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CHAPTER LV.

GUARANTIES, AND THE LAW OF GUARANTY AS APPLICABLE TO NEGOTIABLE INSTRUMENTS.

SECTION I.

DEFINITION, NATURE, AND CONSTRUCTION OF GUARANTIES.

§ 1752. A guaranty is defined to be a promise to answer for the payment of some debt, or the performance of some duty, in case of the failure of another person who is, in the first instance, liable to such payment or performance. The word " guaranty" signifies the same as warranty," and both words are derived from the French verb garantir, to undertake, and were formerly used as synonymous terms.2

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§ 1753. Difference between guaranty and ordinary suretyship.— Guaranty is a peculiar kind of suretyship, as is also an indorsement; but guaranty differs from indorsement, and it differs also from the ordinary contract of a surety. The distinction between a guarantor and an ordinary surety is not easily defined, and the terms have been frequently used as convertible. A surety is generally a comaker of the note, while the guarantor never is a maker; and the leading difference between the two is, that the surety's promise is to meet an obligation which becomes his own immediately on the principal's failure to meet it, while the guarantor's promise is always to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely liable as soon as default is made, without any demand upon the principal whatever, or any notice of his default. He may be damaged by reason of no demand being made or notice given, and he may be sued as a promisor.*

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1. Fell on Guaranty, 1; Story on Notes, § 457; Smith's Merc. Law, chapter XI, section I; Davis Sewing Machine Co. v. Gibbons, 4 Kan. App. 237, 45

Pac. 946.

2. Burrill's Law Diet.

3. 2 Parsons on Notes and Bills, 118.

4. Perry v. Barret, 18 Mo. 140. Hence it has been held that in case of the death of the principal no demand upon his legal representatives for payment is necessary in order to hold the sureties. Willis v. Chowning, 90 Tex. 617, 40 S. W. 395, 59 Am. St. Rep. 842.

The guarantor's liability is less stringent, and unless demand is made within a reasonable time, and notice given in case of default, he is discharged to the extent that he may be damaged by delay. Thus, if the debtor has, in the meantime, become insolvent, so that he could not have recourse upon him, he could not be held. Thus, we see the surety's liability is primary and direct, like that of the principal. The guarantor's is secondary and collateral. And, in general, the guarantor contracts to pay, if, by the exercise of due diligence, the debt cannot be made out of the principal debtor, while the surety undertakes directly for the payment at once, if the principal debtor makes default. As has been well said, the surety "is an insurer of the debt; the guarantor is the insurer of the solvency of the debtor." Nor does his guaranty inure to the benefit of an indorser signing before him, and with whom he is not in privity.

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The contract of the indorser of a note and that of the guarantor upon a note, are so distinct and different that one Statute of Limitations may be applied to the note and another to the guaranty.

§ 1754. Difference between guaranty and indorsement. The liability of a guarantor also differs materially from, and is more onerous than, that of an indorser. The indorser contracts to be liable only upon condition of due presentment of the bill or note on the exact day of maturity, and due notice to him of its dishonor. And he is absolutely discharged by failure in either particular, although he may suffer no actual damage whatever. The guarantor's contract is more rigid, and he is bound to pay the amount upon a presentment made, and notice given to him of dishonor, within a reasonable time. And in the event of a failure. to make presentment and give notice within such reasonable time,

5. Ibid. In Bishop v. Eaton, 161 Mass. 496, 37 N. E. 665, 42 Am. St. Rep. 437, it is held that "A surety upon a promissory note, who relies upon the guaranty of a third person for reimbursement, is not required, after payment of the note, to attempt to collect the money from the maker, and it is no defense in an action on the guaranty that he did not promptly notify the guarantor of the default of the maker, at least in the absence of evidence that the guarantor was injured by the delay."

6. Piedmont Guano Co. v. Morris, 86 Va. 944, 11 S. E. 883.

7. Krampt's Exrx. v. Hatx's Exrs., 52 Pa. St. 525; Reigart v. White, 52 Pa. St. 438; Arents v. Commonwealth, 18 Gratt. 770; Getty v. Schantz, 101 Wis. 229, 77 N. W. 191.

