(b) the continuance of an employee-principal in service after receiving knowledge of his dishonesty85; (c) change in the duties of the employee 36; (d) alteration of the principal's contract, or a variation of the surety's risk, whether material or not 37; (e) a valid extension of time by agreement between the obligee and principal.88 In succeeding sections we will see how far these defenses are available to the compensated surety.

§ 234. Defenses of compensated surety on fidelity bonds. The obligee on a corporate bond may make an express warranty as in ordinary insurance contracts.39 If, for example, the employer falsely states in applying for a fidelity bond that the employee during a previous period of service "faithfully and satisfactorily performed his duties and correctly rendered his accounts," the surety company is not liable on the bond. It is immaterial that the obligee believed his statements to be true. They were express warranties which, because of their falsity, relieve the corporate surety from liability for the employee's default.40 This result follows from the application of the well. recognized rule that a misrepresentation of a material fact, in reliance upon which a contract of insurance is issued, will avoid the contract, and it is not essential that the misrepresentation

35 Phillips v. Foxall (1872) 7 Q. B. 666. See Sec. 117, supra.

86 The National Mechanics' Banking Association v. Conkling et al. (1882) 90 N. Y. 117, 43 Am. Rep. 146.

See Sec. 118, supra.

37 Wood v. Steele (1867) 6 Wall. 80; United States v. Freel (1902) 186 U. S. 309, 22 Sup. Ct. 875, 46 L. Ed. 1177; Allison et al. v. Rutledge (1833) 5 Yerg. (Tenn.) 193; Smith V. Montgomery (1848) 3 Texas 199. See Sec. 114, supra.

38 Samuel v. Howarth (1817) 3 Merivale 272, 36 Eng. Rep. Reprint 105; Pooley v. Harradine (1857) 7 Ellis and Blackburn 431, 119 Eng. Rep. Reprint 1307; Andrews v. Marrett (1870) 58 Me. 539; Page v. Krekey (1893) 137 N. Y. 307, 33

N. E. 311; Moulton v. Posten (1881) 52 Wis. 169. See Sec. 94, supra.

39The enforcement of the express terms of the contract of suretyship cannot be made to depend upon whether the surety is compensated or not. It cannot be one contract when the surety is compensated, and another contract when the surety is not compensated." Bench Canal Drainage District v. Maryland Casualty Co. (1921) 278 Fed. 67, 80.

40 Livingston and Taft, Trustees v. The Fidelity and Deposit Co. (1907) 76 Oh. St. 253, 81 N. E. 330. Accord: Guarantee Co. of North America v. Mechanics' Savings Bank and Trust Co. (1901) 183 U. S. 402.

be known to be false. Therefore, a certificate by the employerobligee that the employee had performed his duties in an acceptable and satisfactory manner, if untrue, relieves the surety from liability. This is because the surety for compensation is an insurer, and this principle from the law of insurance is applied to his contract.41 However, if the parties agree that the employer's statement is a warranty, and its falsity shall render the bond void, if it is also agreed that "this bond is issued on the express understanding that the employee has not within the knowledge of the employer at any former period been a defaulter," unless it can be shown that the employer knew of the falsity of the statement, or made it recklessly or negligently, the surety company is not discharged in the event of loss. Distinction must be made between the case where the obligee warrants a fact to be true, and where he merely states that which is within his knowledge, without warranting it.42

A false statement by the beneficiary of a bond, whether he be the obligee or not, that the principal is not known at the date of the bond to owe any debts, will prevent recovery from the corporate surety. It is no defence that it has been agreed that the beneficiary's reply is to be confidential, because such stipulation as to confidence is not applicable where the party replying to the surety's inquiries sues upon the bond.43 While it is possible for the surety to be relieved from a contract because of the false statements made to it by the principal, they will be construed as representations and not warranties unless they are material and also form a part of the contract. If they are con

41 United States Fidelity and Guaranty Co. v. First National Bank of Dundee (1908) 233 Ill. 475, 84 N. E. 670. It was said in Duke v. Fidelity and Deposit Co. of Maryland (1925) 5 Fed. (2d Ser.) 305, 307, that: ". 'if it (the obligee) made false material representations or warranties relied upon by defendant, the contract of suretyship, like any other induced by fraud, is subject to avoidance.'''

