Mr. B.
Give A credit at your store to the amount of $25.00. I will pay you if he does not.
Signed—C.
The letter of guaranty does not require B to notify C of its acceptance. In the Federal Courts, the rule requires notice of acceptance of guaranties. It is sound business practice always to notify a creditor of acceptance of a guaranty. If a letter of guaranty contains a stipulation that the guarantor is to receive notice of default of his principal, such notice must be given, or the guarantor will be discharged to the amount of his damage resulting from failure to receive this notice. In case of guaranties involving the payment of a definite amount at a definite time, for example, in case of guaranty of payment of a promissory note, no notice is necessary on the part of the creditor to the guarantor of the failure of the principal to pay. In other cases it may be stated as a general rule that notice should be given the guarantor of default of his principal. It is safe business policy for a creditor to give notice to a guarantor of default of payment on the part of his principal.
191. Defense of Payment. Suretyship obligations are obligations to answer for the debts or default of another. They may be in the form of a contract of a surety, of a guarantor, or of an indorser. Certain things constitute suretyship defenses. They apply equally to a surety, a guarantor and an indorser. If a principal debtor pays or settles the debt which another promises to pay, the promisor is thereby discharged. Payment by a principal is a complete suretyship defense. For example, A owes B $100.00. C in writing promises to pay A's debt when it is due. A pays B. C is thereby discharged.
193. Defense of Granting Extension of Time to Principal. If a creditor enters into a contract by which the principal is given an extension of time, the promisor is released. This does not mean mere delay in enforcing the collection of the principal debt, nor does it mean leniency of a creditor with his debtor. If, however, a creditor makes a contract based upon a valuable consideration, by which the principal debtor is granted an extension of time within which to pay his debt, the promisor is discharged. For example, if A owes B $1,000.00 on March 1st, and C in writing promises B to pay if A does not, if B does not collect from A on March 1st, but lets the debt run until March 15th or indefinitely, C is not thereby discharged. If, however, B in consideration of A's promise to pay him interest at a certain rate after March 1st, extends the time until April 1st, C is discharged. To discharge the promisor, the agreement with the principal to extend the time of payment must be based upon a valuable consideration, and must be for a definite time.
194. Defense of Fraud and Duress. Fraud practiced by the creditor upon the principal or upon the promisor is a defense to the promisor. For example, if A is indebted to B and C guarantees A's debt, and if B procured the contract with A by fraud, or procured the guaranty from C, by fraud, C can avoid the contract of guaranty by reason of the fraud. If the fraud is practiced by the principal upon the promisor, it is no defense to the promisor as against the creditor. For example, if C guarantees A's debt to B and the guaranty is procured through the fraud of A without B's knowledge or consent, the fraud will not avail C as a defense to an action brought by B upon the guaranty. The same is true of duress. For a fuller explanation of fraud and duress see sections on Fraud and Duress under Contracts.
195. Surety Cannot Compel Creditor to Sue Principal. Unless so provided for by statute, a promisor to a suretyship contract cannot compel a creditor to sue a principal when the debt secured is due, or claim his discharge for failure on the part of the creditor to comply with this request. A few states provide by statute that a promisor may by notice compel a creditor to sue a principal upon a suretyship obligation when due, or be discharged for his failure so to do.
196. Surety Companies. At the present time, corporations are organized for the purpose of entering into suretyship obligations for profit. Bonds of public officials as well as of private individuals, judicial bonds given in appeal of cases at law from one court to a higher court are commonly signed by surety companies. These companies, for an agreed annual consideration called a premium, sign as surety these bonds for responsible individuals. Sureties were once said to be favorites of the law. This was for the reason that individual sureties signed private, official or judicial bonds as a favor to the principal, ordinarily without receiving any compensation therefore. When a liability arose the surety escaped if possible, since it was not his obligation, but another's which he was called upon to pay. The courts favored him and technical defenses were recognized which were not recognized as a defense by persons primarily liable. In the case of surety companies, however, there is no reason for this favoritism, since the surety engages in the contract for a consideration, and not as a favor to anyone. The tendency of the courts is to hold surety companies strictly to the terms of their contracts.
197. Subrogation. By subrogation is meant the substitution of the promisor for the creditor in case the promisor to a suretyship obligation pays his principal's debt. For example, if A signs a guaranty by the terms of which he agrees to pay B's debt to C, when the debt is due if B fails to pay it, and A pays it, A is placed in C's position and may collect the debt from B. Any securities of B that C held for the debt now belong to A. If C has a judgment against B for the debt, A is subrogated to the judgment and may himself enforce it.