8. Phillips v. Plato, 42 Hun, 189.

9. Carpenter v. Thompson, 66 Conn. 457, 34 Atl. 105.

he is not absolutely discharged from all liability, but only to the extent that he may have sustained loss or injury by the delay.10 The same person may be guarantor, and also indorser of a note; and in such case, while failure to give him due notice of demand and nonpayment will discharge him as indorser, he will still be bound as guarantor."

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§ 1755. As to construction of guaranties. For the interpretation of guaranties, the cases lay down very opposite rules. Some of them incline to construe the guaranty most strongly against the guarantor, on the ground that the words of an instrument are to be taken most strongly against the party using them.12 Others construe it strictly, because it is (generally) an engagement to answer for the debt of another.13 Certainly, where there are ambiguous phrases used, they are to be taken most strongly against the guarantor, upon the general principle which throws the burden of ambiguity upon the party creating it. But no special rules, different from those which apply to other contracts, govern it, and it ought to receive a fair and liberal interpretation according to the true import of its terms. It being an engagement for the debt of another, there is certainly no reason for giving it an expanded signification or liberal construction beyond the fair import of its terms. On the other hand, as guaranties are contracts of extensive use in the commercial world, upon the faith of which large credits and advances are made, care should be taken to hold

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10. Arents v. Commonwealth, 18 Gratt. 770; Story on Notes, § 460; Castle v. Rickley, 44 Ohio St. 490; Burrow v. Zapp, 69 Tex. 476. In New York held, that the holder of a note was not obliged to exhaust collaterals securing same before proceeding against the guarantors, nor were they (the guarantors) entitled to be credited with the value of such collaterals, but that when guarantors have paid they are subrogated to the rights and securities of the holder. See Deering & Co. v. Russell, 5 N. Dak. 319, 65 N. W. 691; Smith v. Ojerholm, 18 Tex. Civ. App. 111, 44 S. W. 41, citing text approvingly.

11. Deck v. Works, 57 How. Pr. 292. In Georgia held, that a person who merely writes his name on the back of a promissory note to guarantee its payment, but whose indorsement is neither essential to, nor proper in, the due transmission of title, is a surety only and is not entitled to notice as an indorser. See Sibley v. American Exch. Nat. Bank, 97 Ga. 126, 25 S. E. 470. 12. Mason v. Pritchard, 12 East, 227; Mayer v. Isaac, 6 M. & W. 610; Drummond v. Prestman, 12 Wheat. 518.

13. Whitney v. Groot, 24 Wend. 82; Bigelow v. Benton, 14 Barb. 128; Evans v. Whyle, 5 Bing. 485, 15 Eng. C. L. 514; Nicholson v. Paget, 1 C. & M. 48. 14. Hargreave v. Smee, 6 Bing. 244, 19 Eng. C. L. 69.

the party bound to the full extent of what appears to be his engagement. Letters of guaranty are commercial instruments, generally drawn up by merchants, sometimes inartificial and often loose in their structure and form. They should not, therefore, be construed with nice and technical care; but according to the facts and circumstances accompanying the transaction, holding in view as the main object to ascertain and effectuate the intentions of the parties. 15

§ 1756. If the guaranty propose a credit, that particular credit must be granted, or the guarantor will not be bound.16 An authority to draw bills at ninety days from time to time means at ninety days' sight, and does not authorize a drawing at ninety days from date.17 But in Massachusetts it has been held that one who is authorized to draw drafts on another "at ten or twelve days" with nothing to indicate whether ten or twelve days after date or after sight is meant, may exercise his own discretion, and consult his own convenience in that particular.18 Where, by letter of credit addressed to the plaintiffs, Q. opened an account with them in favor of R. & Co., for a certain amount to be used by sixty days' sight drafts, "for advances to be made on consignments of merchandise" to Q.'s address, and afterward the plaintiffs by letter informed R. & Co. that Q. had opened a credit with the plaintiffs in favor of R. & Co. for that amount to be used by their drafts at sixty days' sight; and the letter confirmed the credit, and promised that R. & Co.'s drafts should be protested, it was held that only sixty-day drafts, drawn "against shipments o consignments to the address of Q.," fell within the letter.19

