Guaranty, or GUARANTEE, is a contract by which one person binds himself to pay a debt or do some act in case of the failure of some other person, whose debt or duty it is, to do the thing guaranteed. The person so binding himself is generally called the surety in England, while the person who is primarily liable is called the principal. Thus, where A borrows money, and B joins as a party in a bill of exchange or a bond to secure the loan, B is a surety. Where B guarantees that certain goods which are supplied to A shall be paid for, he is more usually styled a guarantor than a surety, but the liability is the same.
Such a contract must be in writing, for the Statute of Frauds (29 Charles II. chap. 3) required that no action should 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 or some memorandum or note thereof should be in writing and signed by the party to be charged therewith, or some other person by him lawfully authorised. So that a surety can only be bound by some writing signed by himself or his agent. And Lord Tenderden's Act (9 Geo. IV. chap. 14, sect. 6) enacted the same thing as to persons making representations as to the character, ability, or dealings of another, with intent that the latter may obtain credit. In order to bind the surety, there must also be no deceit or misrepresentation used as to the nature of the risk or as to the state of the accounts. If a guaranty is given to a firm, it is not binding after a change in the firm, unless the parties expressly stipulate to the contrary. If the creditor discharges the principal, or even gives time, by way of indulgence to him, the surety is released, for he is thereby put to a disadvantage. In general, the creditor can sue either the principal or the surety for the debt at his option. If the surety is obliged to pay the debt of his principal, he can sue the principal for the money so paid, and is entitled to have all the securities assigned to him, so as to enable him to do so more effectually. If one of two or more sureties is made liable for the whole debt, he may call upon his co-sureties to contribute equally with himself. For the Scotch law, see CAUTION.