This section is from the book "American Commercial Law Series ", by Alfred W. Bays. Also available from Amazon: American commercial law series.
By the terms "guaranty" and "suretyship" we indicate that one person has agreed with a creditor or promisee of another person to be responsible for the debt or default of that other person.
In suretyship and guaranty we consider the cases in which one person agrees to be sponsor for another. We have the case of A becoming indebted to B, and C agreeing with B to be responsible for A's debt; we have the case of A under contract to perform services for B, and C undertaking with B that A will be honest and faithful; and other cases of responsibility.
Two terms describe the situation: "guaranty" and "suretyship." Essentially they indicate the same general idea; but guaranty is a form of suretyship which we may devote some separate attention to.
A contract of guaranty is a contract to pay the debt of another if that other does not; the contract of the surety is to pay the debt or answer for the default of another when the debt is due or the default occurs.
Example. C tells B that if B will extend credit to A, he, C, will pay the debt if A does not pay it; ordinarily and in most states in such a case B must sue A, or show that suit is unavailing, before he can sue C. This is a contract of guaranty.
Example. A, being about to appeal a case which has gone against him in the lower courts must file an appeal bond conditioned to pay the judgment below if the appeal is not successfully prosecuted. The law requires a surety on the bond, and C becomes such surety by becoming a co-obligor in the bond. If default is made B can sue C, or A, or A and C at once as co-makers of the bond. This is a contract of suretyship as distinguished from guaranty.
Example. B makes a promissory note to A and C joins with him as a surety. C's liability as far as A is concerned is the same as the other maker's and he is liable on the maturity of the note.
A surety, then, is one who makes himself a co-maker a co-promisor, to pay the debt when it is due, relying upon his ability to secure reimbursement from the real debtor, if he shall have to pay, while a guarantor makes himself a collateral promisor saying in effect not that he has made the debt or obligation his, but that it is another's debt which he will pay if the other doesn't. It is true that in some states there is what is called an absolute guaranty upon which the guarantor may be sued at once upon the maturity of the debt, as where one signs or indorses a note, describing himself as guarantor; he, practically, here is in the same position as a surety. His liability is substantially as onerous.
Contracts of guaranty are usually on separate instruments, as a letter to a merchant that if he will let the bearer have goods, the writer will pay if the bearer does not; while contracts of suretyship are usually upon the same instrument, as in case of a bond, or note.
Guaranty and suretyship are, however, fundamentally the same relationships - the obligation of one person to stand sponsor for another, and guaranty is sometimes called a form, or subdivision, of suretyship.
Guaranties are called absolute, conditional, limited, unlimited, general and special.
An absolute guaranty has been defined. It is sometimes called a guaranty of payment, as distinguished from a guaranty of collection.
A conditional guaranty is a guaranty to pay if the other does not, due diligence by suit having been had against the main debtor, unless it can be shown that suit would be unavailing.
A limited guaranty is one limited in amount or limited to a certain or certain transactions.
Where unlimited in time, or where extending over a period of time, it is sometimes called continuing.
A general guaranty is to the public at large as a letter of credit, or to any one of a certain class of the public.
A special guaranty is a guaranty of a particular debt.
The form of contract of guaranty (as distinguished from suretyship) is usually that of a collateral agreement. Under the statute of frauds a guarantor cannot be held unless his promise is provable by written memorandum signed by him or duly authorized agent.
A form of guaranty may be very informal as in a letter addressed by one merchant to another. But there must be a writing signed by the guarantor in order to hold him, as this is an agreement within the fourth section of the statute of frauds. (See Volume on Contracts in this Series.)
The acceptance of the offer of guaranty consists in doing the act or making the promise which the offer of guaranty contemplates and calls for; but the guarantor is entitled to notice that his offer has been accepted, and if he has no notice he is not bound.
Where a guaranty is made when all parties are present there is only the question whether the guaranty was in fact made and accepted.
Frequently, however, guaranties are in the form of letters addressed to the creditor, the acceptance of which consists in supplying credit on the strength thereof, but the guarantor is uninformed whether the guaranty has been accepted or not. In such a case, the guarantor is entitled to notice that his guaranty has been accepted, and this notice should be given within a reasonable time. This matter is very important where one relies upon a guaranty in extending credit. He should always at once notify the guarantor of his acceptance, and state that he has supplied goods, and if it is a continuing guaranty that he will continue to supply goods on the faith thereof; and should keep the guarantor supplied from time to time with information as to the state of accounts; and when the account is closed, should notify the guarantor of the amount due.