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rity held by the creditor.36 Otherwise the guarantor might be seriously damaged by the act of the guarantee. But taking security from the principal would not discharge him, unless there were some agreement to give him time, because that would strengthen, rather than weaken, his debt.37 In short, a guarantor is a species of surety, and will be discharged by any act of the creditor that would discharge a surety.38 A guaranty of the payment by another of goods to be sold not founded on any present consideration to the guarantor, and providing that it shall continue until written notice shall be given of its termination, is revoked by the death of the guarantor." It has also been held that the guarantor may avail himself of any offset or counterclaim growing out of the contract, performance of which is guaranteed, to which the original promisor is entitled.40 While in general the surety is not released by the passivity or delay of the creditor in suing the principal, a delay of five years in bringing an action against the maker has been held to discharge the guarantor of a note.*

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36. Sigourney v. Wetherell, 6 Metc. (Mass.) 553; Shook v. Shute, 9 Port. 113; Crosby v. Wyatt, 10 N. H. 318; Mayhew v. Crickett, 2 Swanst. 185; Hart v. Hudson, 6 Duer, 294; Howell v. Jones, 1 Cromp., M. & R. 97; Dixon v. Spencer, 59 Md. 247. An extension of time allowed the principal will not discharge the guarantor, if the guarantee provide for renewals. Koenig v. Bramlett, 20 Mo. App. 637; Del., L. & W. R. Co. v. Burkhard, 43 N. Y. S. C. 59; Manning, Cushing & Co. v. Alger, 85 Iowa, 617, 52 N. W. 542; First Nat. Bank v. Bradley, 61 Kan. 615. But not when he assents to the renewal and helps to bring it about. Harvey v. First Nat. Bank, 56 Nebr. 320, 76 N. W. 870; Foerderer v. Moors, 33 C. C. A. 641, 91 Fed. 476; Holmes v. Williams, 177 Ill. 386, 53 N. E. 93.

37. Sigourney v. Wetherell, 6 Metc. (Mass.) 553; Norton v. Eastman, 4 Greenl. 521.

38. See ante, §§ 1308 et seq., 1326 et seq.; Conger v. Babbett, 67 Iowa, 14. 39. Jordan v. Dobbins, 122 Mass. 168. It is considered by some authorities that unless the terms of the guaranty forbid, the law writes in the contract of continuing guaranty, the power to revoke the guaranty upon notice. Coulpart v. Clemenston, L. R., 5 Q. B. Div. 42; Jordan v. Dobbins, 122 Mass. 168. 23 Am. Rep. 305; Bank v. Strever, 18 N. Y. 502; Gay v. Ward, 67 Conn. 147. 34 Atl. 1025; Hyland v. Habich, 150 Mass. 112, 22 N. E. 765, 15 Am. St. Rep 174. While death may not ipso facto terminate continuing guaranty, notice to or knowledge thereof by the party guaranteed is a revocation and precludes fresh advances on faith of the guaranty. Gay v. Ward, 67 Conn. 147 34 Atl. 1025.

40. Aultman Co. v. Heffner, 67 Tex. 62.

41. Tiffany v. Willis, 37 N. Y. S. C. 266; Blanding v. Wilsey, 107 Iowa, 46 77 N. W. 508; Getty v. Schantz, 40 C. C. A. 560, 100 Fed. 577.

§ 1789a. Effect of payment by guarantor.- The guarantor may agree with the payee of a note that his payment thereof shall not operate an extinction of the debt, but that the note or bill shall be kept alive for his benefit, so that his right of action against any prior party will be upon the instrument itself, and not for money paid for the use and benefit of such party.

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42. Granite Nat. Bank v. Fitch, 145 Mass. 567; ante, § 1758. In absence of agreement, guarantor's action is not on note, but to recover money paid out for the use and benefit of defendant. See Austin v. Hamilton, 7 Wash. 382, 34 Pac. 1097.

CHAPTER LVI.

LETTERS OF CREDIT AND CIRCULAR NOTES.

SECTION I.

DEFINITION AND NATURE OF LETTERS OF CREDIT.

§ 1790. Letters of credit are instruments of frequent use in commerce, and while not possessing all the characteristics of negotiability which pertain to bills and notes, partake of them to such an extent as to be necessarily classed as negotiable instruments. A letter of credit may be defined to be a letter of request, whereby one person requests some other person to advance money or give credit to a third person, and promises that he will repay or guarantee the same to the person making the advancement, or accept bills drawn upon himself, for the like amount. It is called a general letter of credit when it is addressed to all persons in general requesting such advance to a third, and a special letter of credit when addressed to a particular person by name.1

Sometimes the letter of credit is in the form of an authority to the correspondent to draw bills on the letter writer; and there are cases, as we shall see, in which it amounts to an actual acceptance by the letter writer of the bills when drawn.

