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Corbin on Contracts

Copyright 2007, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

PART I FORMATION OF CONTRACTS

TOPIC A OFFER AND ACCEPTANCE

CHAPTER 3 ACCEPTANCE AND REJECTION OF OFFER

1-3 Corbin on Contracts § 3.14

§ 3.14 Notice as a Requisite of Guaranty and Letters of Credit

Any attempt to review and criticize the innumerable cases in the field of suretyship and guaranty must be left to monographic treatises on that special topic. The confusion and conflict in that field seem to be due in large part to a similar confusion in the general doctrines applicable to all agreements.

It is beyond question that in many thousands of cases an offer to become guarantor for another has been made in such terms as to induce the offeree to advance money, goods, or services on credit without first sending any notice of acceptance to the offeror. Later, when demand is made upon the guarantor to pay the debt of another in accordance with the promise, the guarantor complains of this lack of notice and asserts that the offer was not accepted as the law requires.

With respect to this, there is nothing peculiar to the relation of suretyship that requires the application of rules different from those applicable to other contracts. One who offers to be surety or guarantorn1 for another can prescribe or suggest the mode of acceptance, just as in other cases. The offeror can prescribe the giving of notice, by mail or otherwise. In very numerous cases, however, the offeror makes no such suggestion, and if the offeree acts as requested, the offer should be held to be accepted. Even if notice might be required as a condition precedent to performance, as discussed below, rather than as a condition to creation of the contract, the offer may waive the condition.n2

In a well known case,n3 Frank Eaton wrote from Nova Scotia to Bishop in Illinois: ''If Harry needs more money, let him have it, or assist him to get it, and I will see that it is paid.'' In reliance on this and at Harry's request, Bishop indorsed Harry's note to Stark. This action by Bishop was an operative acceptance that instantly bound Frank Eaton as surety. A telegraphic revocation would have been too late, even though Bishop had not yet written or mailed any notice to Frank that he had complied with the latter's request. A unilateral contract had been consummated by an offered promise requesting action, followed by the offeree's action as requested. Frank Eaton's legal duty as surety for Harry may, indeed, be conditional on various events, including a notice or two, to occur subsequently, but it is not the occurrence of these events that constitutes acceptance of the offer.n4

The foregoing reasoning has received much judicial approval,n5 and it is adopted by the American Law Institute.n6 Many of the cases that say a notice of acceptance is required confuse notice as the required form of acceptance of an offer with a later notice as a condition precedent to the surety's duty to make payment of the debt.n7 Even where notice is arguably required as a condition precedent to performance, a formal notification is not necessary if it is obvious that the offeror has knowledge of the extension of credit,n8 or if the offeror had reason to know of the extension of credit.n9 If reasonable inquiry would provide the offeror with notice that the offer had been accepted, the offeror has reason to know of the acceptance.n10 The condition of notice is constructed in the interests of commercial reasonableness. Consequently, it should be constructed only where it serves the purpose of protecting the legitimate interests of the offeror. Thus, in the case of Frank Eaton's offer of guaranty, there was no stated maximum amount of credit that could be extended. The offeror, if informed of the fact and amount of extension of credit, could take steps to either revoke the offer of guaranty as to the future, or take steps to control the conduct of the debtor to help assure the debtor's ability to repay the principal debt. Notice would be an important component of the guarantor's ability to plan these or other steps for self-protection.

An offer to become surety for another may request some promise in return, either by the creditor or by the principal obligor. If it does this, a notice that the requested promise is given must be made in order to accept the offer.n11 Mere action in reliance on the surety's offer would not be enough if the offer looks unequivocally to a promissory acceptance. In such a case, the offeror may contemplate the establishment of a continuing ''line of credit'' for the principal, or the surety may wish to be assured of a profitable continuing suretyship business. In many cases, however, the offer may be indifferent as to the desired means of acceptance, and performance or commencement of performance may create a binding contractn12 and action in reliance short of that may create an irrevocable offer.

