As every simple contract must be supported by a consideration, a guaranty must be so supported and otherwise it is unenforceable. What is the consideration that supports a guaranty? We know that a consideration is defined as a detriment to the promisee; it need not be a benefit to the promisor. If the credit is extended on the strength of the promise of the guarantor, that is sufficient and is the usual consideration. If the guaranty is made after the debt has been incurred, there must be a further extension of credit, and extension of time to the debtor, or some new element of detriment.
Suretyship may be and usually is on the same document as the principal's undertaking, although it may be on a different one.
Suretyship on notes. One form of suretyship is that on a note in which the surety signs as a co-maker. The surety may in such a case describe himself as a surety or not. He could in any event prove himself a surety to get reimbursement from the real debtor if compelled to pay the instrument.
Suretyship on bonds.
(1) Bonds defined.
A surety bond is an instrument under seal, in which the surety is named, and which he executes as an obligor with the principal, conditioned to perform an obligation described in the bond, the breach of which is recited to impose the payment of a penalty and is called penal bond. Penal bonds may be executed by the principal alone, but almost all public bonds are required by law and most all private bonds are required by the obligee, to have a surety. Surety companies do in the aggregate an immense amount of business by becoming surety upon public and private bonds.
The bond is in form a recital of an absolute obligation to pay a certain sum. It then recites that the condition is that a certain undertaking has been entered into, and if it is performed the bond shall be void, otherwise to be in full force and virtue.
The penalty named is not recoverable as such. Damages must be proved and constitute the amount of the recovery.
(2) Bonds required by law.
Bonds required by law include official bonds and judicial bonds. An official bond is given to cover defaults in public office, such as bonds of sheriffs, treasurers, executors and administrators. An injunction bond, or an appeal bond, is a judicial bond.
(3) Other bonds.
Bonds are given for a multitude of purposes, bonds of building contractors, bonds given by employes and officers (fidelity bonds), etc.
The offer of a surety (or guarantor) may be invalid by reason of the invalidity of the principal's obligation, or by reason of some cause operating peculiarly upon the surety.
(1) Fraud on principal by obligee.
Fraud, duress under influence and similar defenses practiced by the obligee in the bond or the guaranteed party, upon the principal, are available to the surety provided the principal does not waive them. These matters make a contract only voidable and not void and they may be waived.
(2) Principal's personal incapacity.
That the principal is incompetent or limited in his contractual powers, is not available as a defense to the surety. One mercantile reason for having a guarantor or surety is to overcome the defect of the personal incapacity of the principal; and no reason appears why the law should not allow this commercial requirement.
Example. A minor buys goods from A, upon G's written assurance that if A does not pay, G will. G cannot defend that A is a minor.
(3) Fraud on surety or guarantor.
If fraud, duress and similar impositions are practiced on the surety or guarantor, the surety may for any such reason defend; unless the facts show a ratification by him.
(4) Concealment of facts from surety or guarantor.
A surety or guarantor must be apprised of facts material to the risk. This principle has its greatest application in case of fidelity bonds.
(5) Personal incapacity of surety or guaranty.
If the surety is under age, or insane, or has any personal incapacity, this may be made a defense on the bond or other writing. Such defense is good even against a holder in due course.
(6) Lack of capacity of corporation.
A corporation acting as a surety or guarantor may have no such charter power. Usually corporations cannot enter into contracts of guaranty or suretyship as proper corporate enterprises unless chartered under the law as surety companies. But if the act of guaranty or suretyship is incident to a proper corporate undertaking, the corporation is bound. See corporations in this series.
If one assumes another's existing debt which the other still remains responsible for, the former debtor becomes a surety for the latter, as between the parties, and if the creditor assent, as to him also.
Example. A owes B $1000 and C purchasing A's business, assumes this indebtedness. A cannot thus avoid his indebtedness to B, and B may refuse to recognize C, but if he does, and as between A and C if he does not, A is a surety for the payment by C of the indebtedness.
So if land is sold subject to a mortgage which the buyer assumes, a relationship of principal and surety arises. (Flagg v. Geltmacher, 98 111. 293.)