Surety in Europe

Definition of Surety

A person who binds himself usually by deed to satisfy the obligation of another person, if the latter fails to do so: a guarantor.

If a surety satisfies the obligation for which he has made himself liable, he is entitled to recover the amount from the principal debtor. If one of several sureties is compelled to pay the whole amount or more than his share, he is entitled to contribution (q.v.) from his co-sureties. A surety is entitled to the benefit of all the securities which the creditor has against the principal. If the creditor releases the principal debtor, this will discharge the surety from liability, unless the creditor reserves his rights against the surety. See Dering v. Earl of Winchelsea. [1]

Guarantee and Surety in English Law

According to the Encyclopedia Britannica (Volume 10, Part 2):

Liability of Surety

Bef ore 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 prin cipal debtor or resorting to securities for the debt received from the latter. The surety’s liability is limited to the amount which he has undertaken to pay on default of the principal debtor. This amount may be equal to the sum due from the principal debtor, or it may be less than such sum. If the guarantee is one which the surety has entered into jointly with others, he is still liable to pay the whole amount he has agreed to pay on the debtor’s default, unless the guarantee otherwise expressly provides. His right of contribution against his co-sureties may be a partial indemnity, but cannot, in the absence of agreement binding the creditor, compel the creditor to proceed against the other sureties. Should the surety become bankrupt, either before or of ter default has been made by the principal debtor, the creditor will have to prove against his estate. This right of proof is regulated by s. 3o of the Bankruptcy Act 1914, which is most comprehensive in its terms.

Rights of Surety Against Principal Debtor.—The surety can recover, with interest, from the principal debtor all money properly paid when due on account of the guarantee, provided of course that the guarantee was made with the principal debtor’s consent. In the event of the principal debtor’s bankruptcy, the surety can, 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 bef ore the bankruptcy of the principal debtor, but also, it seems, in respect of the contingent liability to pay under the guarantee. The surety is also entitled to enforce against the debtor the rights which the creditor enjoyed with respect to the debt in question. Moreover, a surety has the right before payment to compel the principal debtor to relieve him from his liability by paying off the debt, if the debt is actually due and the surety admits liability. In such a case it is not necessary to prove that the creditor has refused to sue the principal debtor (Ascherson v. Tredegar Dry Dock and Wharf Co. Ltd., loop, 2 Ch. 401).

Rights of Surety Against the Creditor

The surety, on payment of the debt, is entitled to the benefit of the securities in the hands of the creditor, whether he knew of them or not at the time of contracting; including all securities which the creditor may have acquired since the date of contracting ; and where, by the default or laches of the creditor, such securities have been lost or rendered otherwise unavailable, the surety is discharged pro tanto. If the surety is surety for part of the debt only, his rights to the securities also are but partial (Goodwin v. Gray, 1874, 22 W.R. 312).

On this subject the Mercantile Law Amendment Act 1856, s. 5, provides that “every person who, being surety for the debt 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, 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 pro ceeding 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.”

Right of Surety Against Co-sureties

A surety on payment of the debt, or more than his proportion, is entitled to contribution from his co-sureties in respect of the excess. This right is not founded originally upon contract, but upon a principle of equity, though it is now established to be the foundation of an action. It exists whether the sureties are bound jointly, or jointly and severally, and whether they are bound by the same or different instruments. If the principal debtor makes default, all must contribute equally, if each is a surety to an equal amount, and if not equally, then proportionately to the amount for which each is a surety (Ellesmere Brewery Co. v. Cooper and Others 1896, Q. B. 75). In counting the number of sureties for this purpose, those unable to pay are not reckoned.

Thus where four sureties are jointly and severally bound in a surety bond, and one of them pays the amount of the bond, but one of the remaining three sureties is insolvent, the right of contribution against the two other sureties is for thirds, not for fourths, of the sum paid (per Lord Esher, M.R., ibid., at p. 8o). But a surety is not entitled to call upon his co-sureties for contribution until he has paid more than his proportion, either of the whole debt or of that part which remains unpaid, even though his co-sureties have not been required by the creditor to pay anything (Ex parte Snowdon, 188t, 17 Ch. D. 44) . And so where the debt guaranteed is pay able by instalments, a surety cannot call on his co-sureties to contribute until he has paid more than his proportion of the entire debt. The fact that he has paid more than his share of the instalments which have come due will not entitle him to contri bution (Stirling v. Burdett, 1911, 2 Ch. 418).

