Monday, July 26, 2010
Clarification - Contracts - Statute of Frauds - Suretyships
I have recently been asked to clarify the issue of primary and secondary promises regarding suretyships in the statute of frauds. Please refer to the post: 11 – Contracts – Formation (Defenses – Statute of Frauds – Part Two). It was written on Tuesday, April 20, 2010. The question is from Jay:
Could you please try to clarify the primary vs. secondary promise. I was unable to follow your explanation.
What I gather:
C acting as surety for A.
a) If C acts substantially for their own benefit = Primary Promise. No need to be in writing, no need for consideration. Separate agreement, K formation rules apply including need for consideration?
b) If C acts primarily for A = Secondary Promise. Must be in writing, needs consideration. Attaches to existing debt agreement and doesn't need consideration??
Seems like I'm crossing up the two options somewhere.
Here is the Blog section in question:
Guarantee (Suretyship) Provision
The guarantee, or surety, provision covers a promise to answer for the debt of another (secondary promise). Keep in mind here, the situation is where person A enters into an agreement with person B, where B gives something of value, whether goods, services or other non-goods property, like real property, and A is supposed to pay a certain consideration to B. Person A can’t pay person B, so A goes to person C and asks C to agree with B to pay this debt agreement. C is acting as the surety/guarantor for A’s promise to pay B.
If the guarantor or surety is contracting for his own benefit/purpose, or at least, substantially for his own benefit/purpose, then it would not be a secondary promise as far as the surety is concerned. If the surety is contracting for the primary benefit/purpose of someone else, that’s what makes the agreement a secondary agreement. The purpose of the suretyship is not primary to the surety, but rather it is primary to the other person. All of this is called the “primary purpose” rule or the “leading object” rule. So ask the question “Is the “leading object” of the surety’s promise to benefit the surety or the other person?”
Why is this important? Two reasons: First, if it is a secondary promise, the agreement must be in writing. If it is a primary promise (as far as the surety is concerned), then it does not need to be in writing. Second, if it is a secondary promise, the agreement must be supported by consideration. If it is a primary promise, the Suretyship agreement does not need to be supported by consideration. The policy behind all of this is that an ordinary suretyship is not a separate contract – it is appended to the debt agreement and the consideration of the debt agreement is sufficient. If the suretyship promise is for the primary purpose of the surety, then it IS a separate agreement that must, under basic “formation of contracts” principles, be supported by a separate consideration.
Explanation: Remember that the statute of frauds (SoF) states that certain kinds of contracts must be in writing in order to be enforceable. One type of contract that must be in writing is the guaranty or suretyship contract – where one party agrees to pay the debt of another. Usually the whole question you are expected to address in an essay or other type of exam is whether or not the contract is, in fact, a suretyship contract. You make this determination by looking to see if it is a “primary” promise or a “secondary” promise. This portion of the SoF applies only to secondary promises. In other words, if, as between B and C, it is a primary promise, the SoF does not apply and the contract does not have to be in writing.
How do you tell if it is a primary or secondary promise? The example above is: A enters into an agreement with person B, where B gives something of value, whether goods, services or other non-goods property, like real property, and A is supposed to pay a certain consideration to B. Person A can’t pay person B, so A goes to person C and asks C to agree with B to pay this debt agreement. C is acting as the surety/guarantor for A’s promise to pay B.
The “primary purpose” rule or the “leading object” rule requires you to ask the question “Is the “leading object” of the promise to benefit the surety or the other person?” If the leading object or primary purpose of the contract is to benefit the original obligor or promisor (Person “A”), that contract must be in writing. Since the primary purpose of Person C is to benefit Person A, Person C is the surety or guarantor. If person A does not pay Person B, Person B can require Person C to pay the obligation IF the contract is in writing. Obviously the contract must be otherwise valid – mutual assent (offer and acceptance) and consideration.
On the other hand, if the primary purpose of the contract is to benefit Person C, then it is not a suretyship contract. It is primary between Person B and Person C. Again, the contract must be properly formed in order to be valid – mutual assent (offer and acceptance) and consideration. In this case, though there may be consideration between Persons A and B, there is NO CONSIDERATION between Persons B and C in our example. So, the contract does NOT have to be in writing (assuming other provisions of the SoF do not apply), but the agreement still requires consideration as between Persons B and C to be enforceable.
In our example: Contract between A and B (with C as the alleged guarantor) has mutual assent and consideration, but there is no consideration between C and B. B can enforce the contract he has with A. Can B enforce the contract against C as a guarantor? If C is, in fact, a guarantor, the answer is yes IF the contract is in writing – even though there is no consideration between B and C – since consideration is not necessary between B and C because it is a suretyship agreement. The consideration that validates the contract is between A and B. On the other hand, if C’s primary purpose is to benefit himself, B cannot enforce the contract against C AS THE GYARANTOR. B cannot enforce the contract against C by saying that he (B) has a stand-alone contract with C either. Why? The contract must have mutual assent (offer and acceptance) between B and C – let’s assume it does. It does not have to be in writing, but it still must have consideration between B and C. It does not, so B would lose this argument also.
A -> B with mutual assent and consideration. C is guarantor (primary purpose to benefit A). B can enforce against C even though no consideration between B and C IF the contract is in writing.
A -> B with mutual assent and consideration. C agrees to guaranty , but is not a guarantor (primary purpose to benefit C). B cannot enforce against C as guarantor even though the contract is in writing, since C's primary purpose is to benefit himself. If B sues C based upon a direct contract between B and C, , also loses since there is no consideration between B and C - even if the contracts is in writing.
I hope this is helpful.
Professor Doug Holden
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