This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
To what extent a contract of suretyship is uberrima fidei with reference to non-disclosure is a question upon which there is a conflict of authority. Some courts hold that when a contract of suretyship is made, the creditor is bound to disclose to the surety every material fact which can affect the risk of the surety substantially. The proposition is laid down that non-disclosure releases a surety if it concerns such facts that (1) the surety would not have entered into the contract if he had known them, or (2) his risk is thereby increased.1 Non-disclosure "which necessarily must have the effect of increasing the responsibility of the surety or operating to the prejudice of his interest" releases him.2 Where this view obtains if the creditor omits to disclose all the material facts known to him, the surety may avoid the contract,3 as for omission to disclose the amount of the debt or obligation,4 or that the maker and payee of the note to which the party is to become surety were firms having a common partner,5 or in case of a general guaranty, to disclose a former defalcation of the principal obligor,6 or former negligence whereby the principal obligor had damaged his employer.7 So in a continuing guaranty it is held that the creditor must notify the guarantor or surety of
40 Gardner v. North State Mutual Life Ins. Co., 163 N. Car. 367, 79 S. E. 806.
41Wright v. Fraternities' Health & Accident Ass'n, 107 Me. 418, 78 Atl. 475; Mutual Life Ins. Co. v. Ford (Tex.), 130 S. W. 769 [writs of error denied, Mutual Life Ins. Co. v. Ford, 103 Tex. 522, 131 S. W. 406].
1 First National Bank -v. Clark's Estate, 59 Colo. 455, 149 Ac. 612; Sherman v. Smith, - la. - , 169 N. W. 216; Hudson v. Miles, 185 Mass. 582, 102 Am. St. Rep. 370, 71 N. E. 63; Traders' Ins. Co. v. Herber, 67 Minn. 106, 69 N. W. 701; Powers Dry Goods Co. v. Harlin, 68 Minn. 193, 64 Am. St. Rep. 460, 71 N. W. 16; see to the same effect, Dough-ty v. Savage, 28 Conn. 146.
2Comstock v. Gage, 91 111. 328. (An obiter here, as neither of such facts existed.)
3United States. Griswold v. Hazard, 141 U. S. 260, 35 L. ed. 678.
California. Guardian, etc., Co. v. Thompson, 68 Cal. 208, 9 Pac. 1.
Colorado. First National Bank v. Clark's Estate, 59 Colo. 455, 149 Pac. 612.
Connecticut Doughty v. Savage, 28 Conn. 146.
Georgia. Denton v. Butler, 99 Ga. 264, 25 S. E. 624.
Iowa. Lingenfelter Bros. v. Bowman, 156 Ia. 649, 137 N. W. 946; Selma Savings Bank v. Harlan, 167 la. 673, 149 N. W. 882; Sherman v. Smith, - la. - , 169 N. W. 216.
Kentucky. Peck v. Durett, 39 Ky. (9 Dana) 486; Graves v. Bank, 73 Ky. (10 Bush.) 23, 19 Am. Rep. 50; Commonwealth v. Berry, 95 Ky. 443, 26 S. W. 7.
Maine. Franklin Bank v. Cooper, 36 Me. 179; Franklin Bank v., Stevens, 39 Me. 532.
Massachusetts. Hudson v. Miles, 185 Mass. 582, 102 Am. St. Rep. 370, 71 N. E. 63.
Minnesota, Powers Dry Goods Co. v. Harlin, 68 Minn. 193, 64 Am. St. Rep. 460,71 N. W. 16.
Missouri. St. Charles Savings Bank v. Denker, - Mo. - 205 S. W. 208.
North Dakota. North Star Lumber Co. v. Rosenquist, 29 N. D. 566, 151 N. W. 289.
Ohio. Dinsmore v. Tidball, 34 O. S. 411; Smith v. Josselyn, 40 O. S. 409.
Pennsylvania. Wayne v. Bank, 52 Pa. St. 343; Lauer Brewing Co., v. Riley, 195 Pa. St. 449, 46 Atl. 71.
Utah. Jungk v. Holbrook, 15 Utah 198, 62 Am. St. Rep. 921, 49 Ac. 305.
