Sec. 169. Various Causes Discharging The Surety

(1) By discharge of principal's debt.

When the debt of the principal is discharged, the surety's obligation also falls.

As a general rule, anything which discharges the principal's debt, as payment, of course also discharges the surety's obligation. The surety is answerable for the debt of another and when that debt is gone, the surety's obligation is necessarily gone also.

(2) By alteration of the written instrument.

If the instrument on which the surety is bound is purposely altered in a material part, he is discharged.

The general rule is that any purposeful alterations of the written instrument (the bond, or note, etc.), on which the surety is liable, in a material part, without the surety's consent, discharges the surety, even though the change operates to his benefit, as in case of reducing the amount of a bond. When sued upon such an instrument he can reply that it is not the instrument he signed.

Any change is material which changes the time or place of payment, amount of debt, nature of obligation, medium of payment, number of co-sureties, etc.

If the surety by leaving blank spaces makes alteration easy, he will be liable to any person innocently acting thereon.

(3) By death of principal.

The death of the principal before credit extended or before default, operates to release the surety.

If the principal dies after the debt has arisen, or in case of a bond or similar obligation, after he has made default thereon, then the death in no way affects the surety's liability because it occurs after his liability has arisen; but the death of the principal before any debt or default obviously releases the surety.

(4) By death of surety.

The surety's death operates to discharge the liability on continuing guaranties, but on the absolute undertakings of suretyship the death of the surety, even before breach, does not release the surety's estate.

In cases of continuing guaranty, the death of the guarantor stops the liability for subsequent indebtedness. In cases of absolute suretyship, as on a note or a bond, the death of the surety does not operate to extinguish the liability, but the estate is bound even for defaults arising after the surety's death, and also, the heirs are bound in so far as the estate of the principal comes to their hands.

(5) By extension of time to principal debtor.

If the creditor extends definitely and upon consideration the time of payment, without the surety's consent, the surety is released unless the creditor expressly saves his rights against the surety.

The surety can maintain that his contract has been changed and himself released if the creditor without his consent gives a definite enforceable extension of time to the principal debtor. Thus if S is surety on a note signed by D as principal to the order of C, and C when the note is due extends D's time another year in a definite way so that C can enforce the extension, S is released. This does not mean that a mere delay on C's part to prosecute suit will have this effect. There must be an extension for a definite time, upon an enforceable agreement, because, a mere promise not to sue at once or for a little while, is not enforceable, and though carried out amounts to nothing in the way of releasing the surety.

The principal may, however, avoid this consequence by expressly stipulating at the time that the surety is not to be released, even though he does this without the knowledge or consent of the surety. Such a reservation must be express. The creditor must, in effect, say, "Hereby expressly reserving all rights against the surety," or "It is hereby understood and stipulated that the rights against the surety are hereby reserved."

(6) By failure of the creditor or obligee to sue or use diligence against the principal debtor.

The mere failure of the creditor or obligee to use diligence to enforce his rights against the principal debtor does not release the surety, unless there is a local statute to that effect.

By the common law, it is established that the mere delay on the part of the creditor to sue the debtor within a reasonable time will not discharge the surety. The surety's remedy in such a case is to pay the debt and then sue the principal debtor for the reimbursement.

Under the statute of some states, the laws provide that a surety or guarantor may notify the creditor after the debt is due to begin suit against the debtor, and in that case the surety is released unless the creditor proceeds within a reasonable time. Of course the creditor in such a case could also sue the surety with the principal debtor.

(7) By release of principal debtor.

The surety is released if the creditor released the principal debtor, unless the creditor expressly reserves his right against the surety.

The surety is released by a release of the principal debtor, unless at the time, the rights against the principal debtor are expressly saved. The same reasoning governs here which governs the subject-matter of section 36.

(8) By relinquishment of security by creditor.

In so far as the creditor relinquishes security, the surety is released.

We have seen how the surety on payment of the debt is entitled to be subrogated to the remedies and titles of the creditor. Where the creditor has security from the debtor and voluntarily releases it to him, the surety will be released to the extent of the value of the security.

(9) By failure of obligee to report defaults, etc.

Where the principal obligor makes default, and this is known to the obligee, he must report to the surety, otherwise the surety will be discharged.

The subject we now discuss has its most frequent application in the case of fidelity bonds given by employes. If the employer learns of a default on the part of the employe, he must report it, otherwise the surety will be discharged. Thus A employs B and requires a bond. B gives bond signed by himself and the C Surety Company. B afterwards breaks the condition of the bond by stealing some money with which under his contract he is entrusted. A learns of the matter but decides to retain B, and does not report the default to the C Surety Company. The C Surety Company is discharged in case of subsequent default.

(10) By change of duties or enlargement of liability.

Where the obligee enlarges the liability of the main obligor or materially changes his duties, the surety is released.

If the contract of the surety by its terms covers a possible liability in respect to nonperformance of certain duties, or the misappropriation of certain funds, the change of the duties of the employe without the consent of the surety will discharge the surety. But this does not mean that a growth of the employer's business, whereby the employe has more to do or more money to handle, will affect the bond; but it means that where there are certain duties of a general nature whose performance is sought to be covered by the bond, that a change of those duties, especially such as make possible a greater appropriation of funds by the employe, will release the surety for subsequent defaults.