Before the surety can be rendered liable on his guarantee, the principal debtor must have made default. When, however, this has occurred, the creditor, in the absence of express agreement to the contrary, may sue the surety, without even informing him of such default having taken place, or requiring him to pay, and before proceeding against the principal debtor or resorting to securities for the debt received from the latter. In those countries where the municipal law is based on the Roman civil law, sureties usually possess the right (which may, however, be renounced by them) originally conferred by the Roman law, of compelling the creditor to insist on the goods, &c. (if any) of the principal debtor being first “discussed,” i.e. appraised and sold, and appropriated to the liquidation of the debt guaranteed (see Codes Civil, Fr. and Bel. 2021 et seq.; Spain, 1830, 1831; Port. 830; Germany, 771, 772, 773; Holland, 1868; Italy, 1907; Lower Canada, 1941-1942; Egypt [mixed suits] 612; ibid. [native tribunals] 502), before having recourse to the sureties. This right, according to a great American jurist (Chancellor Kent in Hayes v. Ward, 4 Johns. New York, Ch. Cas. p. 132), “accords with a common sense of justice and the natural equity of mankind.” In England this right has never been fully recognized. Neither does it prevail in America nor, since the passing of the Mercantile Law Amendment Act (Scotland) 1856, s. 8, is it any longer available in Scotland where, prior to the last-named enactment, the benefit of discussion, as it is termed, existed. In England, however, before any demand for payment has been made by the creditor on the surety, the latter can, as soon as the principal debtor has made default, compel the creditor, on giving him an indemnity against costs and expenses, to sue the principal debtor if the latter be solvent and able to pay (per A. L. Smith, L.J., in Rouse v. Bradford Banking Company, 1894, 2 Ch. 75; per Lord Eldon in Wright v. Simpson, 6 Ves., at p. 733), and a similar remedy is also open to the surety in America (see Brandt on Suretyship, par. 205, p. 290) though in neither of these countries nor in Scotland can one of several sureties, when sued for the whole guaranteed debt by the creditor, compel the latter to divide his claim amongst all the solvent sureties, and reduce it to the share and proportion of each surety. However, this beneficium divisionis, as it is called in Roman law, is recognized by many existing codes (Fr. and Bel. 2025-2027; Spain, 1837; Portugal, 835-836; Germany, 426; Holland, 1873-1874; Italy, 1911-1912; Lower Canada, 1946; Egypt [mixed suits], 615, 616).
The usual mode in England of enforcing liability under a guarantee is by action in the High Court or in the county court. It is also permissible for the creditor to obtain redress by means of a set-off or counter-claim, in an action brought against him by the surety. On the other hand, the surety may now, in any court in which the action on the guarantee is pending, avail himself of any set-off which may exist between the principal debtor and the creditor. Moreover, if one of several sureties for the same debt is sued by the creditor or his guarantee, he can, by means of a proceeding termed a third-party notice, claim contribution from his co-surety towards the common liability. Independent proof of the surety’s liability under his guarantee must always be given at the trial; as the creditor cannot rely either on admissions made by the principal debtor, or on a judgment or award obtained against him (Ex parte Young In re Kitchin, 17 Ch. Div. 668). Should the surety become bankrupt either before or after default has been made by the principal debtor, the creditor will have to prove against his estate. This right of proof is now in England regulated by the 37th section of the Bankruptcy Act, 1883, which is most comprehensive in its terms.