In the chapter on Guaranties,2 letters of credit have been incidentally treated where they partook of the nature of guaranties. But they are frequently direct and independent promises, and deserve more particular notice.

§ 1791. Mr. Bell, the learned commentator on the Laws of Scotland, whose language has been approvingly quoted by Judge Story

1. See Union Bank v. Coster, 3 N. Y. 214; Johannessen v. Munroe, 9 App. Div. 409, 41 N. Y. Supp. 586, quoting with approval the text; Krakauer v. Chapman, 16 App. Div. 115, 46 N. Y. Supp. 127, citing text; London, etc., Bank v. Parrot, 125 Cal. 472, 58 Pac. 164, 73 Am. St. Rep. 64.

2. See ante, chapter LV. In Scribner v. Rutherford, 65 Iowa, 551, a letter of credit is said to be, in effect, an absolute undertaking to pay the money advanced upon the faith of the instrument.

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in his treatise on Bills, says: "Letters of credit, strictly speaking, are mandates, giving authority to the person addressed to pay money, or furnish goods, on the credit of the writer. They are generally made use of for facilitating the supply of money or goods required by one going to a distance or abroad, and avoiding the risk and trouble of carrying specie, or buying bills to a greater amount than may be required. The debt, which arises on such a letter in its simplest form, when complied with, is between the mandatory and mandant; though it may be so conceived as to raise a debt also against the person who is supplied by the mandatory: 1. Where the letter is purchased with money by the person wishing for the foreign credit; or, is granted in consequence of a check on his cash account; or, procured on the credit of securities lodged with the person who grants it; or, in payment of money due by him to the payee, the letter is, in its effects, similar to a bill of exchange drawn on the foreign merchant. The payment of the money by the person on whom the letter is granted raises a debt or goes into account between him and the writer of the letter, but raises no debt to the person who pays on the letter against him to whom the money is paid. 2. Where not so purchased, but truly an accommodation, and meant to raise a debt against the person accommodated, the engagement generally is to see paid any advances made to him, or to guarantee any draft accepted, or bill discounted; and the compliance with the mandate. in such case raises a debt both against the writer of the letter and against the person accredited."

$1792. Letters of credit have long been in use amongst merchants. Hallam, in his work on the Middle Ages, has observed that: "There were three species of paper credit in the dealings of merchants: 1. General letters of credit, not directed to any one, which are not uncommon in the Levant. 2. Orders to pay

money to a particular person. 3. Bills of exchange regularly negotiable. Instances of the first are mentioned by Macpherson about 1200. The second species was introduced by the Jews about 1183."

§ 1793. Marius gives a very full description of letters of credit. "Now," he says, "letters of credit, for the furnishing of moneys by exchange, are of two sorts, the one general, the other special.

3. Story on Bills, § 463.

4. Marius on Bills, 36, 37; Story on Bills, § 460.

The general letter of credit is, when I write my open letter, directed to all merchants, and others, that shall furnish moneys unto such and such persons, upon this my letter of credit, wherein and whereby I do bind myself, that what moneys shall be by them delivered unto the party or parties therein mentioned, within such a time, at such and such rates (or, in general terms, at the price current), I do thereby bind myself for to be accountable and answerable for the same to be repaid according to the bill or bills of exchange, which, upon receipt of the money so furnished, shall be given or delivered for the same. And if any money be furnished upon such my general letter of credit, and bills of exchange therefor given, and charged, drawn, or directed to me, although, when the bills come to hand, and are presented to me, I should refuse to accept thereof, yet (according to the custom of merchants) I am bound and liable to the payment of those bills of exchange, by virtue and force of such my general letter of credit, because he or they which do furnish the money have not so much (if any) respect unto the sufficiency or ability of the party which doth take up the money as unto me, who have given my letter of credit for the same, and upon whose credit, merely, those moneys may be properly said to have been delivered. The special letter of credit is, when a merchant, at the request of any other man, doth write his open letter of credit, directed to his factor, agent, or correspondent, giving him order to furnish such or such a man, by name, with such or such a sum of money, at one or more times, and charge it to the account of the merchant that gives the letter of credit, and takes bills of exchange, or receipts for the same." And again: "Now, in the general letter of credit, he that writes it doth make use of his credit for his own account and concernments in his way of trade; and, therefore, there needs no more than his letter of credit to make him liable to repay what shall be so furnished. But in the particular letter of credit, he that writes the letter doth it not to make use of the moneys himself, or to be employed for his own use, but for the use and accommodation of some other man, at whose request he is willing and doth write his letter of credit; and, therefore, it is very expedient and ordinary for him at whose entreaty the letter is written at the writing and upon receipt thereof, to give security by bond, or otherwise, unto the merchant that gives the letter of credit, for repayment unto him, his executors, or assigns, of all such moneys. as shall be received by virtue of the said letters of credit; for the

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