Guaranty ,.This word is derived from the old English word warrant. The Latin and the Norman French languages, not having the letter w, in spelling this word and many others used the letter g instead of w, as in the name Wilhelm or William, which is in Latin Guiliel-mus, and in French Guillaume. Thus the barbarous word guarantiso came into use in law proceedings, although the even more barbarous word warrantiso was also used. Gradually the words became distinguished in their meaning; and at present it is found very convenient to use the Latin form guaranty in one sense, and warranty in a different although an analogous meaning. A guaranty is a promise that some other party (who is called the principal) shall pay a debt, or discharge some duty, or perform some act; and to answer for the consequences if the principal fails to do what is thus promised. It is an extremely common business transaction; and we shall endeavor to give the principal rules by which it is governed. - Every indorser of negotiable paper is in fact a guarantor; but in such a peculiar way, that the law attaches to him duties on the one hand, and on the other gives him rights, not known to common guarantors. (See Negotiable Paper, and Promissory Note.) Every surety also is a guarantor, and the law for guarantors and for sureties is in many respects similar, but in other respects different. (See Surety.) In the first place, a guaranty is not in general negotiable; by which is meant that it cannot be transferred in such a way as to give the transferee the right of suing upon it in his name, or, if this be permitted, of suing with all the rights and advantages of an original holder.
In the next place, although it is a promise only to pay the debt of another, the guarantor may be held, although the promise of that other was voidable by him who made it, and could not be enforced at law; as if it were the promise of an infant, and not for necessaries, or of a married woman. In fact, guaranties are very often taken for the very reason that the debt or promise guarantied is one which has no value by itself. But generally, the liability of the guarantor is measured and determined by that of the principal, or the party whose debt or promise is guarantied. No especial words or phrases or form of instrument is necessary to constitute a guaranty. The intention must be manifest, and the words must be such as may be construed into an expression of that intention; and this will be sufficient. The contract of guaranty is one which is construed, if not severely, at least exactly. Thus if A guaranties the notes of B, he is not bound for notes which B signs jointly with C; and if B changes his business or the nature of his debts, so as to throw upon A a liability distinctly different from that which it was his intention to assume, A is thereby discharged from his guaranty. - The guarantee (or party guarantied) must preserve all the securities he has of the principal debtor unimpaired, because if the guarantor pays the debt, he is entitled to all these securities; and a court having equity powers will, upon cause shown, compel the guarantee to do what he can to turn these securities to account for the beneft of the guarantor, if the guarantee alone can do it, or can do it to the most advantage, before it will permit him to call upon the guarantor.
Indeed, it may be regarded as a fundamental proposition of the law of guaranty, that the guarantee shall act with entire fairness toward the guarantor, and shall do all that can properly be done to lessen his burden. Therefore if the creditor, being guarantied, agree with the principal to reduce his debt in any certain proportion, he shall be understood to make the agreement for the guarantor's benefit as much as for his own, and therefore the guaranty shall be reduced in the same proportion. Still, however, it seems to be generally held that the guarantor's right is confined to the securities for the debt, and does not extend to the debt itself; if therefore a guarantor pays a debt, it is said that he has no right to demand from the creditor a transfer of the debt itself, or of the note by which the debt was evidenced, for the reason that this very debt has been already paid or discharged by himself as guarantor. But he may demand, with the securities, the note itself, or a transfer of the debt, if this be necessary to make the securities available; and it would be difficult to resist his right, wo should say, to be subrogated to the creditor's claim so far as he could make that available to himself.
But the law on this point can hardly be considered as distinctly settled. - The promise to pay the debt of another, like every other promise known to the law, must rest upon a good consideration, or it cannot be enforced by legal process. The law on this subject is a little nice in respect to guaranties; for while it demands inexorably that there should be a consideration, it sometimes declares that if the promise which is guarantied rests upon a good consideration, this same consideration shall be sufficient to sustain the promise of guaranty; but if the guaranty is given subsequently, after the consideration for the original promise is executed and passed, so that it can have no force or application whatever to the new and distinct promise of guaranty, the latter will require a new and distinct consideration for its support. But to make this consideration sufficient, it is not necessary that anything shall pass directly from him who receives the guaranty to him who gives it; for if the party for whom it is given, or the party by whom it is given, receive any benefit, or the party to whom it is given suffer any loss or injury, from or by reason of the promise of guaranty, it is a good consideration.
