Though a covenant not to sue or a qualified release does not have the effect as such of discharging other debtors than the one to whom it was given, its effect must also be considered with reference to an equitable principle of suretyship.
An agreement to give time to a principal debtor, the surrender of collateral to him, or any other act or agreement with him which will increase or vary the risk of the surety, discharges the latter from liability.57 Joint debtors, as well as several debtors, as between one another may bear the relation of principal debtor and surety for the whole debt, or they may be bound as between one another to bear the debt in equal proportions or in any other proportions.
In so far then as a creditor chooses to make a binding agreement to give time and even more clearly in so far as he chooses to covenant never to sue a co-debtor who is the principal debtor, he will be unable thereafter to charge another co-debtor who is surety for the same debt.
An exception to this principle has been established in regard to negotiable instruments made where the Uniform Negotiable
57 See infra, Sec.Sec. 1220 et seq.
Instruments Law is in force.58 It has been held under this law that one who signs negotiable paper jointly with another, although a surety and known by the holder of the instrument to be such, is not discharged by an extension of time to the principal debtor.59 Though such a conclusion may be technically justified by construction of the statute, it seems an undesirable result since it is opposed to principles generally governing the law of suretyship. Why there should be different rules applicable to joint makers of a bond, and joint makers of a note is not easy to see. The principle which discharges the surety is, however, an equitable one and is subject to equitable modifications. If a surety consents to a discharge or change of liability of the principal debtor, he cannot claim exemption from liability.60 It has also been established that the surety cannot claim exemption if the agreement with the principal debtor reserves in effect to the surety all rights of indemnification to which he is entitled, and this is the legal effect of an agreement which reserves to the creditor a right against the surety, as well as of an agreement which in terms reserves the surety's rights against the principal debtor61 The rule which permits a creditor to make a covenant not to sue or to release a principal debtor known to be such and nevertheless by a reservation of the creditor's rights against co-debtors, still hold them bound, though they are sureties and known to be such, is in reality inconsistent in principle with the rule that an agreement with the principal debtor to forbear or to give time discharges the surety. This latter rule must rest on the injustice of holding a surety bound when the creditor has either varied the terms of the obligation, or has impaired the right of subrogation to which the surety would be entitled on paying the debt. The injustice is no less because the creditor when he varies the obligation agrees with the principal debtor but without the consent of the Burety that the surety shall not be discharged. If it be urged that where the right against the surety is reserved, his right of indemnity against the principal is also reserved, and that therefore the surety is not injured, the reply is obvious that the surety's right of indemnity can never be taken away from him in any case without his consent, and that therefore, if the continued existence of the right of indemnity justifies the creditor in changing the terms of his contract with the principal, no agreement to give time to the principal should discharge the surety. And certainly if the creditor has precluded himself from successfully suing the principal debtor, the surety will not have anything to which the word subrogation is properly applicable. The fact, therefore, will always remain that after a covenant with the principal debtor whether or not there is an express reservation of rights against the surety, not only the surety's right of subrogation if he chooses or is compelled to pay the debt is injuriously affected, but also the chance which he is called upon to face is different after the covenant has been made from what it was before.
58Sees. 119, 120 of the Act of those operative in this respect. See infra, Sec.Sec. 1189, 1190, 1260.
59Vandeford v. Fanners' etc. Bank, 10S Md. 164, 66 Atl. 47, 10 L. R. A. (N.S.) 129; Lane v. Hyder, 163 Mo. App. 688, 147 S. W. S14, 515; Richards v Market Exchange Bank Co., 81 Oh. St. 348, 90 N. E. 1000, 26 L. R. A.
(N. S) 09; Wolstenholme v. Smith, 34 Utah, 300, 97 Pac. 329; Bradley Engineering Co. v. Heyburn, 56 Wash. 628, 106 Pac 170, 134 Am. St. Rep. 1127. See also Fritts v. Kirchdorfer, 136 Ky. 643, 124 S. W. 882, and infra, Sec.1260.
Though it is not possible to reconcile the general rule forbidding the giving of time with the special rule permitting it without the surety's consent if the creditor's right against the surety is expressly reserved, at least it is possible to show how the inconsistency arose. The general rule forbidding the giving of time is a modern one in equity.62 Its recognition at law is still more modern.63 About a century before such a doctrine was heard of even in equity, it had been laid down that a covenant not to sue one joint debtor did not discharge the others.64 Before the adoption by courts of law of the rule protecting sureties from agreements between creditor and principal debtor for forbearance a case had presented the question of the effect of a release of one joint debtor with a reservation of rights against another.65 The court purported merely to construe a release in terms contradictory and held it to amount in effect to a covenant not to sue one joint debtor, and, therefore, under well-recognized law to have no effect on the liability of his co-debtor. The doctrine of this case persisted and was even applied to cases where the joint debtor against whom rights were reserved was a surety, while side by side with this doctrine there flourished the newly arisen doctrine discharging sureties if time was given to the principal debtor. Lord Eldon was thought to recognize the right of the creditor in equity to reserve his rights against the surety.66 Baron Parke added the weight of his authority,67 and the matter must now be considered settled,68 however unsatisfactory may be the attempts to reconcile two conflicting doctrines.
62See infra, Sec.1222.
63 In Dean v. Ncwhall, 8 T. R. 163, and Hutton v. Eyre, 6 Taunt. 289, covenants to discharge a joint debtor known to be the principal debtor were held not to bar the creditor from proceeding against the other joint debtors, though they were sureties, and the covenants contained no reservation of rights against the latter.
64 Lacy v. Kinnaston, Holt 178; s. c. 1 Ld. Raym. 688; s. c. 12 Mod. 548; s. c. 2 Salk. 575; s. c. 3 Salk. 298; Fitz-gerald v. Trant, 11 Mod. 254.
As a creditor may release one joint debtor and expressly reserve rights against the other, so in the case of joint and several obligations, a creditor may release the several liability of one or more of the debtors with a reservation of the joint right.69 And the joint liability may be released with a reservation of the several right.70