In the North British Ins. Co. v. Lloyd, 10 Exch. 523; 28 Eng. Law & Eq. 456 (1854), the ground is clearly taken that actual fraud must be made out, and that the mere concealment of a material fact is not sufficient, although such fact, had it been known, would have prevented the guarantor from entering into his obligation. The plaintiffs in this case had lent £10,000 to Sir Thomas Brancker, on the 26th of August, 1846, payable in a year, on the deposit of certain shares, with a stipulation that if the market value of the shares should fall £20 per cent below £10,000, he unknown to the third person taking the guaranty, there would be reason to say that he having acted upon the guarshould furnish new shares, or pay their value, so as to leave a surplus of £20 per cent. The shares having fallen in value below that amount, the defendant and three others, in consideration of the plaintiff's not requiring the deposit of the shares to secure them the interest, guaranteed the payment to the amount of the deficiency, each being liable to a certain share. The defendant was liable to the amount of £500. The action was founded on this guarantee to recover this sum. There was a plea of fraud, and on the trial, before Mr. Justice Crowder, the evidence in support of the plea was that when the loan was due a new agreement was made to forbear the call of £10,000 for six months more, on having the additional security of Sir Thomas Brancker's brother, James Brancker, for £2,000, which was given to the plaintiffs. In January, 1848, James Brancker wrote to the plaintiffs' manager, to inform him of the plaintiffs having arranged to replace his security by the guaranty on which the action was brought, and mentioned the terms of it, and the proposed names of the trustees, and the manager received the proposed security as a substitute. The defendant knew nothing of this arrangement; but James Brancker and Sir Thomas Brancker called on them to inform them of the loan and its terms, and told them, unless they could procure security, that the plaintiffs would sell his shares, and then the defendant and others gave the guaranty, the subject of the action, and drawn by the plaintiffs' attorney. It was submitted by the counsel for the defendant that the plea of fraud was proved, that in case of a surety all the material circumstances known to the creditor must be disclosed, and that the non-disclosure of the fact that Sir Thomas Brancker's brother had withdrawn his guaranty and substituted the deposit was an undue concealment of a material fact, and, therefore, constructively a fraud. Pollock, C. B., said: "My brother Crowder was of opinion that the non-disclosure of material circumstances was not to be considered as a constructive fraud; but he proposed to reserve the point, and in the first instance left the question to the jury, whether the circumstance that the debtor's brother had been a surety for him to the plaintiffs, and withdrawn his suretyship, was a material matter, which ought to have been disclosed by them. The defendant swore that he would not have given his guaranty had he known of the circumstance. The jury found that the substitution was not a circumstance material to be disclosed, and, therefore, the question proposed to be reserved did not arise; but notwithstanding that finding it is still contended it was material, and that in the case of a surety the non-disclosure of such a circumstance was a constructive fraud. We are all of opinion that it is not. It occurs to us as not a correct proposition that the same rule prevails in case of guarantees as in assurances on either ships or lives, in which it is a settled rule, no doubt, that all the material circumstances known to the assured are to be disclosed, though there should be no fraud in the concealment.