The guarantee must conduct himself in all respects with entire good faith, and if there be any taint or fraud about the consideration (as, for example, if a guaranty is given for a certain amount of goods sold, and the seller has made an arrangement with the buyer whose debt is guarantied, by which arrangement the buyer is to pay him more than the true price, the difference going toward an old debt due from the buyer to the seller), this is a fraud upon the guarantor, and he is discharged not only as to this unfair excess, but as to his whole promise of guaranty. - A guaranty, being a promise to pay the debt of another, is precisely within the clause of the statute of frauds which requires that such a promise be in writing and signed by the guarantor. It often happens, however, that a guaranty, or a contract which has all the appearance of a guaranty, and which is not in writing, is still enforced by the courts. This occurs when they can hold the promise to be an original promise, and not a collateral promise. For an original promise is a promise to pay one's own debt; while a collateral promise is a promise to pay a debt which is primarily the debt of another. This is a very nice and difficult question, and has been very variously decided.
The disposition of the courts so to construe and apply the statute of frauds as that it shall not be an instrument of fraud, has led them to some strange decisions. Comparing the cases, and drawing from them the true principle which must govern the question, we should say the rule must be this : If one who promises to pay the debt of another receives an independent consideration for his promise, and thereby enjoys a benefit or advantage which is entirely his own, and which he would not have enjoyed but for the transaction, then the promise is to be regarded as his promise to pay his own debt, and therefore needs not to be in writing. As an illustration of this question, which is frequently recurring and always difficult, we should say that if the creditor had attached the property of the original debtor, and the alleged guarantor had requested that the attachment might be discharged and agreed to pay the debt if it were, and the attachment was then discharged and the property set free, this would not be enough to make it the guarantor's promise for his own benefit, or his original promise, and therefore it could not be enforced, unless it was in writing.
But if the alleged guarantor had requested not only that the attachment should be discharged, but that the property should be delivered over to him for his own advantage, this new element would make his promise one for his own benefit, or, in the language of the law, an original and not a collateral promise, and therefore it needs not to be in writing. So, if A delivers goods to B, at the request of C, who is to pay for them, and who may be considered as the buyer of them, C, when he promises to pay for them, promises to pay his own debt, and therefore the promise may be in spoken words only. But if A sells goods to B, on C's promise to pay for them if B does not, then A's promise is only collateral to B's, and it must be in writing. The question therefore is, were the goods sold to 0 for the benefit of B, or were they sold to B on C's guaranty? On this question the seller's entry in his books is sometimes very important evidence. If he charges C with them primarily, this may not go far to bind 0, because he may have charged them so for the very purpose of holding C. But if he charges them simply to B, it will be very difficult for him to prove afterward that he considered himself as selling them to C, and not to B on C's guaranty.
But still he might show that even this entry was made by mistake, and did not represent the truth. - The contract of guaranty, like every legal contract, requires two parties, who agree to the same thing. It follows therefore that a guaranty, or a promise to pay the debt of another, is not valid until it is accepted; and this is true, whatever he the consideration, and whether it be in writing or otherwise. But this acceptance need not be direct and unequivocal; indeed, it need not be in any words whatever; it may be implied from circumstances. Thus, if A goes with B to C, and says to C, "If you will sell B the goods he wishes, I will see that he pays you the price," and C, without reply to A, turns to B and sells and delivers him the goods, there would be no question in this case as to whether C accepted and acted upon the guaranty of A. It is under a different class of circumstances that this question generally arises. Thus, if the guaranty were by letter, and referred to subsequent operations, the question would then arise whether there was a sufficient acceptance of it.
Some courts have asserted that the guarantor had a perfect right to know whether his offer was accepted, and whether he stood bound as guarantor; and some have gone so far as to hold that the guarantor was entitled to know at once, not only that his guaranty was acted upon, and the amount, but all the terms of the sale which it could be desirable for him to know, that he might arrange accordingly. On the other hand, courts of the highest authority have held, that where an offer of guaranty is absolute, and does not expressly or by distinct intimation call for any acceptance or any special information, the party making the offer might suppose it to be accepted and act on that supposition; and the party receiving the offer may act under it and within the terms of it, and hold the guarantor without giving him any notice of his acceptance. It has already been said that the party receiving the guaranty must conduct himself I with good faith and proper care toward the guarantor; and one effect of this principle is that if any material change is made in the extent or the terms or character of the liability of the principal, this discharges the guarantor.
