§ 1124. Inasmuch as the liability which the guarantor or surety intends to assume must depend upon a full knowledge of the terms of the original agreement, it becomes the duty of the party taking a guaranty to put him in possession of all the facts likely to materially affect his responsibility; and if there be any misrepresentation or fraudulent concealment in relation thereto, the contract will be thereby nullified. And though a creditor is not, in every case, bound to inquire into the circumstances under which a third person becomes surety to him, he is so when the dealings between the parties are such as to lead to a suspicion of fraud.1 So, also, if any secret agreement be made between the guarantee and the principal, materially affecting the nature and extent of the obligation of the surety, he is not bound by his contract. Thus, where it was agreed between the vendors and the vendee of goods, that the latter should pay ten shillings per ton beyond the market price, which sum was to be applied in liquidation of an old debt due to one of the vendors, and this agreement was not communicated to the surety, it was held that it was a fraud upon him, which rendered his guaranty void.2 The misrepresentation or concealment must, however, be in regard to such a fact as either might have prevented the guarantor from entering into such an agreement, or might increase the extent of his liability.3 Thus, if a principal, knowing that he had been cheated by an agent, should apply for security for the good conduct of the agent, and conceal such fact, and any one in ignorance thereof should become surety for the agent, it would be void.1 And generally, whatever will discharge a surety in equity will, it is said, be a good defence in law.2
1 Owen v. Homan, 4 H. L. Cas. 997 (1853).
2 Pidcock v. Bishop, 5 Dowl. & Ry. 505; 3 B. & C. 605. See Franklin Bank v. Stevens, 39 Me. 532; Franklin Bank v. Cooper, Id. 542.
3 Stone v. Compton, 5 Bing. N. C. 142.
§ 1125. The question whether a mere concealment of material facts affecting the situation of the parties, without fraudulent intent, would avoid the liability of the surety, has been discussed in the late English cases, and considerable difference of opinion has been manifested by different judges. By some it has been held that the guarantor is entitled to know all the facts material to his contract, and that the same principles are applicable to sureties as to insurers. But, on the other hand, this doctrine is expressly denied in some of the late cases, and it is asserted that the concealment of a material fact will only avoid the contract by a surety when it operates as an actual fraud,3 although, if the concealment only to the principal, would have the same operation is rendered doubtful by the late cases. A distinction should, did not inform the sureties of their knowledge or suspicion on that head, but required security upon a ground which could not lead the proposed sureties to suspect that any thing was wrong, and that ground, too, could be proved to have had no existence in fact, all these circumstances would unquestionably be material evidence."
1 Maltby's case, 1 Dow, 294; Franklin Bank v. Cooper, 36 Me. 189, 195; Smith v. The Bank of Scotland, 1 Dow, 272.
2 Springer v. Toothaker, 43 Me. 381 (1857).
3 In Pidcock v. Bishop, 3 B. & C. 605 (1825), Lord Tenterden said: "I am of opinion that a party giving a guarantee ought to be informed of any private bargain made between the vendor and vendee of goods which may have the effect of varying the degree of his responsibility. Here the bargain was that the vendee should pay, beyond the market price of the goods supplied to him, ten shillings per ton, which was to be applied in payment of an old debt due to one of the plaintiffs. The effect of that would be to compel the vendee to appropriate to the payment of the old debt, a portion of those funds which the surety might reasonably suppose would go toward defraying the debt for the payment of which he made himself collaterally responsible. Such a bargain, therefore, increased his responsibility. That being so, I am of opinion that the withholding the knowledge of that bargain from the defendant was a fraud upon him, and vitiated the contract." And Mr. Justice Bayley added: "It is the duty of a party taking a guaranty to put the surety in possession of all the facts likely to affect the degree of his responsibility, and if he neglect to do so, it is at his peril." Holroyd, J., said: "I am also of opinion that the contract of the surety is not binding upon him, by reason of the plaintiff's not having communicated to the surety a secret bargain previously made by him with the vendee of the goods. The effect of that bargain was to divert a portion of the funds of the vendee from being applied to discharge the debt which he was about to contract with the plaintiffs, and to render the vendee less able to pay for the iron supplied to him. The defendant might reasonably suppose that Tickell was to pay only the market price of the iron, but the plainhave any taint of fraud, it undoubtedly will avoid the contract.1 Whether the non-disclosure of a material fact, known tiff knew that he was to pay more, and did not communicate that fact to the defendant. The plaintiff and defendant, therefore, were not on equal terms. The former, with the knowledge of a fact which necessarily must have the effect of increasing the responsibility of the surety, without communicating that fact to him, suffers him to give the guarantee. That was a fraud upon the defendant, and vitiates the contract." Mr. Justice Littledale was of the same opinion. In Smith v. The Bank of Scotland, 1 Dow, 272 (1813), the question arose upon a bond of cautionry given by Smith to the Bank of Scotland for one Paterson, the bank agent at Thurso. Paterson having mismanaged the affairs of the bank and become bankrupt, the bank proceeded to enforce the bond, but Smith resisted payment, alleging fraudulent concealment of material facts. The alleged fraudulent concealment consisted in this, that at the time the bank company took the bond of cautionry, they were aware of, or had strong reason to suspect, the misconduct and insolvency of Paterson. Lord Eldon, taking the allegation and the facts, says: " Among these [grounds of proceedings by suspension], frauds was one, though that expression appeared to be considered too harsh, and it was sometimes called a concealment of material circumstances." He afterwards says: "If an agent had been guilty of embezzlement or other improper conduct unknown to his employer, the cautioner would be liable. But if a man found that his agent had betrayed his trust, that he owed him a sum of money, or that it was likely that he was in his debt; if, under such circumstances, he required sureties for his fidelity, holding him out as a trustworthy person, knowing or having ground to believe that he was not so, - then it was agreeable to the doctrines of equity, at least in England, that no one should be permitted to take advantage of such conduct even with a view to security against future transactions of the agent." Lord Redesdale said: "If Paterson was the agent of the bank in taking the bond, it remained to consider the circumstances under which it was given, and certainly those stated by the noble Lord (Eldon) were highly important and material. If a person had some doubts as to the circumstances of his agent and therefore required fresh sureties, stating his doubts at the same time to these sureties, they would then have no right to complain, though called upon to pay the amount of their engagement. But if he suggested no doubt, but, on the contrary, required additional security upon an alleged increase of business solely, concealing his doubts as to the misconduct of the agent, this was a species of proceeding which placed the person adopting it in malā fide in regard to the surety. If, then, it could be proved that the bank knew that Paterson was not trustworthy, or had good reason to believe so, and anty, and having been guilty of no concealment himself, ought not to suffer for the concealment by the principal, - and that himself with proper diligence, the concealment of them would afford no good ground to set aside the contract.1