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CHAPTER XVII.

GUARANTEES AND INDEMNITIES.

[See De Colyar on Guarantees, 3rd ed., A.D. 1897; Smith's Mercantile Law, 10th ed., A. D. 1890.]

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(a) See Statute of Frauds, 29 Car. 2, c. 3, s. 4, p. 76, ante.

454

Extent of Surety's Liability 455
Discharge of Surety by Misre-
presentation, &c.

6. Revocation of Guarantee
7. Indemnities of Surety

...

PAGE

...

460
467

469

SECT. 1.-General Nature of Contract of Guarantee.

THE general nature of a contract of guarantee is sufficiently simple. It is a collateral engagement, to answer for the debt, default, or miscarriage of another (a), as distinguished from an original and direct engagement for the party's own act. It is therefore of the essence of this contract, that there should be some one liable as principal (b); and, accordingly, where one party agrees to become responsible for another, the former incurs no obligation as surety, if no valid claim ever arises against the principal; whilst, on the other hand, the liability of the surety upon a claim which is good as against the principal, ceases so soon as such claim is extinguished.

But the rule that a party cannot be liable upon a contract of guarantee, unless the principal be also liable, is, in some cases, true in form or words, rather than in substance. Thus, in the case of a guarantee to answer for the price of goods not necessaries, to be sold to an infant, or other person incompetent to contract, there is no doubt that the party guaranteeing, though professedly contracting only in the character of a surety, would be responsible: for, either he could not urge the incapacity of the supposed principal; or he might, by construction of law, be himself treated as the principal.

(b) Per Lord Selborne, in Lakeman v. Mountstephen (1874), L. R., 7 H. L. 17.

nature of the

General contract of guarantee.

CH. XVII. s. 1.

General Nature of Contract of Guarantee.

Consideration for.

Past consideration insufficient.

Guarantee of past debt, in consideration of future advance.

Guarantee of past and future adrances.

We have already seen that, in the case of every simple contract, a consideration is necessary to give it validity. And we now remark further that, in the case of a guarantee, the mere existence of the debt, default, or miscarriage, in respect of which it is given, is not a sufficient consideration to support it: so that, unless there be some further consideration for the promise of the guarantor, such promise will be void.

Thus, a promise to pay a debt already incurred by another, is not binding without some new consideration, such as forbearance (c); or without showing that such past consideration was moved at the defendant's request (d). And even in the case of a promissory note given by way of guarantee for a past debt, if it shown that there was no consideration, such as forbearance, this will be an answer to an action on the note (e).

But a guarantee of a debt already incurred; or of such a debt and a debt to be afterwards incurred, given in consideration of a future advance of money or sale of goods, by the creditor to the original debtor, is good (ƒ). And it was probably on this ground, that the following memorandum was held to be sufficient :-“I hereby guarantee the present account of Miss H. M., due to R. T. S. & Co., of 112l.; and what she may contract from this date to the 30th September next" (g).

So where, in consideration of advances made and to be made to A. and B., the defendant guaranteed to A. and B. the repayment of the said advances, this was held to be good (h).

And a guarantee will be good, although it may be doubtful whether it referred to a past or a future credit-provided it appear from all the circumstances that the parties contemplated the latter (i); and evidence is admissible to show what the transaction really was (k). For one consideration to be done on the one side stated in a document is at all events primâ facie consideration for all that is to be done on the other, and all the premises are to be referred to all the considerations (1). But if it appear on

(c) See French v. French (1841), 2 M. & G. 644.

(d) See Payne v. Wilson (1827), 7 B. & C. 423; Johnson v. Nicholls (1845), C. B. 251, 261, n. (a).

(e) Crofts v. Beale (1851), 11 C. B.

172.

(f) See White v. Woodward (1848), 5 C. B. 810; Boyd v. Moyle (1846), 2 C. B. 644; Johnson v. Nicholls (1845), 1 C. B. 251; and see Westhead v. Sproson (1861), 6 H. & N. 728.

(g) Russ v. Moseley (1822), 3 B. & B.

211.

