(c) The contract of indemnity is an original one to save the indemnitee harmless against future loss or damage. The contract of guaranty is a collateral one, and presupposes some contract or transaction to which it is secondary.41 (d) The indemnitor agrees to become liable whenever the promisee suffers loss; the guarantor's promise is to become liable conditionally when the principal debtor defaults.12 (e) If the liability of the third person is existing, and not merely in contemplation at the time the defendant makes his promise, it cannot be an indemnity contract. It must be one of guaranty if the obligation of the third person, for whom the promisee becomes responsible, is pre-existing.43 (f) An indemnitee has no remedy on the contract against a third person. His remedy is by direct action against the indemnitor. In the case of a guaranty, the third person for whom the promisee became responsible, may be sued by the promisee for reimbursement, if he is damaged.44 & Guaranty Co. v. Bank of Hattiesburg (1922) 128 Miss. 605, 91 So. 344, 346; Eastern Surety Co. v. Kelley (1911) 27 S. Dak. 465, 131 N. W. 808. 688; 41 Wolthausen v. Trimpert (1913) 93 Conn. 260, 105 Atl. 687, Brandt (1905, 3d Ed.) Sec. 5. 42 See opinions by Lopes, L. J., and Davey, L. J., in Guild v. Conrad [1894] 2 Q. B. 885, 895, and 896, respectively. The opinion of Lopes, L. J. is discussed in Beattie v. Dinnick (1896) 27 Ont. Rep. 285, 292. 43"The distinction between a promise to pay a debt already due a creditor, or one to be created upon the faith of the promise on the one hand; and a promise that if the promisee will incur a liability, the promisor will indemnify him against it on the other hand, is not at all a shadowy one, and when the terms of the statute and the interpretation placed upon it by undisputed cases are considered, the reasons for holding the latter class of promises to be unaffected by it while holding the former class to be within it, seem to be unanswerable." Beattie v. Dinnick (1896) 27 Ont. Rep. 285, 293. Falconbridge on "Guarantees and the Statute of Frauds," 40 Can. Law Times 388, 397, (1919) 68 U. of Pa. L. Rev. 137, 155, says: "On the other hand, if the liability of the third party is existing, not merely in contemplation, at the time of the defendant's promise, it would appear to be impossible to regard the transaction as a contract of indemnity.' 44 For this reason a verbal promise to save the promisee harmless if he will go on the criminal bail bond of a third person, is outside the statute. There is no implied right of reimbursement. "The contract is an original and independent one, in which there is no debt or default toward the promisee, to which (g) Under an indemnity contract, no right of action accrues against the indemnitor until the indemnitee suffers the loss against which the contract protects him. The indemnitee has no rights against the indemnitor merely because he may possibly suffer loss, but it is the actual loss which entitles him to recovery. A guaranty, however, if it be a guaranty of payment, fixes the liability of the guarantor at the time when the principal debtor fails to pay at maturity.45 § 74. The proper test to determine whether the promise is to answer for the debt "of another person." It is believed there are no collateral contracts, and In Administrators of Beaman v. it seems agreed in all the cases, that, if the promise is not collateral to the liability of some other person to the same party, it is not within the statute. . . . In this case, unless there was some person liable to indemnify the plaintiff for signing the notes to the Bank of Rutland, other than the defendant, his undertaking was an origi nal and not a collateral one. (Author's italics.) The general rule is stated in 28 Corpus Juris 892 to be that "a contract of indemnity is original and independent, to which there is no collateral contract and with respect to which there is no remedy against the third party." Corroborative of this general statement, this language was used: "The promise in an indemnity contract is an original, and not a collateral, undertaking. The remedy of the indemnitee who has paid or incurred expense is by direct action Bain v. against the indemnitor." Arthur (1911) 129 La. 143, 55 So. 743. that these distinctions between indemnity and guaranty justify the conclusions in Green v. Cresswell, and had the courts been discriminating in the sense in which the term "indemnity" was used, the century of conflict, confusion and groping would have been spared. By failing to apply the proper reasoning, and by blindly following an erroneous statement of an English opinion, both Scylla and Charybdis have been encountered. Verbal promisors will continue to be uncertain of their liabilities until the courts make some earnest effort at clarification of terminology. The suggestions here made point out some outstanding characteristics. Certainly in Green v. Cresswell, the special promise of the defendant created "a new liability collateral to some liability already existing or intended to be raised." 46 The defendant in that case became the promisor to the plaintiff, whose action was brought as creditor, but who was not permitted to recover because (a) the defendant's promise was verbal, and (b) it was a promise primarily for the benefit of another, for whom the promisee became responsible, and against whom, on his default, the plaintiff had a right of action for reimbursement. While generally it is true, as stated in the obiter in Bayley's opinion in Thomas v. Cook, that contracts of indemnity are not within the statute of frauds, all which the courts have called indemnity contracts are not the same. If the indemnitee assumes the debt of another, it is then within the statute, as Green v. Cresswell decided, but not if the indemnitee has no right of 47 46 2 Street, Foundations of Legal Liability (1906) 187. 