In most cases of guaranty contracts, the offer comes from the guarantor requesting the giving of credit to a principal debtor or the extension of time within which to pay an existing debt. It is quite possible, however, for the creditor to make the offer, requesting an acceptance by the surety or guarantor. In such a case as this, the offeree is being asked for a promise. Practically always it would be necessary for the offeree to accept by communicating the requested promise to the offeror. But it is not necessary for the creditor to give notice of acceptance in such a case, for here the creditor is the offeror, not the offeree.n13 If the guaranty promise is given in return for a consideration actually paid to the guarantor, the acceptance of payment will ordinarily make the giving of a notice of acceptance unnecessary.n14

A letter of credit is a request to advance money or goods to a person named or to its bearer with a promise to repay. The bearer who receives the money may not be a debtor at all, with the result that this is not a case of suretyship. But it is a case in which the offeror requests the act of transferring money or goods. The offeror asks no notice before the transfer, and the actual transfer itself is the acceptance that consummates the contract.n15

Legal Topics:

For related research and practice materials, see the following legal topics:

Contracts LawTypes of ContractsGuaranty ContractsCommercial Law (UCC)Letters of Credit (Article 5)IssuanceGeneral OverviewContracts LawFormationAcceptanceMethods of AcceptanceGeneral OverviewContracts LawFormationAcceptanceGeneral OverviewContracts LawFormationAcceptanceMethods of AcceptanceOvert Acts

FOOTNOTES:

(n1)Footnote 1. For our present purposes, at least, there is no difference between the terms ''surety'' and ''guarantor.'' Accurate analysis will demonstrate that most, if not all, of the supposed differences are non-existent. A promise to answer for the debt or default of another may, indeed, be made in different forms and on varying conditions. One who assures or guarantees payment by another has not exactly the same duty as one who assures or guarantees collectibility by judgment and execution, but this difference is not expressed by the terms surety and guarantor. In the two instances, the promisor is both a surety and a guarantor. The difference is not in the two terms, but in the performance that the promisor undertakes to render-in the nature of what is assured or guaranteed.

(n2)Footnote 2. Crompton-Richmond Co. v. Briggs, 560 F.2d 1195 (5th Cir.1977) (N.Y. law applied). It should be noted that in this case the guarantor certainly knew of the acts of acceptance.

(n3)Footnote 3.

Mass. - Bishop v. Eaton, 161 Mass. 496, 37 N.E. 665 (1894) . Approved in Lascelles v. Clark, 204 Mass. 362, 90 N.E. 875 (1910) .

(n4)Footnote 4. The Court's analysis is quite in harmony with this. It said: ''But this was not a proposition which was to become a contract only upon the giving of a promise for the promise, and it was not necessary that the plaintiff should accept it in words, or promise to do anything before acting upon it. It was an offer which was to become effective as a contract upon the doing of the act referred to. It was an offer to be bound in consideration of an act to be done, and in such a case the doing of the act constitutes the acceptance of the offer and furnishes the consideration. Ordinarily there is no occasion to notify the offeror of the acceptance of such an offer, for the doing of the act is a sufficient acceptance, and the promisor knows that he is bound when he sees that action has been taken on the faith of his offer. But if the act is of such a kind that knowledge of it will not quickly come to the promisor, the promisee is bound to give him notice of his acceptance within a reasonable time after doing that which constitutes the acceptance.''

In Rich v. Clayton Mark & Co., 250 F.2d 622 (8th Cir.1957) , Hamilton ordered goods from Clayton, who refused credit unless a letter of credit were obtained from Rich. Hamilton so informed Rich. Rich then signed a letter addressed to Clayton, saying: ''we jointly and severally will provide adequate financing to Hamilton ... in furtherance of certain contracts'' on account of which Hamilton had ordered the goods. Thereupon, Clayton approved the order and supplied the goods to Hamilton. Later, Hamilton defaulted and Rich refused to advance further funds. Rich had previously taken an assignment from Hamilton of all payments to become due under a contract for which the goods were to be used. The court held that Clayton was reasonable in interpreting Rich's letter as a guaranty of payment for the goods ordered, and that it was not necessary for Clayton to give express notice to Rich of acceptance of the guaranty. Hamilton had at once informed Rich that Clayton had supplied the goods. Acceptance of an offer of guaranty is necessary, but it may be in any form that seems reasonable under all the circumstances. Here the advancement of credit by Clayton in reliance on Rich's letter was a sufficient acceptance, and if subsequent notice was a condition of Rich's duty as guarantor, he received such notice.

(n5)Footnote 5.

Mass. - Lennox v. Murphy, 171 Mass. 370, 50 N.E. 644 (1898) .

Minn. - Midland Nat. Bank of Minneapolis v. Security Elevator Co., 161 Minn. 30, 200 N.W. 851 (1924) , the court approved Bishop v. Eaton and expressly disapproved cases contra.