A surety against whom judgment has been obtained by the principal creditor for the full amount of the debt can, before paying the amount, maintain an action against his co-sureties to compel them to contribute towards the common liability, and where the principal creditor is a party to the action, the surety may obtain an order directing the co-sureties to pay their proportions to the creditor (W olmershausen v. Gullick, 1893, 2 Ch. 514).

The right of contribution is not the only right possessed by a surety against his co-sureties; he is also entitled to a share in every counter-security which his co-sureties may have obtained from the principal debtor, and such security must be brought into hotchpot, in order that the ultimate burden may be distributed between the sureties equally, even though the co-sureties consented to become sureties only upon the terms of having the security (Steel v. Dixon, 1881, 17 Ch. D. 825).

Discharge of Surety

The surety will be discharged on any of the grounds which suffice to terminate contracts in general, and also on the following which are peculiar to contracts of guarantee. In the case of a guarantee for the fidelity of a servant, the non-disclosure by the employer to the surety of the fact that the servant had previously been guilty of dishonesty in his employment will avoid the contract although such non-disclosure was not fraudulent (London General Omnibus Co. Ltd. v. Hollo way, 1912, 2 K.B. 72). On the other hand, in the case of a guarantee given to a banker to secure an overdraft, the mere non-disclosure by the banker to the surety of the fact that, at the time when he signed the bond, the customer was already indebted to the banker for the full amount of the credit and pa ment had been requested by the banker, will not avoid the con tract, for the bank cannot reasonably be taken as affirming, by mere silence respecting earlier dealings, the financial ability of the customer whom the surety is asked to guarantee (Hamilton v. Watson, 1845, 12 Cl. & F. 109).

Fraud subsequent to the execution of the guarantee (as where, for example, the creditor connives at the principal debtor’s default) will certainly dis charge the surety. Again, a material alteration made in the terms of the contract between the creditor and the principal debtor, without the assent of the surety, will discharge the surety, unless it is self-evident that the alteration cannot prejudice the surety; the surety himself being the judge as to the materiality of the alteration (Holme v. Brunskill, 1878, 3 Q.B.D. 495).

Giving time to the principal debtor without the surety’s con sent will discharge the surety, and for this reason, because the creditor by giving time deprives the surety of his right to pay off the debt which he has guaranteed and to sue the principal debtor (Samuel v. Howarth, 1817, 3 Mer. 272). But to produce this result there must be a binding contract to extend the time for payment, not merely by a forbearance of the creditor to en force his rights, and the contract must be with the principal debtor. A contract with a stranger, or even with a co-surety, to give time to the principal debtor, will not prevent the surety dis charging the debt and pursuing his remedy over against the principal debtor, and will not discharge the surety from liability (Frazer v. Jordan, 1858, 8 E. & B. 303 ; Clarke v. Birley, 1889, 41 Ch. D. 422).

To the rule that time given to a principal debtor discharges a surety there is an important exception. A surety is not released by an agreement to give time to the debtor if the creditor expressly reserves his rights against the surety. The reasons why the reservation by the creditor of his rights against the surety does not release the latter are (i.) because it rebuts the implication that the surety was meant to be discharged, and (ii.) because it prevents the rights of the surety against the principal debtor be ing impaired, for the principal debtor, by consenting to the creditor reserving his rights, impliedly agrees that the surety shall have recourse against him, and he may, notwithstanding the agreement, pay the creditor and enforce his rights against the debtor (Kearsley v. Cole, 1847, 16 M. & W. 128, at p. 135). The rule also does not apply where time is given to the principal debtor after a judgment has been recovered by the creditor against both the principal debtor and the surety; the judgment creates a new liability in respect of which the judgment debtors are in the same position (in re a Debtor, 1913, 3 K.B. 1 1).

An absolute release of the principal debtor will discharge the surety. But a covenant not to sue the principal debtor, qualified by a reservation of rights against the surety, allows the surety to retain all his remedies against the principal debtor and will not discharge him from liability (Price v. Baker and Another, 24 L.J.Q.B. 130). A release by the creditor of one of two or more co-sureties will discharge all (Evans v. Brembridge, 1856, 25 L.J. Ch. 334). This is not so, however, if the sureties con tract severally (Ward v. National Bank of New Zealand, 1883, 8 App. Cas. 755).

A surety is discharged if the creditor takes a new security from the principal debtor in lieu of the original one, or by his wilful neglect or default loses the securities which he holds, or deals with the securities in such a way as to deprive the surety of the means of recouping himself by them.