(h) Chapman v. Sutton (1846), 2 C. B.

634. As to continuing guarantee, see Wood v. Priestner (1867), L. R., 2 Ex. 282, Ex. Ch., and post, p. 457 et seq.

(i) Colbourn v. Dawson (1851), 10 C. B. 765; Steele v. Hoe (1849), 14 Q. B. 431; Edward v. Jevons (1849), 8 C. B. 436; Goldshede v. Swan (1847), 1 Exch. 154; Broom v. Bachelor (1856), 1 H. & N. 255.

(k) Goldshede v. Swan (1847), 1 Exch. 154; and see Butcher v. Stewart (1843), 11 M. & W. 857; Haigh v. Brooks (1839), 10 & E. 309.

(1) Harris v. Venables (1872), L. R., 7 Ex. 235.

looking at the facts, that the parties did not necessarily contemplate CH.XVII.s.1. General future advances, the guarantee will be void (m). Nature of

Contract of
Guarantee.

It must be borne in mind, however-as was observed by Best, C.J., in the case of Morley v. Boothby (n)—that "no Court of Common Law has ever said, that there should be a consideration directly between the persons giving and receiving the guarantee. It is enough if the person for whom the guarantor becomes surety receives a benefit, or the person to whom the guarantee is given suffer inconvenience, as an inducement to the surety to become guarantee for the principal debtor."

SECT. 2.-Implied Indemnities.

In many cases the law implies a promise to indemnify. Thus, where there is a parol demise by a lessee to an under-tenant, there is an implied promise by the former to the latter, to indemnify him against any distress which may be made by the superior landlord, for the rent due to him-so long, at least, as the undertenant pays his rent to his immediate landlord (o).

So, if A. become surety or bail for B., at his request, the law implies a promise by B. to indemnify him (p). So where A. entered into a recognizance of bail for B., on the removal by certiorari of an indictment for conspiracy, from the Central Criminal Court to the Court of Queen's Bench; and B. was convicted, and the recognizances estreated for the non-payment of the prosecutor's costs: it was held that A. might sue B., as upon an implied indemnity (q). So there is, even at law, an implied contract between sureties, to contribute equally in discharging the demands for which they become responsible for their principal (1). And so as regards bills of exchange and the respective and mutual rights and liabilities of holders, drawers, acceptors and indorsers it was laid down by Lord Selborne, L.C., in the House of Lords (s), that though there was no contract for suretyship between them, yet there was "a primary and secondary liability of two persons for one and the same debt, the debt being as between

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Considerabe direct.

tion need not

When a promise to indemnify is implied by law, and see

ante, p. 38.

Bills of exchange.

Indemnities.

.)

CH.XVII..2. the two, that of one of those persons only, and not equally of both, Implied so that the other, if he should be compelled to pay it, would be entitled to reimbursement from the person by whom (as between the two) it ought to have been paid. . The liability of the indorser to the holder is by law merchant conditional, and only secondary; but, when the conditions required by that law are fulfilled, it becomes absolute, and is that of a principal; and the indorser's right, if he pays the holder, to recover over against the acceptor, is not founded on any agreement between him and the acceptor (who is as likely as not to be a stranger without any communication with him before the indorsement), but is established by the same law." The respective duties of a holder are now regulated by sects. 38-52, and the liabilities of acceptors, drawers, and indorsers by sects. 53-57 of the Bills of Exchange Act, 1882, 45 & 46 Vict. c. 61 (ante, Ch. XVI.).

The law implies a promise on the part of the principal, to indemnify his agent against any liability which he may incur from the execution of his authority (t); but there cannot be an implied contract to indemnify, in any case where the party has entered into an express contract as to the same subject-matter (u).

Where a party is either expressly or impliedly indemnified against the demand of a third person, he has no right, without express authority, to defend an action by the latter, and then to claim the costs of such defence from the surety; unless, in defending the action and incurring such costs, he has acted as a reasonable and prudent man, unindemnified, would have acted in his own case (x). And a defendant who has a claim to contribution or indemnity over against one who is not a defendant, can bring him in by the third party procedure (y), and in the same way a defendant claiming indemnity or contribution from a co-defendant may have such question determined in the action (z).