§ 1757. Liability of party who writes his name on back of note before that of payee.— Great diversity of opinion has arisen as to the liability of one who writes his name on the back of a note which is payable to a particular payee before such payee's name. If such an indorsement be made at a period subsequent to the

15. Douglas v. Reynolds, 7 Pet. 122; Lee v. Dock, 10 Pet. 493; Lawrence v. McCalmont, 2 How. 449; Bell v. Bruen, 1 How. 187; Mauran v. Bullus, 16 Pet. 528; Moore v. Holt, 10 Gratt. 294; Smith v. Dann, 6 Hill, 543; Mussey v. Rayner, 22 Pick. 228.

16. Walrath v. Thompson, 6 Hill, 540; Foerderer v. Moors, 33 C. C. A. 641, 91 Fed. 476.

17. Ulster County Bank v. McFarlan, 3 Den. 553.

18. Barney v. Newcomb, 9 Cush. 47.

19. Gelpcke v. Quentrell, 66 Barb. 617.

original transaction, the indorser is not an original promisor, but a guarantor.20 It will be presumed, however, that such indorsement was made at the time the note was executed;21 and, as will be seen in the first volume of this work, the decisions of the courts are very diverse and conflicting as to the liability of the party making it some regarding him as a comaker, others as a surety, others as an indorser, and others still as a guarantor.22

Our view is this: When the note is not negotiable, such a party is to be deemed a guarantor. He cannot be an indorser, for the simple reason that there is no such thing as indorsement, in its commercial sense, of nonnegotiable paper. And if he intended to be a surety, it is reasonable to presume that he would have signed conjointly with the maker, or, by the word "surety" attached to his signature, indicated an intention to assume that character. He can, therefore, only be a guarantor.

When the note is negotiable, the very opposite presumption. arises. It is intended to pass current from hand to hand, and it is but natural to presume that one who assures a negotiable instrument intends to assure it to all who may become its holders, unless the contrary design appears; and that assuming the responsibility, he is also entitled to the privileges of an indorser. It is true that there is no transfer accompanying such indorsement, either in point of fact or colorably, as in the ordinary case of an accommodation indorsement, and in the title as against the maker, such indorsement forms no link. But the indorser in such a case seems to us to stand in the position of a drawer whose bill is payable to the order of the payee, and which has been accepted by the maker. His indorsing in that peculiar style would indicate that it was done for accommodation of the maker, and we cannot see that this analogy between his position and that of an accommodation drawer fails in any particular.23

20. Benthall v. Judkins, 13 Metc. (Mass.) 265; Union Bank v. Willis, 8 Metc. (Mass.) 504; Irish v. Cutter, 31 Me. 536; Howard v. Jones, 13 Mo. App. 596; Castle v. Rickley, 44 Ohio St. 490; Etz v. Place, 81 Hun, 203, 30 N. Y. Supp. 765; Burnham v. Gosnell, 47 Mo. App. 637.

21. Benthall v. Judkins, 13 Metc. (Mass.) 265; Lowell v. Gage, 38 Me. 35; Camden v. M'Koy, 3 Scam. 437. Evidence is admissible to show when the signature was made. Draper v. Snow, 20 N. Y. 331. See vol. I, § 728.

22. See vol. I, § 707 et seq.; New York Security & Trust Co. v. Storm, 81 Hun, 33, 30 N. Y. Supp. 605. In Tennessee, regarded as comaker. See Logan v. Ogden, 101 Tenn. 392, 47 S. W. 489.

23. See vol. I, §§ 707, 714.

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