amount.

C."

In this third form of guaranty the original debt is due and the creditor must advance some new consideration for C's guaranty. This he does by extending the time of payment.

259. Assent of parties.-An offer and an acceptance are necessary elements of contracts of guaranty and of surety. Where the contract of guaranty is made at the same time as the original contract between the principal and the guarantee, no special acceptance is necessary; the guarantee accepts the guaranty by entering into the original contract. But where the guaranty is intended to protect the creditor in future transactions it is usually held in the United States that the creditor must notify the guarantor that his offer is accepted. While there is some conflict of opinion on this point, the

safest course is to notify the guarantor that his offer is accepted.

EXAMPLE

276. "To A: I guaranty the payment of my son's accounts with you during the coming year. B." It is held in some jurisdictions that B contemplates that his offer will be accepted not necessarily by a written communication from A, but by A's acts in extending credit to B's son. A would prevent all misunderstanding by writing to B that he would give credit to B's son in view of the father's guaranty.

260. Notice of default.-The courts of the various states do not agree upon the question of whether the guarantor is entitled to notice from the creditor when the debtor defaults. The general rule is that where the contract of guaranty is absolute the guarantor is bound without notice, but if the contract is conditional or if the guarantor is not in a position to learn the debtor's default he is entitled to notice. A prudent creditor would always send prompt notice to his guarantor of the principal's failure to perform the original contract. A surety is usually not entitled to notice, his obligation being as absolute as that of his principal.

261. Creditor's rights.—The creditor has the right to assign a general guarantee, the doctrine being that the assignment of a debt carries with it the securities upon which the debt is based. A special guaranty to one person, however, cannot be assigned till the guaranty has been crystallized into a debt by the debtor's default, after which time it is assignable like any other cause of action. If the principal gives the guarantor property to secure him against loss, the property can be reached by the creditor to satisfy the debt. This rule, however, does not apply if the property is put up by an outside party.

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