Sureties and Guarantees

Brien Roche

Sureties and Guarantees:  Primary and Secondary

A guarantor contracts to pay if, by the use of due diligence, the debt cannot be paid by the principal debtor.  The surety undertakes directly for the payment.  The surety is responsible at once if the principal debtor defaults.  In other words, a guaranty is an undertaking that the debtor shall pay.  A suretyship contracts that the debt shall be paid.  A guarantor is often discharged by the indulgence of the creditor to the debtor and is usually not responsible unless notified of the default of the debtor. 

On the other hand, a surety is an original promisor and debtor and is held ordinarily to know every default of his principal.  A surety, by his contract, undertakes to pay if the debtor does not. The guarantor undertakes to pay if the debtor cannot.  The surety is an insurer of the debt.  However the guarantor is an insurer of the solvency of the debtor.  Phoenix Insurance Company v. Lester Brothers, Inc., 203 Va. 802 (1962)

Guarantor – Notice

From the nature of a suretyship, the undertaking is immediate that the act shall be done, which, if not done, makes the surety responsible at once.  But from the nature of a guaranty, inability (in other words, insolvency) must be shown.  Piedmont Guano Manufacturing Company v. Morris, 86 Va. 941 (1890)  Where the parties agree that a continuing guaranty will remain in effect until such time as the guarantor withdraws it or revokes it in writing, there is no reasonable time limitation on the duration of that guaranty.  Bank of Southside Virginia v. Candelario, 238 Va. 635 (1989)  The ordinary rule is that, if the undertaking is a continuing guaranty, the failure to give notice within a reasonable time to the guarantor of his principal’s default in the payment of the debt will absolve the guarantor from liability.  Goodrich Rubber Company v. Fisch, 141 Va. 261 (1925)

Changes in the Obligation

The guarantor is not primarily liable. In order to charge him, it is necessary that the creditor should be diligent in endeavoring to collect the note from the principal, unless diligence would have been unavailing.  Cobb v. Vaughn & Company, 141 Va. 100 (1925)  In addition where the guaranty is of a continuing nature and does not limit or restrict the period of credit, any reasonable change as to the length of the credit will not relieve the guarantor from his liability thereunder unless the extended period materially changes the contract of guaranty.  A guarantor will not be relieved of liability for renewals when it is contemplated by the parties that renewals will be made.  Looney v. Belcher, 169 Va. 160 (1937)  The law of suretyship discusses how any change in the obligation underlying the bond will discharge the surety.

A guarantor is not discharged by changes in the contract or obligation guaranteed where the guarantor knew of the changes and acquiesced in them and where the guarantor’s liability is not increased by the changes.  Norfolk Mattress Company v. Royal Manufacturing Company, 160 Va. 623 (1933); Holston Corporation v. Wise County, 131 Va. 142 (1921)

The law requires the guarantee to act in good faith.  Unless he has knowledge of or participation therein, he is not responsible for any misrepresentation or deception practiced by the principal, or other third person, upon the guarantor in order to induce him to enter into the contract of guaranty.  Sager v. Rawleigh Company, 153  Va. 514 (1929)

Fraud

A surety will not be discharged from his obligation to the creditor even when his suretyship is procured by the principal debtor by fraud.  A guarantee so induced would be discharged.  

Sureties and Guarantees-Law of Surety

The gratuitous surety stands upon the letter of his contract. His liability is always limited by the terms of his contract.  But his liability cannot be extended by construction or implication beyond what the reasonably necessary import of his language requires and fairly comprehends.  Mann v. Mann, 119 Va. 630 (1938)  That rule does not apply however to compensated sureties.  They must show a material variation in the bonded obligation before they are discharged.  Board of Supervisors v. Southern Cross Coal Corporation, 238 Va. 91 (1989)

Therefore whenever the principal debtor and the creditor enter into any agreement without the consent of the surety, which varies essentially the terms of the contract or materially affects the rights and remedies of the surety, the surety is released.  A surety is discharged by any dealing by the creditor with the principal which amounts to a departure from the terms and conditions of the contract.  However, where the instrument on which the surety is bound is altered at the instance of or with the consent of the surety, such alteration does not release the surety.
Call, or contact us for a free consult. Also for more info on Sureties and Guarantees see the Wikipedia pages. Also see the post on this site dealing with contract issues.