A person liable as a surety for another under a guarantee possesses various rights against him, against the person to whom the guarantee is given, and also against those Rights of sureties. who may have become co-sureties in respect of the same debt, default or miscarriage. As regards the surety’s rights against the principal debtor, the latter may, where the guarantee was made with his consent but not otherwise (see Hodgson v. Shaw, 3 Myl. & K. at p. 190), after he has made default, be compelled by the surety to exonerate him from liability by payment of the guaranteed debt (per Sir W. Grant, M.R., in Antrobus v. Davidson, 3 Meriv. 569, 579; per Lindley, L.J., in Johnston v. Salvage Association, 19 Q.B.D. 460, 461; and see Wolmershausen v. Gullick, 1893, 2 Ch. 514). The moment, moreover, the surety has himself paid any portion of the guaranteed debt, he is entitled to rank as a creditor for the amount so paid, and to compel repayment thereof. In the event of the principal debtor’s bankruptcy, the surety can in England, if the creditor has not already proved in respect of the guaranteed debt, prove against the bankrupt’s estate, not only in respect of payments made before the bankruptcy of the principal debtor, but also, it seems, in respect of the contingent liability to pay under the guarantee (see Ex parte Delmar re Herepath, 1889, 38 W.R. 752), while if the creditor has already proved, the surety who has paid the guaranteed debt has a right to all dividends received by the creditor from the bankrupt in respect thereof, and to stand in the creditor’s place as to future dividends. This right is, however, often waived by the guarantee stipulating that, until the creditor has received full payment of all sums over and above the guaranteed debt, due to him from the principal debtor, the surety shall not participate in any dividends distributed from the bankrupt’s estate amongst his creditors. As regards the rights of the surety against the creditor, they are in England exercisable even by one who in the first instance was a principal debtor, but has since become a surety, by arrangement with his creditor, duly notified to the creditor, though not even sanctioned by him. This was decided by the House of Lords in the case of Rouse v. The Bradford Banking Co., 1894, A.C. 586, removing a doubt created by the previous case of Swire v. Redman, 1 Q.B.D. 536, which must now be treated as overruled. The surety’s principal right against the creditor entitles him, after payment of the guaranteed debt, to the benefit of all securities, whether known to him (the surety) or not, which the creditor held against the principal debtor; and where, by default or laches of the creditor, such securities have been lost, or rendered otherwise unavailable, the surety is discharged pro tanto. This right, which is not in abeyance till the surety is called on to pay (Dixon v. Steel, 1901, 2 Ch. 602), extends to all securities, whether satisfied or not, given before or after the contract of suretyship was entered into. On this subject the Mercantile Law Amendment Act, 1856, § 5, provides that “every person who being surety for the debt or duty of another, or being liable with another for any debt or duty, shall pay such debt or perform such duty, shall be entitled to have assigned to him, or to a trustee for him, every judgment, specialty, or other security, which shall be held by the creditor in respect of such debt or duty, whether such judgment, specialty, or other security shall or shall not be deemed at law to have been satisfied by the payment of the debt or performance of the duty, and such person shall be entitled to stand in the place of the creditor, and to use all the remedies, and, if need be, and upon a proper indemnity, to use the name of the creditor, in any action or other proceeding at law or in equity, in order to obtain from the principal debtor, or any co-surety, co-contractor, or co-debtor, as the case may be, indemnification for the advances made and loss sustained by the person who shall have so paid such debt or performed such duty; and such payment or performance so made by such surety shall not be pleadable in bar of any such action or other proceeding by him, provided always that no co-surety, co-contractor, or co-debtor shall be entitled to recover from any other co-surety, co-contractor, or co-debtor, by the means aforesaid, more than the just proportion to which, as between those parties themselves, such last-mentioned person shall be justly liable.” This enactment is so far retrospective that it applies to a contract made before the act, where the breach thereof, and the payment by the surety, have taken place subsequently. The right of the surety to be subrogated, on payment by him of the guaranteed debt, to all the rights of the creditor against the principal debtor is recognized in America (Tobin v. Kirk, 80 New York S.C.R. 229), and many other countries (Codes Civil, Fr. and Bel. 2029; Spain, 1839; Port. 839; Germany, 774; Holland, 1877; Italy, 1916; Lower Canada, 2959; Egypt [mixed suits], 617; ibid. [native tribunals], 505).
As regards the rights of the surety against a co-surety, he is entitled to contribution from him in respect of their common liability. This particular right is not the result of any contract, but is derived from a general equity, on the ground of equality of burden and benefit, and exists whether the sureties be bound jointly, or jointly and severally, and by the same, or different, instruments. There is, however, no right of contribution where each surety is severally bound for a given portion only of the guaranteed debt; nor in the case of a surety for a surety; (see In re Denton’s Estate, 1904, 2 Ch. 178 C.A.); nor where a person becomes a surety jointly with another and at the latter’s request. Contribution may be enforced, either before payment, or as soon as the surety has paid more than his share of the common debt (Wolmershausen v. Gullick, 1803, 2 Ch. 514); and the amount recoverable is now always regulated by the number of solvent sureties, though formerly this rule only prevailed in equity. In the event of the bankruptcy of a surety, proof can be made against his estate by a co-surety for any excess over the latter’s contributive share. The right of contribution is not the only right possessed by co-sureties against each other, but they are also entitled to the benefit of all securities which have been taken by any one of them as an indemnity against the liability incurred for the principal debtor. The Roman law did not recognize the right of contribution amongst sureties. It is, however, sanctioned by many existing codes (Fr. and Bel. 2033; Germany, 426, 474; Italy, 1920; Holland, 1881; Spain, 1844; Port. 845; Lower Canada, 1955; Egypt [mixed suits], 618, ibid. [native tribunals], 506), and also by the Indian Contract Act 1872, ss. 146-147.
