CHAPTER IX.

OF SURETYSHIP.

As to requiring sureties to join in mortgage securities.

Proviso that surety shall be liable to

mortgagee as principal.

SECTION I.

OF THE NATURE OF CONTRACT OF SURETYSHIP.

i.-Of Sureties in Mortgage Transactions generally.—Where property is mortgaged which is not immediately realizable by the mortgagee in case of default, or which does not of itself yield an immediate income to meet the payment of interest (as, for instance, in the cases of mortgages of policies of life assurance and of reversionary interests), third persons are frequently made parties to the mortgage deed for the purpose of guaranteeing the payment of principal and interest, or of interest alone, and the performance of covenants on the part of the mortgagor necessary for the maintenance of the security.

In order to obviate the risk which the mortgagee runs in such cases of losing his remedies against the surety by reason of subsequent transactions between himself and the mortgagor, who is the principal debtor, it is the usual practice that the surety should enter, jointly and severally with the mortgagor, into all the covenants and stipulations, the performance and observance of which the surety is intended to guarantee, and that a proviso should be inserted in the mortgage deed that, although, as between the mortgagor and the surety, the latter is only a surety, yet that, as between himself and the mortgagee, he shall be deemed a principal debtor, and shall not be released by any subsequent transaction between the mortgagor and mortgagee which would otherwise have that effect (a). The effect of such a proviso is

(a) See Dav. Conv. (4th ed.), vol. ii. pt. ii. p. 603; Key & Elph. Conv.,

(5th ed.), vol. ii. pp. 36, 37, 113; Byth. & Jarm. Conv. (4th ed.), vol. iii. p. 1088.

EVIDENCE.

79

materially to vary, and, indeed, to a great extent, to exclude, CHAPTER IX. the operation of the rules of law which, in the absence of express contract, regulate the relations of principal and surety, as between them and the creditor.

A proviso to the above effect is inserted in all well-drawn mortgages to which sureties are parties; but cases not unfrequently occur in practice where it appears from the terms of the instrument, or from the circumstances of the case, that one or more of the parties to a mortgage, to a mortgage deed or equitable charge, are merely sureties for the payment of the debt by the principal debtor or debtors. A full and general consideration of the law of principal and surety would be foreign to the scope of the present treatise, but it is proposed in the following pages to consider this subject so far as relates to the liabilities, rights and remedies of sureties in mortgage transactions.

dence as to

Before the Common Law Procedure Act, 1854 (b), if it Parol eviappeared by the instrument itself that a person was thereby suretyship. jointly and severally bound with the principal debtor for payment of the debt, parol evidence was inadmissible to prove that he was only a surety (c). But in equity, in such a case, the fact was always provable by parol evidence (d). So, where in a suit to redeem, the mortgagors alleged that they were sureties only, the mortgagees were compelled to discover their dealings with the alleged principals (e).

may become

subsequent

Where two persons are originally co-debtors, they may, by Co-debtors subsequent arrangement between themselves, without the con- principal and currence or consent of the creditor, make one of them primarily surety by liable for the debt and the other a surety only; and, if notice arrangement. of such arrangement is given to the creditor he will be bound thereby so as to render him liable to the risk of losing his remedies against the surety by subsequent dealings with the person who has become the sole principal debtor, as by giving time to him (ƒ).

(b) 17 & 18 Vict. c. 125.

(c) Lewis v. Jones, 4 B. & C. 506. (d) Craythorne v. Swinburne, 14 Ves. 160, 170; Clarke v. Henty, 3 Y. & C. (Ex.) 187. See Reynolds v. Wheeler, 10 C. B. (N. S.) 561; Macdonald v. Whitfield, 8 App. Cas. 733. See now the Jud. Act, 1873 (36 & 37 Vict. c. 66), s. 25 (11).

(e) Bridgwater v. De Winton, 33 L. J. 238.

(f) Rouse v. Bradford Banking Co., (1894) 2 Ch. 32, C. A.; affirmed in D. P. on other grounds, (1894) A. C. 586. See Oakeley v. Pasheller, 4 Cl. & F. 207; Overend, Gurney & Co. v. Oriental Financial Co., L. R. 7 H. L. at p. 360.

CHAPTER IX.

No action on guaranty unless in writing.

Written guarantee shall not be invalid by

ii.-Statute of Frauds.-The Statute of Frauds (g) enacts

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 authorized."

Formerly, if such an undertaking was made by writing not under seal, the consideration must have appeared on the face of the writing (); but now by sect. 3 of the Mercantile Law consideration Amendment Act, 1856 (i), it is enacted as follows:

reason that the

does not
appear in
writing or
by necessary
inference from

a written
document.

Parol evi

dence of con

"No special promise to be made by any person after the passing of this Act, to answer for the debt, default or miscarriage of another person, being in writing and signed by the party to be charged therewith, or some other person by him thereunto lawfully authorized, shall be deemed invalid to support an action, suit, or other proceeding to charge the person by whom such promise shall have been made, by reason only that the consideration for such promise does not appear in writing or by necessary inference from a written document."

Although parol evidence is admissible to supply the considerasideration, &c. tion for a guaranty, it cannot be admitted to explain the promise, which must still be in writing (k). And if the consideration does not appear on the face of the guaranty, it must be clearly proved by parol evidence (7).

If the guaranty is given by a separate instrument, parol evidence is admissible to identify the security in respect of which the promise is made (m) or the amount of the debt intended to be guaranteed (n), or whether it was intended to be a continuing guaranty to cover further advances (o).