N.Y. -In Cinerama, Inc. v. Sweet Music, S.A., 355 F.Supp. 1113 (S.D.N.Y.1972) , judgment vacated for lack of finality, 482 F.2d 66 (2d Cir.) , aff'd, 493 F.2d 1397 , the guarantor delivered to the bank a letter of guaranty drafted by itself. The bank made the requested loan and then asked the guarantor to sign the bank's form. The submission by the bank of its form was not a rejection of the guarantor's offer. That offer had already been accepted by performance. Instead, it was an offer to modify the existing contract.

N.C. - Cowan, McClung & Co. v. Roberts, 134 N.C. 415, 46 S.E. 979 (1904) .

Ohio - Powers v. Bumcratz, 12 Ohio St. 273 (1861) .

Pa. - Siegel v. Baily, 252 Pa. 231, 97 A. 401 (1916) ; Reigart v. White, 52 Pa. 438 (1866) ; Eddowes v. Niell, 4 U.S. (4 Dall.) 133, 1 L.Ed. 772 (1793) .

Va. - Richmond Engineering & Mfg. Corp. v. Loth, 135 Va. 110, 115 S.E. 774 (1923) , materials supplied to a building contractor at promisor's request.

Eng. -Somersall v. Barneby, Cro.Jac. 287 (1611).

Contra:

U.S. - Davis Sewing Machine Co. v. Richards, 115 U.S. 524, 6 S.Ct. 173, 29 L.Ed. 480 (1885) .

Ala. - Birmingham News Co. v. Read, 200 Ala. 655, 77 So. 29 (1917) .

Kan. - Great Western Mfg. Co. v. Porter, 103 Kan. 84, 172 P. 1018 (1918) .

Minn. - Northern Nat. Bank v. Douglas, 135 Minn. 81, 160 N.W. 193 (1916) , but see later cases above.

N.Y. - City Nat. Bank v. Phelps, 86 N.Y. 484 (1881) and Smith v. Dann, 6 Hill 543 (1844) hold that no notice of acceptance is required unless the offer prescribes it.

Or. - Balfour v. Knight, 86 Or. 165, 167 P. 484 (1917) .

Wis. - Electric Storage Battery Co. v. Black, 27 Wis.2d 366, 134 N.W.2d 481 (1965) .

Eng. -Mozley v. Tinkler, 1 C.M. & R. 692 (Exch.1835).

(n6)Footnote 6. Restatement (Second) Contracts, § 54, reads:

''(1) Where an offer invites an offeree to accept by rendering a performance, no notification is necessary to make such an acceptance effective unless the offer requests such a notification.

(2) If an offeree who accepts by rendering a performance has reason to know that the offeror has no adequate means of learning of the performance with reasonable promptness and certainty, the contractual duty of the offeror is discharged unless

(a) the offeree exercises reasonable diligence to notify the offeror of acceptance, or

(b) the offeror learns of the performance within a reasonable time, or

(c) the offer indicates that notification of acceptance is not required.

The provisions of Restatement of Security § 86 are in accord as were those of § 56 of the first Restatement of Contracts.

See Generally, Richard F. Dole, Notice Requirements of Guaranty Contracts, 62 Mich.L.Rev. 57 (1963).

(n7)Footnote 7. For clarification of this distinction, see § 3.15 below.

(n8)Footnote 8.

U.S. - Crompton-Richmond Co. v. Briggs, 560 F.2d 1195 (5th Cir.1977) ; Rich v. Clayton Mark & Co., 250 F.2d 622 (8th Cir.1957) .

Colo. - Gates v. American Nat. Bank, 173 Colo. 371, 479 P.2d 285, 288 (1971) . The court stated: ''Additionally, where as here the guarantors were for all practical purposes the business managers of [the debtor], having negotiated the series of loans for operating capital with the bank, clearly, by reason of their close relationship with [the debtor] and the bank, they had actual notice of the extensions of credit.''

Mont. -In Miller v. Walter, 165 Mont. 221, 527 P.2d 240 (1974) , Walter bought a used truck, borrowed $6,000 from the bank, giving it a security interest in the vehicle. The truck needed a new engine and the bank gave him a letter stating, ''we are willing to guarantee [$1,000] to whomever you purchase this engine from....'' Walter then contracted to buy an engine from Miller for $2,000. Walter went to the bank and obtained $1,000 from it, which he paid over to Miller. He persuaded Miller to rely on the bank's guarantee as to the rest. Walter defaulted on his payments to the bank which repossessed the truck. Miller at this point asked the bank for the $1,000 balance. It refused the request and sold the truck. The court held that the bank's letter entitled Miller to regard it as an offer that was accepted by Miller's performance. The court ruled that Miller's notice came within a reasonable time because it was given before the sale of the repossessed truck. Neither party raised the issue whether a bank may guarantee the debts of another. This is a vexing question involving many subtleties and subterfuges.

