601 Construction of Bonds

• Jurisdiction: Arizona

(a) Nature of Suretyship

A surety or guarantor is one who promises to answer for the debt, default, or miscarriage of another.

 Contracts of suretyship are often thought to be contracts of insurance. Both forms of contracts are generally written by insurance companies to protect some person or persons from loss, but there are also important differences.

 Originally, the only sureties were individuals who assumed the obligations gratuitously. Gratuitous or noncompensated sureties were treated as favorites of the law. See Indian Village Shopping Center v. Kroger Co., 175 Ariz. 122, 854 P.2d 155 (App. 1993). Now, most sureties are insurance companies. Because corporate insurance companies charge for becoming sureties, the courts have sometimes considered suretyship as insurance. Dodge v. Fidelity & Deposit Co. of Maryland, 161 Ariz. 344, 778 P.2d 1240 (1989); Massachusetts Bonding & Ins. Co. v. Lentz, 40 Ariz. 46, 9 P.2d 408 (1932); Lassetter v. Becker, 26 Ariz. 224, 224 P. 810 (1924).

Because suretyship is grounded in commercial practice, the distinction between it and insurance is also recognized. Pearlman v. Reliance Ins. Co., 371 U.S. 132, 140 n. 19, 83 S.Ct. 232, 236, 9 L.Ed.2d 1901 (1962).

The Restatement of Security § 82 (1941), at 228, defines suretyship as follows:

 Suretyship is the relation which exists where one person has undertaken an obligation and another person is also under an obligation or other duty to the obligee, who is entitled to but one performance, and as between the two who are bound, one rather than the other should perform.

This definition emphasizes that in suretyship, unlike in insurance, there is no shifting of the obligation. The principal obligor always remains responsible.

(b) Principles of Interpretation

(1) General

A surety’s liability is strictly limited to and measured by the terms of its contract. The operative clauses of a bond take precedence over the recitals. An interpretation which gives a reasonable, lawful, and effective meaning to all manifestations of intention is preferred to an interpretation which leaves part of such manifestations unreasonable, unlawful, or of no effect.

 Our courts have said that “surety contracts are constructed according to the same rules applicable to other contracts.” Cushman v. National Sur. Corp. of New York, 4 Ariz. App. 24, 417 P.2d 537 (1966). The court of appeals went on to define what it meant by saying:

The liability of a surety is measured by his contract, and, whether he is a gratuitous or compensated surety, while he is liable to the full extent thereof such liability is strictly limited to that assumed by its terms, *** and the surety has the right to stand on the strict, or precise, or the very terms of his contract, and to rely on the strict letter thereof. 72 C.J.S. Principal and Surety § 91 (1951), pages 569-572.

Id. at 27.

The Arizona Supreme Court affirmed this holding in 1975 by quoting with approval the rule announced in Cushman. Western Sur. Co. v. Horrall, 111 Ariz. 486, 533 P.2d 543 (1975). The same rule was also applied in Hilburn v. General Elec. Credit Corp., 8 Ariz. App. 10, 442 P.2d 547 (1968). See also U.S. Fidelity & Guar. Co. v. California-Arizona Constr. Co., 21 Ariz. 172, 186 P. 502 (1920).

Where the recital and operative clauses of a bond conflict, the operative clauses will prevail. Employer’s Liab. Assurance Corp. v. Lunt, 82 Ariz. 320, 313 P.2d 393 (1957); Jamison v. Franklin Life Ins. Co., 60 Ariz. 308, 136 P.2d 265 (1943). Recital clauses appear in the beginning of bonds

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