warranty, however, by the creditor, and if he is ignorant himself of the employee's fraud his non-disclosure of the fact will not excuse the surety though he was guilty of negligence in failing to know; 61 nor will the surety be excused even though the employer suspected the employee of dishonesty, and did not disclose his suspicions.62 And the mere fact's that one whose fidelity is guaranteed has been negligent or inaccurate previously in the performance of his duties in ways not affecting his moral character, and these circumstances have not been disclosed to the surety though known to the creditor, will not excuse the surety.63 & Ohio Live Stock Ins. Co. v. Bender, 32 Ind. App. 287, 69 N. E. 691; Capital Fire Ins. Co. v. Watson, 76 Minn. 387, 79 N. W. 701, 77 Am. St. 657; Ottawa Agricultural Ins. Co. v. Canada Guarantee Co., 30 U. Can. C. P. 360. The same principle was held applicable to a failure to disclose a prior breach of a construction contract for the performance of which the surety bound himself, in Park Paving Co. v. Kraft, 262 Pa. 178, 105 Atl. 39, though the ignorance of the creditor regarding the breach prevented the defence from arising in that decision. Cf. Peerless Casualty Co. v. Howard, 77 N. H. 355, 92 Atl. 165, and cases cited supra, n. 57 ad. fin. An exception has been made in some cases in regard to the bonds of public officials. State v. Rushing, 17 Fla. 226; State v. Dunn, 11 La. Ann. 549; Frownfelter v. State, 66 Md. 80, 5 Atl. 410; Lawder v. Lawder, Ir. R. 7 C. L. 57; Byrne v. Muzio, L. R. 8 Ir. 396. And where the creditor did not himself obtain the signature of the surety, recovery was allowed in Cawley v. People, 95 Ill. 249; Etna Life Ins. Co. v. Mabbett, 18 Wis. 667. It should be observed, however, that the principle on which recovery is denied, namely, that the non-disclosure by a creditor in view of the character of the contract proposed is itself a rep resentation, is applicable though the creditor did not directly induce the signature of the surety. 61 Anaheim Union Water Co. . Parker, 101 Cal. 483, 35 Pac. 1048; McMullen v. Winfield &c. Assoc., 64 Kans. 298, 67 Pac. 892, 56 L. R. A. 924, 91 Am. St. Rep. 236; Tapley v. Martin, 116 Mass. 275; Newburyport v. Davis, 209 Mass. 126, 95 N. E. 110; St. Charles Sav. Bank v. Denker (Mo.), 205 S. W. 208; Bowne v. Mt. Holly Bank, 45 N. J. L. 360; Bostwick v. Van Voorhis, 91 N. Y. 353; Wayne v. Commercial Bank, 52 Pa. 343; Park Paving Co. v. Kraft, 262 Pa. 178, 105 Atl. 39; Wait . Homestead Building Assoc., 76 W. Va. 431, 85 S. E. 637, and see infra, n. 66. 62 National Provincial Bank U. Glanusk, [1913] 3 K. B. 335; Bank of Scotland v. Morrison, [1911] Se. Sess. Cas. 593. 63 Home Ins. Co. v. Holway, 55 Iowa, 571, 8 N. W. 457, 39 Am. Rep. 179; Charles Lawrence Co. v. Buzzell (Me.), 104 Atl. 631; Peerless Casualty Co. v. Howard, 77 N. H. 355, 92 Atl. 165; Howe Machine Co. v. Farrington, 82 N. Y. 121; Bostwick v. Van Voorhis, 91 N. Y. 353; Screwmen's Benevolent Assoc. v. Smith, 70 Tex. 168, 7 S. W. 793; Peers v. Oxford, 17 Grant Ch. 472. But see contra-Smith v. Josselyn, 40 Oh. St. 409. § 1250. Retention of a dishonest employee excuses from further liability a surety for his fidelity. It is well settled on principles analogous to those stated in the previous section, that if an employer, without the consent of the surety, given after knowledge of the facts, retains in his service an employee, after acquiring knowledge of the latter's dishonesty, he cannot hold liable for subsequent defaults a guarantor of the employee's fidelity; 64 though the