A guarantee, the consideration for which is given once for all (as where a third person guarantees that in consideration of the lessor granting a lease, he will be answerable for the lessee paying the rent), cannot be determined by the surety, and does not cease on his death (Lloyd’s v. Harper, 1881, 16 Ch. D. 290). On the other hand, when the consideration for a guarantee is fragmentary, supplied from time to time, and therefore divisible (as where a guarantee is given to secure the balance of a running account at a banker’s), the surety may at any time terminate the guarantee, and notice of death of the surety will put an end to his liability (Coulthart v. Clementson, 188o, 5 Q.B.D. 42).

But the death of one of the co-sureties under a joint and several continuing guar antee does not by itself determine the future liability of the surviving co-sureties (Beckett & Co. v. Addyman, 1882, 9 Q.B.D. 783) . A continuing guarantee 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 (Partnership Act, 189o, s. 18) . A surety who has executed a guarantee on the faith that another person will also become a surety is wholly discharged from liability if that other person refuses to do so, or for any other reason does not join in the guarantee (Evans v. Brembridge, 1853, 25 L.J. Ch. 334)• A discharge in bankruptcy of the prin cipal debtor, or the acceptance by his creditors of a composition or scheme, will not release from liability a person who was surety for his debts (Bankruptcy Act 1914, s. 28, subs. 4; s. 16, subs. 2o) .

The Statutes of Limitation bar the right of action against a surety after 20 years if the guarantee was under seal; and in the case of other guarantees, after six years from the date of the accrual of the cause of action, that is to say from the date on which the creditor might have sued the surety. Where, by the express terms of the guarantee, the surety is only liable to pay after demand, time does not begin to run until after demand to pay has been made upon him.

See Sir S. A. T. Rowlatt, Law of Principal and Surety (end ed., i926) ; T. Hewitson, Suretyship, its Origin and History (1927).

(C. GA.) There have been repeated efforts by American courts and legal writers to distinguish a surety from a guarantor; the efforts have failed, since hardly two of them find the same line of distinction; hence, in the United States as in England the two terms are substantially synonymous. But in some American States the memo randum of a contract of guarantee still requires to state the consideration, if the contract is to be enforceable. Furthermore, laches in the creditor’s dealing with any security he may hold, to be sufficient in American law to discharge the creditor’s claim against the surety, must either involve affirmative action, or must consist in failing to take simple, standard, business-like precautions: such as recording a mortgage, or so presenting a negotiable note as to keep the endorsers from being discharged. But mere failure to enforce the security before it depreciates in value will not in the United States be considered such laches, the judicial view being that the surety’s remedy is to pay off the debt and then realize on the security himself.

It is hard to see why the surety should be forced thus to strain his resources ; it is equally hard to reconcile the harshness against the surety of this rule with the extreme leniency found in discharging him by reason merely of extension of time to the principal. The two lines of precedent grew up separately, and did not come into contact until both were set. Two other divergences from the English law as stated above need notice : the periods of the Statute of Limitations differ among the American States; and the fact that a surety stipulated that a co-surety be procured, or other condition be fulfilled, will not, commonly, discharge him as against a creditor who has relied upon surety’s signature without notice of stipulation or condition.

Corporate Suretyship

In the United States a great and growing part of suretyship business is now in the hands of professional surety companies, which write surety bonds for a premium calculated on loss-expectancies, and which in cases involving any considerable risk take measures to assure themselves of indemnity, in advance of loss. In the case of such “compensated sure ties” the courts have tended distinctly to tighten up the law in favour of the creditor, so that the older tendency to construe the contract narrowly, and employ every possible loophole to let the surety out, is now limited to the cases out of which it originally grew : those of the friend or family member who has lent his credit, without compensation, in an individual case. Hence the bonds of surety companies are approaching, in law as in social function, policies of insurance. T

hey are perhaps of peculiar importance in the field of guaranteeing the fidelity of trusted employes or of public officers (where the check-up system of the bonding companies goes some distance toward anticipatory prevention of frauds) and in that of contracts for building and public works. It should be noted that these bonding companies are not, like most corporations, without charter power to enter into binding contracts of suretyship; also that the larger modern business corporations are now commonly being given charter power to become surety at least for their own subsidiaries. Hence guaranteed bonds are becoming familiar in the market. To be distinguished from suretyship, in law though not in function, is the growing practice among bankers of accepting negotiable paper (see BILL OF EXCHANGE) on behalf of their customers for a commission; this is not in strictness suretyship, not only because the customer’s obligation in all probability ceases when the banker’s is given, but because, in any event, the customer’s liability must be conditional on prior dishonour by the banker.

Resources

Notes

1. Definition of Surety is, temporally, from A Concise Law Dictionary (1927).