42 Legler et al. v. United States Fidelity and Guaranty Co. (1913)

88 Oh. St. 336, 103 N. E. 897. A false representation by the obligee which does not necessarily discharge the corporate suroty must be distinguished from a warranty, which, as already shown, discharges it. Champion Ice Manufacturing and Cold Storage Co. v. American Bonding and Trust Co. (1903) 25 Ky. L. Rep. 239, 75 S. W. 197.

43 United States, to the Use of Heise, Bruns & Co. v. American Bonding & Trust Co. (1898) 89 Fed. 921.

strued as representations the compensated surety remains bound on its contract.44

If the surety's contract provides for its release provided the obligee is guilty of "any willful misstatement or suppression of facts in any statement or declaration to the company concerning the employed," the compensated surety may be discharged by showing that the obligee fraudulently concealed facts which would lead a reasonable man to conclude that the principal was a defaulter, or concealed such suspicious circumstances as would lead a reasonable man to make inquiries which would result in the disclosure of defalcation.45 Without an express stipulation requiring the obligee to exercise any degree of diligence in supervising the employee-principal, constructive notice of his default to the obligee will not release the surety if the employment is continued. It is only his actual knowledge which the obligee must impart to the surety.46 A provision, however, that the employer shall at once notify the surety "on his becoming aware of the said employee being engaged in speculation or gambling," imposes a duty on him to impart to the compensated surety information received from anonymous sources that the employee was engaged in any proscribed activity. Failure to give the information, and the continuance of the principal in the obligee's employ, relieve the surety from liability for subsequent losses.47

Increases in the compensation of the bonded employee, or a promotion, will not affect the corporate surety's liability if the

Texas

44 Missouri, Kansas & Trust Co. et al. v. German National Bank of Denver (1896) 77 Fed. 117, 119, 23 C. C. A. 65.

45 National Bank of Asheville v. Fidelity & Casualty Co. of N. Y. (1898) 89 Fed 819, 32 C. C. A. 355.

46 The Fidelity & Casualty Co. v. The Gate City National Bank (1895) 97 Ga. 634, 25 S. E. 392, 33 L. R. A. 821, 54 A. S. R. 440; Guarantee Co. of North America v. Mechanics' Savings Bank & Trust Co. (1896) 80 Fed. 766, 26 C. C. A. 146. 47 Guarantee Co. of North Amer

ica v. Mechanics' Savings Bank & Trust Co. (1902) 183 U. S. 402, 22 Sup. Ct. 124, 46 L. Ed. 253, in which Chief Justice Fuller observed that to be aware is not the same as to have knowledge.'

Judgment was given the defendant surety company in Kornhauser v. National Surety Co. (1926) 113 Oh. St. 702, 150 N. E. 921, because a director of the corporate employer was "aware of" the principal's dishonesty several months prior to the time notice of default was given the surety.

peculations occurred while exercising the duties covered by the bond, although different duties were added by the promotion.48 The principal and obligee cannot, however, change their contract at will without releasing the surety. An employer who cancels the prior contract of employment by substituting a new one with added responsibilities, differing in kind from those performed when the bond was signed, releases the corporate surety. 49

If the ambiguity consists in the implied portions of the surety's agreement, the courts resolve doubts against the compensated surety or guarantor, and in favor of the beneficiary. To relieve the surety, the departure from the principal's contract must be material and clearly proven by the defendant.50

§ 235. Defenses of compensated surety on contractor's bonds. In building contracts which the corporate surety guarantees will be performed by a certain date, failure of the obligee to notify it of the principal's default at once, or of the breach of any term of the contract, although he has stipulated to do so

48 Bank of England, Arkansas v. Maryland Casualty Co. (1923) 293 Fed. 783, reversed on another ground in (1924) 2 Fed. (2d) 793; Fidelity & Casualty Co v. Gate City National Bank (1896) 97 Ga. 634, 25 S. E. 392, 33 L. R. A. 821, 54 A. S. R. 440.