Nor will a guarantor be held in such case by the party guarantied showing that the change was in no way injurious to the guarantor; because he has a right to judge for himself as to the circumstances under which he is content to be liable, and he may stand upon the precise terms of his contract. The guarantor may, however, assent to such a change, and then he will be held. Thus, if a new note be given for an old one, this discharges the guarantor on the old note; and it has been held that if a guarantor thus discharged, in ignorance that his liability has thus terminated, makes a new acknowledgment of this liability, he cannot be held thereon. So, a guaranty to a partnership is discharged by a change in the partnership, although no change in the firm or style of it be made; and this has been held where the guaranty was given "for advances made by them, or by either of them." The reason given is, that the guarantor may have trusted to the skill or care of the members of the firm as they stood when he gave his guaranty; and the change of a single member may be important in this respect.
It should be stated, however, that the guaranty itself may provide expressly for all these changes, and will not, of course, be affected by any which it anticipates. - Whether a guaranty be a continuing guaranty, or be intended to cover one single transaction only, is sometimes a difficult question, in general, however, a guarantor who intends to limit his liability to a single transaction should so express it; but if it can be gathered from the terms of the guaranty that it was intended and should have been understood to apply to more than one transaction, it will be so held. The limit may be one of time, as to be liable for any amount of goods sold before a certain day; or one of amount, as for any goods up to a certain sum. - That a guarantor is entitled to a reasonable protection we have already seen, but it has been much disputed whether, on this ground, he may insist that the party guarantied shall proceed forthwith against the debtor. It would seem to be very unjust to the guarantor to permit a creditor to let his debt lie without taking any steps to secure it, because he knows that the guarantor is perfectly responsible, and he chooses to indulge some feeling of personal kindness to the debtor.
This question has frequently come before the courts, especially in New York; and it must be admitted that the law is not quite certain. We think, however, that this rule may be drawn from the best authority, and sustained by strong reasons, viz. : that the guarantor is not discharged by mere delay of the creditor in calling on the debtor; but if after a request from the guarantor that he should proceed (especially if the request be accompanied by an offer to pay the costs of proceeding), the creditor delay the demand and all proceedings so long and so stubbornly as to indicate great negligence if not fraud, and the guarantor can show that by such delay he has lost the means of indemnifying himself, the guarantor is now discharged, at least to the extent of the injury which he can show that he thus received. Nor is a creditor prohibited from giving to his debtor all indulgence whatever. He certainly may favor him in some respects without discharging the guarantor. After some fluctuation the law seems to have settled down upon the following rule : Mere forbearance of the debt, without fraud, does not discharge the guarantor; nor does an agreement to forbear, provided this is not so binding on the creditor as to prevent his suing the debtor at any time.
That is, the creditor must retain the power of putting the debt in suit at any time; but if he retain this power, any forbearance consistent therewith does not discharge the guarantor. The reason is, that the guarantor has the right of paying the debt at any time after it is due, and so acquiring the right of suing it at once; and if the creditor destroys this right by putting the debt in such a condition that it cannot be sued at once, he deprives the guarantor of a valuable right, and so loses his hold upon him. Reasonable notice should also be given to the guarantor of the failure of the debtor, so that he may have all proper opportunity of obtaining indemnity. But what this reasonable notice should be is not quite settled. There is no time fixed, as in the case of indorsed paper, within which the notice of non-payment must be given; and perhaps the rule may be stated that no mere delay of notice would discharge the guarantor, unless he can show that he has suffered injury by such delay. But if he can show that if he had received this notice within a day or two from the time when the debt was unpaid, he might then have secured himself, and has now lost the opportunity, even that delay might suffice to discharge him. - Guaranties are sometimes given by one expressly in an official capacity as trustee, church warden, executor, assignee, and the like.
But the guarantor is still held personally on this guaranty, unless, 1, he holds that office, and 2, has a right by virtue of the office to give the guaranty in his official capacity. - Every guaranty may, in general, be revoked at the pleasure of the guarantor, by giving due notice to the party guarantied, unless, 1, the guaranty is given upon some continuing consideration which is not yet exhausted, and cannot be restored or rescinded; or, 2, upon some specific transaction, which is not yet wholly completed; or, 3, the guaranty is against the misconduct of some servant or officer, whom the guarantee cannot at once dismiss, or secure himself against by other means, if the guaranty be rescinded.