Vermont. Connecticut, etc., Ins. Co. v. Chase, 72 Vt. 176, 53 L. R. A. 510, 47 Atl. 825.
West Virginia. Warren v. Branch, 15 W. Va. 21.
4Griswold v. Hazard, 141 U. S. 260, 35 L. ed. 678; Fassnacht v. Gagen Co., 18 Ind. App. 80, 63 Am. St. Rep. 322,
46 N. E. 45, 47 N. E. 480.
Where A was surety on B's note in which B waived homestead rights, but such clause was void because of concealed usury, which payee knew, B can avoid his liability. Denton v. Butler, 99 Ga. 264, 25 S. E. 624.
5Jungk v. Holbrook, 15 Utah 198, 62 Am. St. Rep. 921, 49 Ac. 305.
6 Massachusetts. Hudson v. Miles, 185 Mass. 582, 71 N. E. 63.
Missouri. St. Charles Savings Bank v. Denker, - Mo. - , 205 S. W. 208.
Ohio. Dinsmore v. Tidball, 34 O. S. 411.
Pennsylvania. Lauer Brewing Co. v. Riley, 195 Pa. St. 449, 46 Atl. 71.
Vermont. Connecticut, etc., Ins. Co. v. Chase, 72 Vt. 176, 53 L. R. A. 510,
47 Atl. 825.
7 Smith v. Josselyn, 40 O. S. 409.
subsequent dishonesty of the principal or the surety will be released.8 This rule even in jurisdictions which apply it most strictly does not include omissions of a public officer taking a bond to notify the surety of past negligence on the part of the principal, at least if not criminal.9 So the fact that the officer taking a criminal bond does not disclose the fact that other charges of larceny have been brought against the accused, does not relieve the surety.10
Other courts require a less degree of good faith on the part of the creditor towards the surety, and in the absence of special facts, treat mere non-disclosure as inoperative.11 The duty to make full disclosure, it is said in such jurisdictions, is "peculiar to contracts of insurance and does not extend to contracts of guaranty."12 "A creditor is not bound in the absence of inquiries from the sureties to communicate to them all the circumstances that may affect their undertaking.'13 Thus omission to inform the surety of irregularities of the principal in making collections,14 or to inform him of a judgment in favor of the obligee against the principal,15 or to notify him that the principal was insolvent,16 or of a change in the financial condition of the principal after the original note was executed and before the renewal note was executed,17 or to notify him of a prior defalcation on the part of the principal which is known to the obligee,18 or to notify him that the principal had been guilty of forgery,19 have been held not to release the surety. So mere silence as to the commencement of proceedings to remove a trustee, by which he is enabled to furnish additional bond does not release such surety.20 A public corporation is not bound to disclose the prior dishonesty of its treasurer to sureties upon his bond to secure the faithful performance of his duties.21
8 Saint v. Mfg. Co., 95 Ala. 362, 36 Am. St. Rep. 210, 10 So. 539; Newark v. Stout, 52 N. J. L. 35, 18 Atl. 943.
9 Fidelity & Deposit Co. v. Commonwealth, 104 Ky. 579, 47 S. W. 579 (modified on another point, 49 S. W. 467); Harrisburg v. Guiles, 192 Pa. St. 191, 44 Atl. 48. (Bond of tax collector.)
10San Francisco v. Staude, 92 Cal. 560, 28 Pac. 778.
11Connecticut. Watertown Savings Bank v. Mattoon, 78 Conn. 388, 62 Atl. 622.
Illinois. Roper v. Sangamon Lodge, 91 111. 518, 33 Am. Rep. 60.
Iowa. Independent School District v. Hubbard, 110 la. 58, 80 Am. St. Rep. 271, 81 N. W. 241; Sherman v. Harbin, 125 la. 174, 100 N. W. 629.
Indiana. Ham v. Greve, 34 Ind. 18.
Maryland. Lake v. Thomas, 84 Md. 608, 36 Atl. 437.
Mississippi. Southwestern Co. v. Wynnegar, 111 Miss. 412, 71 So. 737.
New York. Howe Machine Co. v. Farrington, 82 N. Y. 121.
