CHAPTER XIV.

GUARANTY AND SURETYSHIP.

SECTION 1.

GUARANTY.

A Guaranty is a contract whereby one person becomes liable for the payment of a debt or the performance of an obligation which it is the duty of another, who is primarily liable thereon, to pay or perform, in case such other fails to pay or perform. In other words, it is an agreement to answer for the performance of an obligation by another. As a guaranty is a contract, it must have all the elements of a contract. No particular form of words is necessary to create it; all that is necessary is that the intention appears from the instrument creating it. A mere request on the part of one person to give another credit, does not constitute a guaranty. Thus, a letter from one person to another asking the latter to give credit to a third, or a letter to the effect that the writer knows a third person and stating that he feels certain the third person will pay, will not constitute a guaranty. The guaranty may be good although the contract guaranteed is not enforceable. Thus, the officer of a corporation may personally guaranty the performance of a contract made by him for the corporation, which he has no authority to make. Here the contract is void, but the guaranty is good. Thus, a guaranty of an infant's contract is good, and also the guaranty of any void contract, if the guaranty is sustained by an independent consideration, and the contract be not void for illegality.

The object of a contract of guaranty is to secure the payment of a debt or the performance of some obligation which another is primarily liable on. The guarantor's contract is, therefore, secondary. It should be noted that a guarantor's

contract is independent of that of his principal. The guarantor does not agree to perform, but agrees that the principal will perform, and a failure on the part of the principal is necessary before the guarantor can be held. As it is a contract to secure the performance of some obligation, unless the parties obviously otherwise agree, the presumption is that the guarantor's liability is co-extensive with that of the principal on the obligation assumed. The parties can, of course, specifically agree that the guarantor's liability in case of the principals default shall be greater or less than that of the principal, or that he shall be liable only on certain conditions. When nothing to the contrary is agreed upon, the guarantor becomes liable immediately upon default of the principal, unless the guaranty is one for collection.

Must be in writing.-A guaranty must have all the requisites of a contract, and in addition must be in writing and express the consideration. The Statutes of Wisconsin provide, as a part of the celebrated Statute of Frauds, that "in the following cases every agreement shall be void unless such agreement or some note or memorandum thereof, expressing the consideration, be in writing, and subscribed by the party charged therewith. . . . . . Every special promise to answer for the debt, default or miscarriage of another person." This statute has been a fruitful source of litigation. It was passed in order to prevent one person from charging another as a guarantor when such was not the intention, or where the intention was doubtful, by requiring written evidence. Unless a consideration appears from the written instrument, the guaranty is void. What may be a consideration for a contract is discussed at length in the chapter on Contracts. Under the decisions of the courts it is not necessary that a specific consideration appear, but it must appear that there is a consideration for the contract. The consideration moving between the principal and creditor is sufficient to support the contract of the guarantor, if the contract of the guarantor is made at the same time that the one between principal and creditor is made. If the guaranty is made subsequently to the contract or obligation guaranteed, it must be supported by an independent consideration. It has been decided that a guaranty on a note "I hereby guaranty the payment of the within note" is void because it fails to show a consideration. The fact that there is a consideration

will not make the contract valid. A guaranty "for value received" sufficiently shows the consideration. A guaranty whereby one agrees to become responsible for goods sold to another in the future is good, without stating a further consideration, as the furnishing of the goods is a sufficient consideration for the guaranty. A guaranty to pay for goods already furnished is not good unless a distinctly new consideration appears in the guaranty, to support it. Thus, a letter "I will guaranty that A will pay for any amount of goods not exceeding $5000 which he may purchase. . . .", or “Mr. . . will purchase a small stock of clothing from you. I hereby guaranty the collection of any amount you may give him not exceeding $2000", is a good guaranty, as the consideration for the guaranty is the furnishing of the goods. "It has been uniformly held that such memoranda relating to future sales do express, not in so many words, but as gathered from the whole instrument, the consideration, and are valid." Thus, a guaranty, "I hereby guaranty account of E. B. to W. & Co. for $221.25 at $40 per month; the payments commencing September 8, 1894", where it is shown that the account was one about to be contracted, sufficiently shows the consideration. A guaranty, "I hereby extend the guaranty of O. K.'s account which expires to-day to an amount not exceeding $2500 to May 1, 1897," is good for the same reason. When there is no consideration and none is expressed, the guaranty is void. A guaranty of an existing indebtedness without consideration is void. The consideration in such case may exist in value received by the promisor or some thing of value parted with by the creditor, or the relinquishment of some legal right by the creditor, at the guarantor's request. Therefore, an agreement on the part of one to whom a debt is due to extend the time of payment for a definite time, at the request of a guarantor, is a sufficient consideration for a guaranty. Whether a guarantor who signs a guaranty "for value received", or "in consideration of one dollar", but really received no consideration, may dispute the statement made and thus avoid liability on the guaranty, has not been definitely decided, but it is safe to say that he will not be permitted to dispute the fact recited.