surety remains bound for defaults up to the discovery of his dishonesty.65 65 Negligent ignorance on the part of the employer of the employee's dishonesty, will not, however, serve as the equivalent of knowledge.66 Nor will the surety be discharged even though the employer knows of the employee's misconduct, if he has no power to discharge him; 67 but as dishonesty of an employee is a justification for terminating a partially completed contract of employment,68 this contingency will rarely arise. Failure to discharge an employee or to disclose defaults in accounting not involving fraud or dishonesty will not free the 64 Phillips v. Foxall, L. R. 7 Q. B. 666; Saint v. Wheeler & W. Mfg. Co., 95 Ala. 362, 10 So. 539, 36 Am. St. Rep. 210; Alabama Fidelity, etc., Co. v. Alabama, etc., Iron Co., 190 Ala. 397, 67 So. 318; Roberts v. Donovan, 70 Cal. 108, 9 Pac. 180, 11 Pac. 599; Rapp v. Phoenix Ins. Co., 113 Ill. 390, 55 Am. Rep. 427; Donnell Mfg. Co. v. Jones, 49 Ill. App. 327; Delbridge v. Lake, etc., Assoc., 82 Ill. App. 388; LaRose v. Logansport Bank, 102 Ind. 332, 1 N. E. 805; Connecticut Life Ins. Co. v. Scott, 81 Ky. 540; Charles Lawrence Co. v. Buzzell, 117 Me. 570, 104 Atl. 631; Lake v. Thomas, 84 Md. 608, 36 Atl. 437; Colby Co. v. Coon, 116 Mich. 208, 74 N. W. 519; Newark v. Stout, 52 N. J. L. 35, 18 Atl. 943; Enright v. Falvey, L. R. 4 Ir. 397. But see contra-Pittsburgh Co. v. Schæffer, 59 Pa. 350; Bank v. Tumbler Co., 172 Pa. 614, 626, 33 Atl. 748. 65 Donnell Mfg. Co. v. Jones, 49 Ill. App. 327; Lake v. Thomas, 84 Md. 608, 36 Atl. 437; Enright v. Falvey, L. R. 4 Ir. 397; Regina v. Pringle, 32 U. Can. Q. B. 308; and see cases in the preceding note. 66 Trent Navigation Co. v. Harley, 10 East, 34; Frelinghuysen v. Baldwin, 16 Fed. 452; Phillips v. Bossard, 35 Fed. 99; Planters' Bank v. Lamkin, R. M. Charlt. (Ga.) 29; Campbell v. People, 154 Ill. 595, 39 N. E. 578; Colby Wringer Co. v. Coon, 116 Mich. 208, 74 N. W. 519; Manchester Fire Assur. Co. v. Redfield, 69 Minn. 10, 71 N. W. 709; Chew v. Ellingwood, 86 Mo. 260, 56 Am. Rep. 429; Newark v. Stout, 52 N. J. L. 35; Atlas Bank v. Brownell, 9 R. I. 168, 11 Am. Rep. 231; Crawn v. Commonwealth, 84 Va. 282, 4 S. E. 721, 10 Am. St. 839; Enright v. Falvey, L. R. 4 Ir. 397; and see supra, n. 61. 67 Caxton, etc., Union v. Dew, 80 L. T. 325; Byrne v. Muzio, L. R. & Ir. 396. 68 Supra, § 1022. 69 surety; nor will the creditor's mere indulgence in failing to terminate the contract because of such a breach by the principal as would justify it, excuse the surety.70 § 1251. The surety's right to set off a claim of the principal against the creditor. To an attempt by a surety to set off a cross-claim of the principal which the latter could have set up against the creditor's claim, four objections have been suggested: 71 1. That the cross-right is not a mere failure of consideration, but an independent claim, and not being due to the defendant, cannot be claimed by him. 2. That the principal has a right of election whether his damages shall be claimed by recoupment or counterclaim, or reserved for a cross-action. 3. That if the surety is allowed to set up the counterclaim it must bar a future action by the principal, and that as the cross-claim might be greater than the creditor's demand, the surety, if allowed to set up the claim merely to defeat the action against him, would also destroy a right of the principal. 