Also known as: principal & surety · principal/surety · suretyship · surety relationship
Written by attorneys · grounded in primary & secondary sources — see below
A suretyship relationship in which one party known as the principal is primarily obligated to perform a duty owed to a creditor while another party known as the surety is secondarily liable to perform that duty if the principal defaults.
Preston Pratt sold his mortgaged warehouse to Prime Logistics. The purchase price reflected the outstanding mortgage balance. After the transfer Preston negotiated directly with the mortgagee and received a signed release from personal liability on the note. When Prime Logistics later defaulted the mortgagee could not pursue Preston because the express release discharged him under suretyship principles.
Phuong Pham orally assured a supplier that she would pay Progressive Healthcare's invoice if the company failed to do so. The supplier extended credit on the strength of that statement alone. When Progressive Healthcare defaulted the supplier sued Phuong on the oral assurance. The court dismissed the claim because a contract to answer for the duty of another must satisfy the statute of frauds.
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Patricia Patel transferred her mortgaged clinic to Prism Analytics under an assumption agreement. Prism Analytics fell behind on payments and threatened to let the property deteriorate. Patricia faced imminent foreclosure and sued Prism Analytics for an order compelling it to pay the mortgagee directly. The court granted relief because Patricia as secondary obligor was entitled to exoneration from the principal obligor.
A transfer with assumption of liability treats the transferor as a secondary obligor and the transferee as the principal obligor under suretyship principles. The transferor then holds rights to exoneration reimbursement restitution and subrogation if the transferee defaults or impairs the security.
Yes. A contract to answer for the duty of another falls within the statute of frauds and is unenforceable without a signed writing or an applicable exception.
The transferor may receive an express release from the mortgagee or may invoke suretyship defenses when the mortgagee materially modifies the obligation without consent.
…is: Every corporation created under this chapter shall have power to: (13) Make contracts, including contracts of guaranty and suretyship, incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds and other obligations, and secure any of its obligations by mortgage,…