The discharge of a surety from liability under his guarantee may be accomplished In various ways, he being regarded, especially in England and America, as a “favoured debtor” (per Turner, L.J., in Wheatley v. Bastow, 7 De G. M. & G. 279, 280; per Earl of Selborne, L.C., in In re Sherry—London and County Banking Co. v. Terry, 25 Ch. D., at p. 703; and see Brandt on Suretyship, secs. 79, 80). Thus, fraud subsequent to the execution of the guarantee (as where, for example, the creditor connives at the principal debtor’s default) will certainly discharge the surety. Again, a material alteration made by the creditor in the instrument of guarantee after its execution may also have this effect. The most prolific ground of discharge, however, is usually traceable to causes originating in the creditor’s laches or conduct, the governing principle being that if the creditor violates any rights which the surety possessed when he entered into the suretyship, even though the damage be nominal only, the guarantee cannot be enforced. On this subject it suffices to state that the surety’s discharge may be accomplished (1) by a variation of the terms of the contract between the creditor and the principal debtor, or of that subsisting between the creditor and the surety (see Rickaby v. Lewis, 22 T.L.R. 130); (2) by the creditor taking a new security from the principal debtor in lieu of the original one; (3) by the creditor discharging the principal debtor from liability; (4) by the creditor binding himself to give time to the principal debtor for payment of the guaranteed debt; or (5) by loss of securities received by the creditor in respect of the guaranteed debt.
In this connexion It may be stated in general terms that whatever extinguishes the principal obligation necessarily determines that of the surety (which is accessory thereto), not only in England but elsewhere also (Codes Civil, Fr. and Bel. 2034, 2038; Spain, 1847; Port. 848; Lower Canada, 1956; 1960; Egypt [mixed suits], 622, ibid. [native tribunals], 509; Indian Contract Act 1872, sec. 134), and that, by most of the codes civil now in force, the surety is discharged by laches or conduct of the creditor inconsistent with the surety’s rights (see Fr. and Bel. 2037; Spain, 1852; Port. 853; Germany, 776; Italy, 1928; Egypt [mixed suits], 623), though it may be mentioned that the rule prevailing in England, Scotland, America and India which releases the surety from liability where the creditor, by binding contract with the principal, extends without the surety’s consent the time for fulfilling the principal obligation, while recognized by two existing codes civil (Spain, 1851; Port. 852), is rejected by the majority of them (Fr. and Bel. 2039; Holland, 1887; Italy, 1930; Lower Canada, 1961; Egypt [mixed suits], 613; ib. [native tribunals], 503); (and see Morice, English and Dutch Law, p. 96; van der Linden, Institutes of Holland, pp. 120-121). A revocation of the contract of suretyship by act of the parties, or in certain cases by the death of the surety, may also operate to discharge the surety. The death of a surety does not per se determine the guarantee, but, save where from its nature the guarantee is irrevocable by the surety himself, it can be revoked by express notice after his death, or, it would appear, by the creditor becoming affected with constructive notice thereof; except where, under the testator’s will, the executor has the option of continuing the guarantee, in which case the executor should, it seems, specifically withdraw the guarantee in order to determine it. Where one of a number of joint and several sureties dies, the future liability of the survivors under the guarantee continues, at all events until it has been determined by express notice. Moreover, when three persons joined in a guarantee to a bank, and their liability thereunder was not expressed to be several, it was held that the death of one surety did not determine the liability of the survivors. In such a case, however, the estate of the deceased surety would be relieved from liability.
The Statutes of Limitation bar the right of action on guarantees under seal after twenty years, and on other guarantees after six years, from the date when the creditor might have sued the surety.
Authorities.—De Colyar, Law of Guarantees and of Principal and Surety (3rd ed., 1897); American edition, by J. A. Morgan (1875); Throop, Validity of Verbal Agreements; Fell, Guarantees (2nd ed.); Theobald, Law of Principal and Surety; Brandt, Law of Suretyships and Guarantee; article by de Colyar in Journal of Comparative Legislation (1905), on “Suretyship from the Standpoint of Comparative Jurisprudence.”
(H. A. de C.)