4. That where there are a number of sureties severally liable, if one may set a counterclaim, another ought to have the same privilege. These reasons have generally been thought conclusive: and when the surety is sued alone he has not been allowed to use 69 Williams v. Lyman, 88 Fed. 237, 60 U. S. App. 25, 31 C. C. A. 511; Alabama Fidelity &c. Co. v. Alabama Fuel &c. Co. (Ala.), 79 So. 57; Wilkerson v. Crescent Ins. Co., 64 Ark. 80, 82, 40 S. W. 465; Sherman v. Harbin, 125 Ia. 174, 100 N. W. 629; Charles Lawrence Co. v. Buzzell (Me.), 104 Atl. 631; Watertown Ins. Co. v. Simmons, 131 Mass. 85, 41 Am. Rep. 196; Cumberland Assoc. v. Gibbs, 119 Mich. 318, 78 N. W. 138; Lancashire Ins. Co. v. Callanan, 68 Minn. 277, 71 N. W. 261, 64 Am. St. Rep. 475; Atlantic & Pacific Tel. Co. v. Barnes, 64 N. Y. 385, 21 Am. Rep. 621; Wilmington, etc., R. Co. v. Ling, 18 So. Car. 116; Richmond & P. R. Co. v. Kasey, 30 Gratt. 218. The contract with the surety, however, may make notice in such a case a condition of the surety's promise. Clydebank &c. Trustees v. Fidelity & Deposit Co., 53 Scotch L. R. 103. 70 Alabama Fidelity &c. Co. D. Alabama &c. Iron Co., 190 Ala. 397, 67 So. 318; Young Coal Co. v. Hill, 112 Ark. 180, 165 S. W. 292; McKecknie v. Ward, 58 N. Y. 41, 17 Am. Rep. 281. But it seems that after such a breach the surety might by giving notice terminate a continuing guaranty. Emery v. Baltz, 94 N. Y. 408, 414, and see infra, § 1252. 71 By Selden, J., in Gillespie r. Torrance, 25 N. Y. 306, 82 Am. Dec. 355. matter of recoupment, counterclaim, or set-off based on rights of the principal against the creditor.72 With the principal's consent, however, set-off has been allowed in some States.73 The impropriety of allowing the surety the right in question in an action at law to which the principal is not a party seems obvious. And though the English court has allowed the surety the defence as an equitable plea,74 there seems as little propriety in allowing it as an equitable defence as allowing it as a legal defence, unless the principal is made a party; for he is surely entitled to be heard in any litigation which determines the existence and amount of a claim which he may have against the creditor, since the decision will inevitably affect him. On the other hand it is to be said that the rule in equity is that if a creditor have security, the surety is entitled to the benefit thereof.75 If instead of having security, the creditor owes the principal part of the amount, the effect of this is to secure the creditor, and the surety should by some procedure be allowed 72 Osborne v. Bryce, 23 Fed. 171; Beard v. Union, etc., Publishing Co., 71 Ala. 60; Scholze v. Steiner, 100 Ala. 148, 14 So. 552; Stockton Society v. Giddings, 96 Cal. 84, 30 Pac. 1016, 31 Am. St. Rep. 181; Thalheimer v. Crow, 13 Colo. 397, 22 Pac. 779; Glazier v. Douglass, 32 Conn. 393; Mordecai v. Stewart, 37 Ga. 364; Graff v. Kahn, 18 Ill. App. 485; Purdy v. Forstall, 45 La. Ann. 814, 13 So. 95; Becker v. Northway, 44 Minn. 61, 46 N. W. 210, 20 Am. St. Rep. 543; Brewer v. Norcross, 17 N. J. Eq. 219; Morgan v. Smith, 7 Hun, 244, 245; Gillespie v. Torrance, 25 N. Y. 306, 82 Am. Dec. 355; Lasher v. Williamson, 55 N. Y. 619; Elliott v. Brady, 192 N. Y. 221, 000 N. E. 000; Ettlinger v. National Surety Co., 221 N. Y. 467, 117 N. E. 945; Newton v. Lee, 139 N. Y. 332, 34 N. E. 905; Jarratt v. Martin, 70 N. C. 459; Clark v. Sullivan, 2 N. Dak. 103, 49 N. W. 416; Phoenix &c. Co. v. Rhea, 98 Tenn. 461, 40 S. W. 482 (affirming 38 S. W. 1079); Lamoille Co. Nat. Bank v. Bingham, 50 Vt. 105, 28 Am. St. Rep. 490; Baltimore Co. v. Bitner, 15 W. Va. 455, 36 Am. Rep. 820; Hiner v. Newton, 30 Wis. 640; McDonald Co. v. Moran, 52 Wis. 203, 8 N. W. 864; Gray v. Smith, 6 U. C. Q. B. 62. A few jurisdictions, however, allow the surety a remedy. Marcy v. Whallon, 115 Ill. App. 435; Sefton v. Hargett, 113 Ind. 592, 15 N. E. 513; Springfield Engine, etc., Co. v. Park, 3 Ind. App. 173, 29 N. E. 444; Scroggin v. Holland, 16 Mo. 419; Aultman v. Hefner, 67 Tex. 54, 2 S. W. 861; Edmunds' Assignee v. Harper, 31 Gratt. 