47 Sweet v. Colleton (1893) 96 Mich. 391, 55 N. W. 984, says: "The test to be applied is whether the party sought to be charged is the principal debtor, primarily li able, or whether he is only liable in case of the default of a third person; whether the party promising contracted an independent obligation of his own, or whether his position to the creditor was that of a surety merely." (1920) 2 Page, Contracts, 2d Ed., Sec. 1249: "If A, in order to induce B to become surety for C, promises to indemnify him against any loss, arising out of such suretyship, the question of the application of the Statute of Frauds depends on the view of such transaction taken by the courts. A's promise may be regarded as a promise of B to pay B's debt to the obligee. If this view of the essential of the transaction is entertained, A's promise is not within the Statute of Frauds. Other authorities look on A's promise as a promise to pay C's debt to B if C does not, and hence within the statute.” reimbursement against the third person whose obligation he has assumed. But if the contract be made, even orally, to guaranty the fidelity of a person, it is not required to be in writing.48 Likewise, the promisor is liable if the promisee agrees to pay the debt of a third person, who, because of incapacity to contract, is not legally liable.49 The cases referred to make it obvious that by whatever name the agreement is designated, the liability of the verbal promisor must depend upon (a) whether the original party remains liable; (b) whether there is any liability on the promisor except that created by the promise upon which reliance is had; and (c) whether there is any liability of the third party to indemnify the promisee.50 If there is no duty, express or implied, on the third person to reimburse the promisee, the courts of England and America seem to agree that the promise is not one intended to be in writing by the statute of frauds. The disagreement is seen in those cases where there is an agreement, express or implied, on the part of the third person to reimburse the promisee. § 75. Classification of the cases involving the statute of frauds. One would be pertinacious, indeed, who would contend that the opinions during the last century, filling volumes on this subject, are reconcilable with each other. Obvious misapplication of principles has been made to facts, and courts have indulged in the great common-law amusement of adhering to the rule of stare decisis by discriminating, rather than by frank 48 Quinn-Shepherdson Co. v. U. S. Fidelity and Guaranty Co. (1919) 142 Minn. 428, 172 N. W. 693. See Tighe v. Morrison (1889) 116 N. Y. 263, 22 N. E. 164, 5 L. R. A. 617; (1920) 30 Yale L. J. 301. See a contrary view expressed in Commonwealth v. Hinson (1911) 143 Ky. 428, 136 S. W. 912, Ann. Cas. 1912-D 291, L. R. A. 1917B 139. So a lawyer, who was so certain of his ability he made a verbal promise to the printer that if the latter would print the former's ly overruling a prior absurdity. But it is believed that all the cases are able to be grouped into one of these four classes: (A) Cases where the promisor becomes bound with the promisee to pay the same obligation to a third person. The statute requires only those agreements to pay the debt or default "of another person" to be in writing. Those verbal contracts to pay the debt or default of the promisor, in whole or in part, are not affected by the statute, and are enforceable as they were at the common law. In this class should be placed Thomas v. Cook. The previous analysis of that case shows the defendant verbally promised to pay his own debt or default. In spite of the brief opinion referring to indemnity contracts, it is submitted this was not an indemnity contract to which that language should be pertinent, and the reasoning of the opinion is inapplicable to the facts.51 (B) Cases where the verbal promisor agrees to indemnify the promisee for any loss caused by a third person, there being no collateral obligation, express or implied, of the third person to reimburse the promisee. The promisor here is held liable. In this class Reader v. Kingham deserves to be placed. (C) Cases where the promisor is not bound with the promisee, and the promisee becomes bound to pay the pre-existing or concurrently assumed obligation of a third person, the promisor's object being to protect the third person or secure for him credit. This class requires an obligor, an obligee, and a principal debtor. Such promise the statute requires to be in writing. Clearly, Green v. Cresswell should be classified here. The plaintiff there was the obligee to whom the defendant made the promise that Hadley would not default. Concurrently with the plaintiff's liability thereon, Hadley became liable to the plaintiff for reimbursement. "The original party remained liable; and the defendant incurred no liability except from his promise.” 52 51 In this class also should be placed Ferrell v. Maxwell (1876) 28 Oh. St. 383, 22 Am. Rep. 393, and Horn v. Bray (1875) 51 Ind. 555, 19 Am. Rep. 742. And while the conclusion reached is erroneous, in this class also should be placed Bissig v. Britton (1875) 59 Mo. 204, 21 Am. Rep. 379, and Wolverton v. Davis (1888) 85 Va. 64, 6 S. E. 619, 17 A. S. R. 56. 52 The concluding sentence of Lord Denman's opinion in Green v. Cresswell (1839) 10 Ad. & Ell. 453, 113 Eng. Reports Reprint 172. |