The general rule is, that there is no contribution amongst wrongdoers ; so that where one man does an act at the instance of another, which the former must be taken to have known to be against law, even an express promise to indemnify him is void (a).

Implied indemnity.

Right of the party indemnified to recover costs.

No contribution amongst wrongdoers.

(t) Westropp v. Solomon (1849), 8 C. B. 345.

(u) Ante, p. 42. And see Upton v. Fergusson (1833), 3 M. & Sc. 88.

(x) Broom v. Hall (1859), 7 C. B., N. S. 503. Where the action has been properly defended, the indemnity covers the whole costs, and not merely the taxed costs of the defence; Howard v. Lovegrove (1870), L. R., 6 Ex. 43; and see also as

to "

reasonably defending," Hammond v. Bussey (1887), 20 Q. B. D. 79, C. A.

(y) R. S. C., 1883, Ord. XVI., rr. 4855; and see notes thereto in the Annual Practice.

(z) R. S. C., 1883, Ord. XVI., r. 55. (a) See Merryweather v. Nixon (1799), 8 T. R. 186; 16 R. R. 810; Clerk aud Lindsell on Torts, 3rd ed.,

P.60.

The statute, however, applies as well to contracts to be answerable for the debt of another, as to engagements to satisfy damages recovered or recoverable against another; and it is not necessary that the third party should have requested the person giving the guarantee to enter into the engagement, or that he should be in any manner a party thereto.

The question, therefore, whether any particular case comes within this clause of the statute, depends on whether the result of the contract is, to create any primary liability on the part of the defendant (f). And accordingly it is held, that if the person for whose use 'goods are furnished upon the defendant's guarantee, be liable to the vendor, the defendant's engagement, though it

SECT. 3.-Requirement of Signed Writing by Statute of Frauds. (a) Application of Statute to Collateral Engagements only.

The Statute of Frauds, 29 Car. 2, c. 3, s. 4 (p. 76, ante), provides "that no action shall be brought, whereby to charge the defendant upon any special promise to answer for the debt, default, or miscarriage of another person, unless the agreement upon which such action shall be brought, or some memorandum or note thereof, shall be in writing and signed by the party to be charged therewith, or some other person thereunto by him lawfully authorised" (b).

Let us, first, consider to what cases this statute applies.

of statute

Darnell.

It is clearly settled that the statute applies only to collateral Application engagements; and that it has not, either in its words or principle, to collateral any reference to cases where there is an original promise to pay a engagements only. debt or satisfy a demand or damages, for which no other person Lakeman v. was intended or expected to be responsible (c). As it is put in Mountstephen. the headnote to the leading case of Birkmyr v. Darnell (d) : "A Birkmyr v. promise to answer for the debt, default, or miscarriage of another, for which that other remains liable, must be in writing to satisfy the Statute of Frauds. Contra, where the other does not remain liable." Therefore where the defendant undertook that a horse to be delivered to A. by the plaintiff, should be re-delivered safe by A. to the plaintiff, this was held a collateral undertaking, for "where the undertaker comes in aid only to procure a credit to the party, in that case there is a remedy against both, and both are answerable according to their distinct engagement; but where the whole credit is given to the undertaker so that the other party is but his servant, this is not a collateral undertaking" (e).

(b) The 6th section of the Mercantile Law Amendment (Scotland) Act, 1856, 19 & 20 Vict. c. 60, is similar to this.

(c) Lakeman v. Mountstephen (1874), L. R., 7 H. L. 17.

(d) Birkmyr v. Darnell (1705), Salk. 27; 1 Sm. L. C.

(e) Birkmyr v. Darnell, supra.

(f) See the cases cited in the notes to Birkmyr v. Darnell (1705), 1 Sm. L. C.

CH. XVII. s. 3.
Guarantees
(Statute of
Frauds).

must be in

Guarantees writing by the Statute

of Frauds.

When the engagement is within the

collateral

statute.

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