It is a peculiar doctrine, applicable to contracts of insurance in which, in general, the assured knows and the underwriter does not know the circumstances of the voyage and of other matters. The cases decided by Lord Eldon and afterwards by Lord Cottenham, which were cited as containing the doctrine that there is an obligation on the part of the person guaranteed to disclose all material matters, proceed both on the ground of actual fraud, and not constructive fraud. In Smith v. The Bank of Scotland, decided by Lord Eldon, the case proceeded on the ground of a representation to the surety of the trustworthiness of the principal, known or believed by the banker to be untrue. And in Railton v. Mathews the point decided by the concurrent opinion of Lord Campbell and Lord Cottenham was, in effect, that it was not necessary, in order to render the concealment by a person fraudulent, that it should be made with a view to the advantage of that person, the Lord Justice Clerk having left that question to the jury in a more complex form. And again in Pidcock v. Bishop, which was cited, although there was some expression used by Mr. Justice Bayley, as to the necessity of communicating to the surety all the material facts likely to affect the surety, these expressions must be understood with respect to the facts of the particular case to be decided, and certainly that case was decided on the ground of actual fraud. The fact was that it was a suretyship on the sale of goods, namely, iron; and it was agreed that the iron should be charged 10s. above the market price, in order that the 10s. might be applied to the payment of an old debt; and it is impossible not to see that it is quite on a par with getting a security from an insolvent on a bygone debt, or getting a bankrupt, after he has obtained his certificate, to deal with you and pay an old debt. All the cases have been decided over and over again to be on the same footing as actual fraud, and not constructive fraud. But that the mere relationship of creditor and surety requires, in all cases, a full disclosure of all material circumstances, was distinctly denied by the House of Lords in the case of Hamilton v. Watson; and particularly Lord Campbell, in delivering his judgment, stated that if the principle contended for, that every thing that was material for the sureties to know should be disclosed by the creditors, was law, it would put an end to giving security on a cash account. If such were the rule, it would become necessary for the bankers to retain the security, and get a statement of how the account was kept, whether the debtor was in the habit of overdrawing his account, whether he was mercantile in his dealings, and whether he ever dishonored his bills, and whether he performed his promises in an honorable manner. All these things are extremely material to know, if you are to form a judgment on the whole case. But unless questions be particularly put by the surety to gain that information, Lord Campbell held it was not necessary for the creditors, to whom the surety was given, to make since one or the other party must suffer, the loss should fall upon the guarantor, since by his guaranty he had induced the third person to trust the principal. But if both principal and third person should conceal a material fact, although there were no fraudulent intention, there would evidently be a breach of implied trust, and as both would have been in fault, they should bear the loss. It would seem, also, that facts concealed should be so material that, had they been known to the guarantor, he would not have assumed the guaranty, and should also have been specially within the knowledge of the parties concealing them; for if they be not vital to the undertaking, or if they be matters of individual supposition, general opinion, or public reputation in relation to which the guarantor had ample means to inform any such disclosure. It is very true that Lord Truro, in the case of Owen v. Homan, lays down the doctrine differently, for he says: 'The cases which are reported have occasionally arisen out of transactions in which there have been personal communications;' and he says, ' the clear principle derived from those decisions is, that the creditor must make a full, fair, and honest communication of every circumstance calculated to influence the decision of the surety in entering into an obligation.' He says: 'He thinks the same principle is applicable to the case of sureties, and that when a communication does take place between the creditor and the surety, the duty of the creditor cannot be better illustrated than by the case of an assured.' We, however, think that it was laid down without sufficiently adverting to the fact of the decision in the previous case cited by the court, of Hamilton v. Watson; in which case, certainly, a different doctrine was laid down and decided by all the law lords who were then present, - Lords Cottenham, Brougham, and Campbell. We think this doctrine is applicable to the guarantee in question. The nondisclosure of the circumstance of the change of security, even if it had been material, would not have vitiated the guaranty, unless it had been fraudulently kept back; and there was no ground to impute fraud, in fact, to the plaintiffs or their agent. They might well have supposed that the desire of J. Brancker to get rid of his own guaranty did not indicate any bad opinion of his brother's circumstances or character, but arose from a wish on other grounds to contract his liability. I may add that the jury having actually found that the circumstance was, in itself, a matter wholly immaterial, whatever was stated by the witness to be his own view of the subject, it is hardly open to us now to consider; it was a matter of fact. For these reasons, the rule, in our judgment, must be refused." See, also, Leith Banking Co. v. Bell, 8 Shaw & Dunl. 721; 8. c. 5 Wils. & Sh. 703; Evans v. Keeland, 9 Ala. 42. And see Moens v. Heyworth, 10 M. & W. 147; and Taylor v. Ashton, 11 Id. 401.