Washington. Oregon National Bank v. Gardner, 13 Wash. 154, 42 Pac. 545; Osborne v. Chicago; Bonding & Surety Co., 96 Wash. 133, 164 Pac. 742.
Wisconsin. Aetna Life Ins. Co. v. Mabbett, 18 Wis. 667.
12Aetna Life Ins. Co. v. Mabbett, 18 Wis. 667.
13Lake v. Thomas, 84 Md. 608, 36 Atl. 437.
14Lake v. Thomas, 84 Md. 608, 36 Atl. 437.
15 Oregon National Bank v. Gardner, 13 Wash. 154, 42 Pac. 545.
16Sebald v. Citizens' Deposit Bank (Ky.), 14 L. R. A. (N.S.) 376, 105 S. W. 130; Farmers' & Drovers' National Bank v. Braden, 145 Pa. St. 473, 22 Atl. 1045.
17First National Bank v. Johnson, 133 Mich. 700, 103 Am. St. Rep. 468, 95 N. W. 975.
Under either theory actual fraud on the part of the creditor avoids the contract of suretyship, as where the obligee represented falsely to that surety that the principal wished him to sign.22 Omission of the creditor to correct a false statement made by the principal debtor in the presence of the prospective surety as to the total amount of such principal's liabilities, which such creditor knows to be false, avoids such contract as to the surety.23 The contract of the surety may be avoided if the creditor knows that the principal has induced the sureties to sign by fraud. Thus a payee who knows that the maker means to use fraud to obtain in-dorsers is responsible therefor unless he informs indorsees of the facts.24
An attempt has been made to reconcile the conflict of authority by holding that non-disclosure of facts which affect the liability of the surety avoid his contract if such facts constitute a crime,25 or affect the integrity of the principal debtor,26 while if not of such character, the surety is liable.27 This distinction does in fact reconcile many cases, in most of which, however, it is not stated by the court as a ground for its decision. It has, however, been expressly repudiated,28 The surety has in some jurisdictions been held even where the fact that the principal debtor was a defaulter has not been disclosed;29 in others he is released, though the nondisclosure concerned only the negligence of the principal.30
18Watertown Savings Bank v. Mat-toon, 78 Conn. 388, 62 Atl. 622; Lake v. Thomas, 84 Md. 608, 36 Atl. 437; Southwestern Co. v. Wynnegar, 111 Miss. 412, 71 So. 737.
19Wright v. German Brewing Co., 103 Md. 377, 63 Atl. 807. (Obiter, as the evidence failed to establish such fact.)
20Lamar v. Walton, 99 Ga. 356, 27 S. E. 716.
21Independent School District v. Hubbard, 110 la. 58, 80 Am. St. Rep. 271, 81 N. W. 241.
22Meek v. Frantz, 171 Pa. St. 632, 33 Atl. 413.
23Selma Savings Bank v. Harlan, 167 la. 673, 149 N. W. 882.
24Beath v. Chapoton, 115 Mich. 506, 69 Am. St. Rep. 589, 73 N. W. 806.
25Georgia. Charlotte, etc., R. R. v. Gow, 59 Ga. 685, 27 Am. Rep. 403.
Kentucky. Graves v. Bank, 73 Ky. (10 Bush.) 23, 19 Am. Rep. 50.
Maine. Franklin Bank v. Cooper, 36 Me. 179.
New Jersey. Sooy v. State, 39 N. J. L. 135.
Tennessee. Hebert v. Lee, 118 Tenn. 133, 121 Am. St. Rep. 989, 101 S. W. 175.
Vermont. Connecticut, etc., Ins. Co. v. Chase, 72 Vt. 176, 53 L. R. A. 510, 47 Atl. 825.
26Atlantic, etc., .Telegraph Co. v. Barnes, 64 N. Y. 385, 21 Am. Rep. 621. (Non-disclosure of facts subsequent to the contract.) Hebert v. Lee, 118 Tenn. 133, 121 Am. St. Rep. 989, 101 S. W. 175.
Non-disclosure operates only if it concerns a material matter.32 Omission to disclose to a surety company that the contractor, on whose bond it was becoming surety, was to be paid in part by other property, does not discharge the surety.33