Special Rules Flashcards
Do most common law contract principles apply to suretyship?
Yes. Suretyship is merely a specific type of contract that has a few special rules.
Is consideration required?
Yes, as with all contractual promises, a surety’s promise is not enforceable without consideration.
What is the consideration in a compensated surety situation?
The compensation received by the surety serves as consideration in exchange for the surety’s promise.
What is the consideration in a gratuitous surety situation?
When must that consideration be given?
The creditor’s promise or performance to the debtor is consideration for the surety’s promise.
Consequently, to constitute effective consideration the surety’s promise generally must be given BEFORE OR CONTEMPORANEOUS with the creditor’s performance or promise to perform.
Rationale: if the surety does not make her promise until after the creditor has performed or made an absolute promise to perform, there is no consideration to support the surety’s promise because of the PREEXISTING DUTY RULE.
When is a gratuitous surety’s promise enforceable NOTWITHSTANDING a violation of the preexisting duty rule?
1) the contract between the debtor (principal) and the creditor makes obtaining a surety a condition precedent to the creditor’s performance and creditor performs in reliance on the surety’s promise; OR
2) the creditor gives additional consideration in exchange for the surety promise (i.e. there is a new duty).
In general, must a suretyship undertaking be in evidenced by a writing to enforceable?
Exceptions?
Yes - otherwise it violates the Statute of Frauds.
1) A promise that is not collateral to another’s person’s promise to pay (i.e. a third party’s PRIMARY PROMISE to pay) is NOT a “suretyship” bound by the Statute of Frauds.
2) If the main purpose of the surety’s promise is how own pecuniary advantage, it is not within the Statute of Frauds.
How are gratuitous suretyship contracts construed by the courts?
Strictly construed against theca creditor
How are compensate suretyship contracts construed by the courts?
Like any other contract.
If a commercial surety has provided her own printed form, ambiguous language will be strictly construed against the surety.
May the terms of the contract between the principal and the obligee (the creditor) be used in construing the surety’s contract?
Yes.
What happens when a surety signs a writing as an apparent principal?
She is entitled to the rights of a surety only as against those persons who know she is signing as a surety.