(n9)Footnote 9. First Nat. Bank of Hominy v. Citizens & Southern Bank, 651 F.2d 696 (10th Cir.1981) .

In Cobb v. Texas Distributors, Inc., 524 S.W.2d 342, 345 (Tex.Civ.App.1975) , the court, while stating that notice was not required, went on to say: ''Even if some kind of notice to the guarantor is regarded as a condition of liability, as distinguished from a requisite of a valid contract (see 1 Corbin, § 69) [§ 3.15], the guarantor here is not in a position to assert that plaintiff was required to notify him that it was relying on the guaranty in continuing to sell to the corporation on credit, since defendant, as an officer of the corporation, presumably had access to information concerning the corporation's purchases from plaintiff.''

(n10)Footnote 10. In Ross v. Leberman, 298 Pa. 574, 148 A. 858 (1930) , Ross, the owner of a one-quarter interest in a Philadelphia firm, had moved his residence to London. He agreed with Leberman to pay one-third of the advances necessary to keep the firm in business as a going concern. Leberman advanced over $100,000 to the firm over a three year period and then sought reimbursement from Ross. In denying a motion for summary judgment, the court intimated that Ross was entitled to notice of the advances only if he would have been unable, upon inquiry, to obtain honest information concerning them from the firm in which he had an interest.

(n11)Footnote 11. Where A offered to guarantee payment by P for materials to be used in construction work, if P should promise to pay the bills out of money received by him on the building contract, it was held that a notice of acceptance to A was necessary. In particular he was entitled to know that P had made the required promise. King v. Batterson, 13 R.I. 117 (1880) .

However, where a clearly bilateral agreement of guaranty has been made, as where, in exchange for the guaranty, an extension of time is promised, no further notice of acceptance is required. Fasco, A.G. v. Modernage, Inc., 311 F.Supp. 161 (W.D.Pa.1970) .

(n12)Footnote 12. In Southdale Center, Inc. v. Lewis, 260 Minn. 430, 110 N.W.2d 857, 6 A.L.R.3d 345 (1961) , a commercial lease was drawn up and signed by the prospective tenant and a guarantor on 7/13. On 7/25, officers of the landlord signed; no notice of this was given the guarantor, who, however, could readily ascertain that the tenant had taken possession of the premises. It as held that no notice to the guarantor was required.

(n13)Footnote 13.

Mass. - Mayo v. Bloomberg, 290 Mass. 168, 195 N.E. 99 (1935) , guaranty requested by the creditor; Stauffer v. Koch, 225 Mass. 525, 114 N.E. 750 (1917) .

And see also:

U.S. - Rawleigh, Moses & Co. v. Kornberg, 210 F.2d 176 (8th Cir.1954) .

Ga. - Peck v. Precision Machine Co., 20 Ga.App. 429, 93 S.E. 106 (1917) .

La. - Hibernia Bank & Trust Co. v. Succession of Cancienne, 140 La. 969, 74 So. 267 (1917) .

N.Y. - Hi Fashion Wigs, Inc. v. Peter Hammond Advertising, Inc., 32 N.Y.2d 583, 347 N.Y.S.2d 47, 300 N.E.2d 421 (1973) . Plaintiff sued the defendant advertising agency on various theories of breach of contract and tort. The agency counterclaimed for its fees and brought a third party complaint against Schuminsky, plaintiff's guarantor. The issue was whether jurisdiction existed over Schuminsky under the long-arm statute. As part of the arrangement by which the agency agreed to provide services for plaintiff, an Oklahoma corporation, Schuminsky, one of two owners of all of the corporate stock, agreed to guarantee the corporation's obligations to the agency. Delivery of the written guarantee in New York created a bilateral contract upon delivery, subjecting him to New York's jurisdiction.

Wis. - Fond du Lac Skyport, Inc. v. Moraine Airways, Inc., 67 Wis.2d 109, 226 N.W.2d 428 (1975) .

See contra:

Pa. - Evans v. McCormick, 167 Pa. 247, 31 A. 563 (1895) .

(n14)Footnote 14.

U.S. - Davis v. Wells, 104 U.S. 159, 26 L.Ed. 686 (1881) .

(n15)Footnote 15.

Pa. - Eddowes v. Niell, 4 U.S. (4 Dall.) 133, 1 L.Ed. 772 (1793) .

Eng. - In re Agra and Masterman's Bank, L.R. 2 Ch. 391 (1867) .

This is codified in U.C.C. § 5-106.