An important point to be noted here is that the statute of frauds refers only to contracts of secondary liability.

Contracts on which one is primarily liable, although the debt be that of another, need not be in writing. The following example will make this distinction clear. If A and B go into a clothing store and A says to the proprietor "Let B have an overcoat and if he does not pay for it, I will", here A's agreement is collateral, or secondary to that of B, because A does not agree to pay for the overcoat, but agrees to pay only in case B does not; under the statute this agreement on A's part, to be binding, must be in writing, expressing a consideration. If A says, however, "Let B have an overcoat and I will pay for it," here A makes an original contract on which he is primarily liable and his contract need not be in writing, and is not affected by the statute. Whether a contract is one on which a person is primarily or secondarily liable is sometimes a matter of some difficulty, and it is an important point in determining liability under the statute. If in the above case A and B should say to the proprietor "Let B have an overcoat and we will pay for it" A and B would be jointly bound, and if A and B had an understanding that A merely agreed with B to become liable for the overcoat with him for the purpose of enabling him to purchase it, but that as between them B should pay for it, the contract would be one of suretyship and not guaranty. Whenever it appears that one is absolutely bound to pay or perform, irrespective of payment or performance by another, then the contract is original and need not be in writing. Thus, where one requests another to surrender certain securities which he holds for the payment of a debt, and guarantees that he will become responsible for the payment of the debt if the holder will release such securities, his promise is an original undertaking and does not need to be in writing, as he is bound to pay it in the first instance. Again, where a person assigns a lease and the assignee in consideration of the assignment agrees to pay the rent which the original lessee owed, the contract does not need to be in writing, and the landlord may look to the assignee for payment in the first instance. When the seller of a note guarantees that it is good, his agreement is not within the statute and does not need to be in writing, as it is not collateral.

Distinguished from other contracts.-A contract of guaranty differs from one of suretyship. The purpose of both of these contracts is to secure the performance of an

obligation on the part of a principal, but the form of the contract and its effects on the parties are different. The main difference is that a contract of guaranty is secondary, whereas the contract of a surety is primary. A guarantor agrees to pay only in case the principal does not, and cannot be held until the principal has defaulted, but a surety is equally liable with the principal, and may be held in precisely the same way as a principal, without waiting for the principal to default. A guarantor may be discharged in some cases by want of diligence on the part of the creditor to prosecute, but mere delay, although it result in damage, will never discharge a surety. A guarantor agrees that another will pay; a surety agrees to pay. A principal and surety, being both liable on an obligation, may be sued together; but a principal and a guarantor, being liable on different contracts, cannot be sued together.

It should be noted that the word "guaranty" used in a contract is not conclusive as to whether the contract is one of guaranty or suretyship, or an original contract. The question is whether the contract is one of primary or secondary liability. For instance, an instrument, "for value received I guarantee to pay for all goods delivered to A B" is an original undertaking.

The indorsement of a negotiable instrument is in some respects similar to a contract of guaranty and suretyship, but there are distinguishing features. The prime object of indorsing a note is usually to transfer the title and incidentally an indorser also guarantees payment of the instrument at maturity. But an indorser's contract is not as extensive as that of a guarantor. A guarantor is bound when the principal defaults and may be held by the creditor at any time after default. Delay, except in those cases where the creditor is first obliged to sue the principal, will not discharge the guarantor. The contract of an indorser is, however, only that he will pay on condition that the paper is presented for payment and not paid, and immediate notice of non-payment is given him. If such presentment is not made or notice not given him, he is discharged, whether he has suffered damage or not.

A contract of indemnity is closely allied to one of guaranty, but it differs from it in that the indemnity contract is an original undertaking. Thus, where A is liable on a