Contract of suretyship requires

SECTION II.

AVOIDANCE OF CONTRACT OF SURETYSHIP.

i.—Of Suretyship Contracts void ab initio.-The contract of suretyship requires that all parties to it should mutually exer

(g) 29 Car. II. c. 3, s. 4. See Mallet v. Bateman, L. R. 1 C. P. 163, Ex. Ch. (h) Wain v. Warlters, 5 East, 10; Saunders v. Wakefield, 4 B. & Al. 595. (i) 19 & 20 Vict. c. 97.

(k) Holmes v. Mitchell, 7 C. B. N. S. 361.

(1) Glover v. Halkett, 2 H. & N. 489. (m) Shortrede v. Cheek, 1 A. & E. 57. (n) Bateman v. Phillips, 15 East, 272. See Brunton v. Dullens, 1 F. & F. 450.

(0) Grahame v. Grahame, 19 L. R. Ir. 249.

faith between

cise the utmost good faith (p). The contract will be void in CHAPTER IX. its inception, unless the fullest information is afforded to the utmost good surety as to all material facts affecting his obligations and all parties. liabilities, and unless the instrument strictly and literally embodies the terms on which he agreed to assume such obligations and liabilities. So, also, a contract of suretyship, though originally valid, will be avoided by any subsequent transaction between the creditor and the principal debtor which may affect the remedies or liabilities of the surety.

avoided ab

tion.

Thus, the contract will be void ab initio if, with the knowledge Contract or assent of the creditor, any material part of the transaction initio by misbetween the creditor and the debtor is misrepresented to the representasurety, and the misrepresentation be such that, but for the same having taken place, either the suretyship would not have been entered into at all, or, being entered into, the surety's liability might be thereby increased (9).

of material

So, if a private bargain is entered into between the creditor Concealment and principal debtor which may have the effect of varying the fact will avoid responsibility or position of the surety, the withholding the know- contract. ledge of that bargain from the surety will vitiate the contract of suretyship. So, where the bargain was that the vendee of goods should pay beyond the market price of goods supplied to him 10s. per ton, which was to be applied in payment of an old debt due to the vendor, and the payment for the goods was guaranteed by a third person as follows:-"I will guarantee. you in the payment of 2007., value to be delivered to T. in Lightmoore pig iron," but the bargain was not communicated to the surety, it was held, that the concealment was a fraud on the surety, and rendered the guaranty void (r).

cealed must

In order, however, to vitiate the contract, the concealment Fact conmust be of a fact which materially varies the position of the be material. surety from that which he might naturally expect to hold. So, where a surety guaranteed a cash account opened by the principal debtor to the amount of 7501., and the money was applied in discharge of a debt of that amount owing by the principal debtor to the same creditor, of the existence of which debt the surety was not informed, it was held that the creditor was

(p) Davies v. London and Provincial Marine Insurance Co., 8 Ch. D. 469, C. A.

(1) See Stone v. Comton, 5 Bing. N. S. 142, 157; Smith v. Bank of Scotland, 1

VOL. I.-R.

Dow. 272; Railton v. Matthews, 10 Cl.
& F. 934; Burke v. Rogerson, 14 L. T.
N. S. 780.

(1) Pidcock v. Bishop, 3 B. & Cr. 605.
See Maltby's case, cited 1 Dow, 294.

G

CHAPTER IX. under no obligation to disclose the purpose for which the money was intended to be applied, and that the concealment of the existing debt did not avoid the contract of suretyship (s).

Creditor,

when bound to make in

fraud.

So, where a person procured an advance of 5007., for the repayment of which two other persons became sureties, and, in pursuance of a previous agreement, the borrower handed over 1257. out of the 5007. as a loan to one of the sureties without the knowledge of the other surety, it was held that there was no such concealment of a material fact as to prejudicially affect the position of the latter (t).

A creditor is not, as a general rule, bound to inquire into the circumstances under which a person becomes surety to him for a quiries as to debt, unless the circumstances are of such a nature as that they ought to raise a reasonable ground of suspicion in his mind that the surety has been induced to assume his obligations by fraud on the part of the debtor; under such circumstances the creditor is bound to make inquiries (u).

Application of the rule to

mortgages of life policies.

Alteration of conditions of contract.

The rule that the fullest disclosure must be made to the surety would seem to be applicable with the utmost strictness when a third party concurs in a mortgage of a policy of life assurance for the purpose of guaranteeing the payment of the mortgage moneys, and the punctual payment of the premiums; for in such cases the creditor and the assured have full knowledge of all circumstances affecting the health of the assured, and other matters with regard to which the surety cannot readily obtain information (x).

ii. Of the Discharge of the Surety by Subsequent Transactions. The contract of suretyship is construed in the strictest manner, so that the surety will only be bound according to the strict letter of his engagement (y). If it is in any way altered without his consent, even for his benefit or innocently, he is entitled to be discharged (). He is discharged by an arrange

Labouchere, 3 De G. & J. 593.

(y) Stamford, &c. Bkg. Co. v. Ball, 4 De G. F. & J. 310; Blest v. Brown, 4 De G. F. & J. 367, 376.

(2) Blest v. Brown, sup. ; Samuel v. Howarth, 3 Mer. 272; Gardner v. Walsh, 5 E. & B. 83; Polak v. Everett, 1 Q. B. D. 669; Holme v. Brunskill, 3 Q. B. D. 495.