637. 73 Scholze v. Steiner, 100 Ala. 148, 152, 14 So. 552; Reeves v. Chambers, 67 Ia. 81, 83, 24 N. W. 602; Cohn v. Bromberg (Ia.), 170 N. W. 545; Balsley v. Hoffman, 13 Pa. St. 603; Phœnix, etc., Co. v. Rhea, 98 Tenn. 461, 40 S. W. 482 (affirming 38 S. W. 1079). 74 Bechervaise v. Lewis, L. R. 7 C. P. 372; Murphy v. Glass, L. R. 2 P. C. 408. See also Alcoy, etc., Ry. Co. v. Greenhill, [1896] 1 Ch. 19. 75 See infra, §§ 1266, 1276. the benefit of it. Where both principal and surety are joined as defendants in the same action the right to set off the claim has generally been allowed in favor of the surety.76 Even though the surety is sued alone, it seems that he should be allowed by equitable proceedings to bring the principal before the court and utilize the security of the cross-right.” An argument not stated in the cases for discharging the surety may be suggested where the creditor subjects himself, after the creation of the suretyship contract, to a right of set-off by the principal debtor,-namely that the creditor has impaired the surety's right of subrogation. § 1252. Termination of surety's liability. If a surety becomes bound for the performance of a contract and the principal fails to perform at the time, or in the manner agreed, though the delay of the creditor in enforcing his rights against the principal will not discharge the surety,78 it has been held in New York at least that if this default is sufficient 76 Livingston v. Marshall, 82 Ga. 281, 11 S. E. 542; Waterman v. Clark, 76 Ill. 428; Himrod v. Baugh, 85 Ill. 435; Ronehel v. Lofquist, 46 Ill. App. 442; Slayback v. Jones, 9 Ind. 470; Park v. Ensign, 66 Kan. 50, 71 Pac. 230, 97 Am. St. Rep. 352; Reeves v. Chambers, 67 Iowa, 81, 24 N. W. 602; Rumley Co. v. Welcher, 23 Ky. L. Rep. 1745, 66 S. W. 7; Spencer v. Almoney, 56 Md. 551; M'Hardy v. Wadsworth, 8 Mich. 349; Becker v. Northway, 44 Minn. 61, 46 N. W. 210; St. Paul & M. Trust Co. v. Leck, 57 Minn. 87, 58 N. W. 826; Raymond v. Green, 12 Neb. 215, 10 N. W. 709; Concord v. Pillsbury, 33 N. H. 310; Brewer v. Norcross, 17 N. J. Eq. 219; Loring v. Morrison, 15 N. Y. App. D. 498, 44 N. Y. S. 526; Wagner v. Stocking, 22 Ohio St. 297; Willoughby v. Ball, 18 Okla. 535, 90 Am. St. Rep. 1017; Hollister v. Davis, 54 Pa. 508; People's Bank v. Legrand, 103 Pa. 309, 316, 49 Am. Rep. 126; Guggenheim v. Rosenfeld, 9 Baxt. 533; Downer v. Dana, 17 Vt. 518; Wartman v. Yost, 22 Gratt. 595; Edmunds' Assignee v. Harper, 31 Gratt. 637; Baltimore Co. v. Bitner, 15 W. Va. 455, 36 Am. Rep. 820. But see contra, Joyce v. Corkrill, 92 Fed. 838, 35 C. C. A. 38; Noble v. Anniston Nat. Bank, 147 Ala. 697, 41 So. 136; Woodruff v. State, 7 Ark. 333; Leach v. Lambeth, 14 Ark. 668; Banks v. Pike, 15 Me. 268; Walker v. Leighton, 11 Mass. 140; Warren v. Wells, 1 Met. 80; Robbins v. Brooks, 42 Mich. 62, 3 N. W. 256; Paine v. Lewis, 64 Miss. 96, 8 So. 207; Dart v. Sherwood, 7 Wis. 523, 76 Am. Dec. 228. Sometimes it has been held that the principal should not only be a party but be insolvent in order to justify the set-off. Becker v. Northway, 44 Minn. 61, 46 N. W. 210, 20 Am. St. Rep. 543; Willoughby v. Boll, 18 Okla. 535, 90 Pac. 1017. See Hiner v. Newton, 30 Wis. 640. 78 See supra, § 1231. |