49 Sun Life Insurance Co. V. United States Fidelity & Guaranty Co. (1902) 130 N. C. 129, 40 S. E. 975.

50 Empire State Surety Co. v. Lindenmeier et al. (1913) 54 Colo. 497, 131 Pac. 437, Ann. Cas. 1914-C, 1189; People v. Travers et al. (1915) 188 Mich. 345, 154 N. W. 130; Young et al. V. American Bonding Co. (1910) 228 Pa. 373, 380, 77 Atl. 623, 626; Roberts v. Security Trust & Savings Bank (1925) Cal. App. 238 Pac. 673.

See Brown v. Title Guaranty & Surety Co. (1911) 232 Pa. 337, 81 Atl. 410, 38 L. R. A. (N. S.) 698, where the surety agreed to pay, if the principal did not, such damages as should be assessed under the provisions of the acts of the general assembly" for a strip of land for railroad purposes. The plaintiff subsequently gave a deed in fee of the land to the principal, which the defendant surety contended released it, inasmuch as the principal, under the law, was entitled to an easement only. Obviously, this increased the loss to the plaintiff. The corporate surety was held liable for the value of the land conveyed in fee, the agreement to convey this estate rather than an easement not being a material departure from the terms of the defendant's bond, and no prejudice to it.

"immediately," will not release the surety.

The obligee is

allowed a reasonable time within which to give such notice.51 A stipulation that no extras shall be ordered except upon "written order of the owner or architects," does not discharge the surety as a matter of law even though the extras are ordered verbally.52 A provision in the bond that no action can be brought on it more than six months after the completion of the building, the erection of which it is to secure, does not bar an action subsequent to that time if the principal abandons his contract, provided the obligee is reasonably diligent in causing the work to be resumed by another contractor.58

§ 236. Extension of time by agreement between obligee and principal. Frequently by agreement between the obligee and principal, time for the performance of a contract is extended, or, after suit is brought against the principal and corporate surety on a judicial bond, without the consent of such surety, the principal and surety continue the time for taking testimony, thus prolonging the proceedings. Such extension of time does not discharge the surety unless material injury by the subsequent agreement can be shown.54 But if the conditions of the

un

51Immediate notice' ordinarily means, in this connection, within a reasonable time, with due diligence under the circumstances of the particular case, and without necessary or unreasonable delay, of which the jury are ordinarily to be the judges." Remington v. Fidelity & Deposit Co. (1902) 27 Wash. 429, 67 Pac. 989, 992.

52 Hormel v. American Bonding Co. (1910) 112 Minn. 288, 128 N. W. 12, 33 L. R. A. (N. S.) 513; Bross v. McNicholas (1913) 66 Oregon 42, 133 Pac. 782, Ann. Cases 1915-B, 1272. But see First Congregational Church, etc. v. Lowrey et al. (1917) 175 Cal. 124, 165 Pac. 440.

53 Hull et al. v. Massachusetts Bonding & Insurance Co. (1912) 86

Kan. 342, 120 Pac. 544.

54 United States to the Use of Heise, Bruns & Co. v. American Bonding & Trust Co. (1898) 89 Fed. 921; United States to the Use of Delaware Hardware Co. v. Lynch et al. (1912) 192 Fed. 364; Philadelphia v. Fidelity & Deposit Co. of Maryland (1911) 231 Pa. St. 208, 80 Atl. 62, Ann. Cases 1912-B, 1085; Board of Commissioners of the County of Ohio v. Clemens et al. (1919) 85 W. Va. 11, 100 S. E. 680.

In Trustees of M. E. Church, etc. v. Equitable Surety Co. (1921) 269 Pa. 411, 112 Atl. 551, 552, the opinion states: "The surety will be relieved only if the variance in the terms of the contract is material and worked to its damage."