By Matthew A. Quick A guaranty assumes liability for contractual obligations of another in the event the obligations are not performed. In many instances, the contractual obligations that a guaranty ensures include payment of funds, payment of fees and costs associated with collecting any funds and performance of tasks and duties. To specifically ascertain the liability of a guaranty, however, one must always look to the agreement between the guaranty and the party for whom the guaranty is ensuring action (pursuant to the Statute of Frauds, agreements to guarantee must be in writing to be effective). McCarthy Foundation v Winshall, 372 Mich 389 (1964); First National Bank of Ypsilanti v Redford Chevrolet Company, 270 Mich 116 (1935). After agreeing to guaranty an obligation, guaranties are bound until the obligation has been performed, unless the obligation is modified.
If the obligation is modified, guaranties are not immediately discharged. A guaranty's continuing liability depends on the type of guaranty it represents. Guaranties are categorized in two types: gratuitous and compensated. A gratuitous guaranty ensures contractual obligations without requiring compensation (e.g. a friend or family member) and a compensated guaranty only ensures contractual obligations if paid (e.g. an officer of a company; a bond or surety company). In the case of gratuitous guaranties, liability will not be extended to an obligation which varies from the one that was contemplated when the guaranty became bound. In other words, the risk of the guaranty will not be increased in any manner without the guaranty's consent, nor will the immediate protection of the guaranty be lessened in the event of default. Grinnell Realty Company v General Casualty & Surety Company, 253 Mich 16 (1931).
In the case of compensated guaranties, the rule is that they are not discharged unless the departure from the initial obligation of the parties is material and the guaranty is injured by the change in the contract. In re Landwehr's Estate, 286 Mich 698 (1938); Grinnell Realty Company v General Casualty & Surety Company, 253 Mich 16 (1931); Gunsul v American Surety Company of New York, 308 Ill 312 (1923).
In short, a compensated guaranty's bond is looked upon as one of insurance or indemnity instead of one of suretyship or guaranty. Grinnell Realty Company v General Casualty & Surety Company, 253 Mich 16 (1931).