26. Liability Of A Guarantor

Sometimes the payment of a note is guaranteed by another. This is not the same thing as an indorsement. The chief characteristics of a guaranty will now be given.

First. The guaranty must be in writing. It is usually written on the back of the note, but it may be written on a separate paper. A statute that exists probably in all the states requires this obligation to be in writing. Sometimes this promise or guaranty, though in form to pay the debt of another, is in truth to pay the guarantor's own debt; and when the promise or guaranty is of the latter character, it need not be in writing. Thus, if the owner of a note transfers it to another for value with a guaranty that he will pay the same if the maker does not, the guarantor in truth merely promises to pay his own debt, as he has received value therefor at the time of parting with it and ought in justice to repay and save the purchaser from loss.

Second. Another peculiarity of a guaranty is, the holder can not proceed to collect the amount of the guarantor, should the maker decline to pay, until he has exhausted his legal remedy to collect of the principal debtor. In other words, the holder must sue the principal debtor, obtain judgment against him, and seek to take his property, if he has any, in payment, before he can ask as a legal right the guarantor to pay him. When he has taken these steps to collect of the maker and failed, then the owner can demand and, should the guarantor decline to pay, proceed against him by suit, if need be, to recover his money.

1 Justice Black, Lord v. Ocean Bank, 20 Pa. 386.

The owner, however, is excused from resorting to this long and costly procedure against the guarantor whenever he has no property, and nothing could be recovered. Tin-law does not require a needless expense to be incurred before endowing the owner with the right to proceed against the guarantor.

Third. A guarantor need not be notified like an in-dorser at the maturity of a note of its non-payment if it happens to run for a definite period.

Fourth. A guarantor can not be held for a larger amount or longer time than the original debtor. When his liability ceases, so does that of the guarantor. Nor can his liability be extended in any manner without his consent.

27. Liability Of A Surety

Sometimes a note is signed by a surety, and the distinction between his Liability and that of a guarantor is not easily defined. Nor can the distinction always be ascertained horn the form of writing.

On one occasion the owner of a judgment "guaranteed payment thereon in one year from date." He was regarded as a surety, and as the time of payment was extended without his consent, he was discharged. On another occasion, the indorsement on an order, "I hereby become security for C for the fulfillment of the within obligation," created a contract of suretyship. Again, by the following indorsement the signer was declared liable as a surety, "I hereby acknowledge to be security for the within amount of $5,000 unless satisfactorily paid by W. A." So were the signers of the following indorsements: "I will see the within note paid;" "Guarantee payment when due;" "Agree to its terms." The promise or contract of suretyship must be in writing to comply with the statute of frauds.

One of the chief differences between a guarantor and surety is, the holder or owner of a note that is not paid at maturity can proceed at once, if he wishes, against the surety himself instead of the maker, unless he is notified by the surety to proceed first against the maker. It is true that the holder usually pursues this course, but if the surety remains silent, the holder can do otherwise. We have shown how very different must be the course of the holder of a guaranteed note before he can take legal action against the guarantor to collect the amount.

The holder of a note signed by a surety, like the holder of a guaranteed note, is not required to give notice to his surety of the non-payment of the note at its maturity, nor to display any diligence in recovering from the debtor before proceeding against the surety himself. Consequently a surety is not discharged by the creditor's omission to bring an action against the maker or principal debtor. But if a surety, or one properly authorized for him, gives his creditor a positive and clear direction to sue the principal debtor at a time when the debt can be collected, which is disregarded, the surety will be released.

The note or other obligation must be due before the notice can be given. A notice, therefore, by a surety on a note not yet due that he will not remain responsible if the holder does not sue the principal debtor as soon as the debt becomes due, or that he must get other security, will not discharge the surety.

Formerly, the notice need not be in writing, though this was always regarded as better evidence, but in some states a statute has been enacted requiring a written notice.

When a creditor has been notified, he must not only begin his action against the principal immediately, or without unnecessary delay, but must prosecute it with all reasonable diligence. So long as a creditor is not notified, his silence can never affect his remedy against the surety.

If, for a consideration, more time is given to the principal debtor to pay, without the surety's consent, who is thereby prevented from proceeding against the debtor, he is discharged. A surety often escapes through the creditor's forgetfulness or disregard to obtain his acquiescence to an extension of the time of payment given to the debtor. Doubtless in most cases a surety would readily consent, but he is not asked, the extended time expires, the debtor does not pay, and the surety is released.