Machetti v. Hospicio de San Jose

Summary

This 1922 Supreme Court case involved a construction contract dispute where contractor Machetti sued Hospicio de San Jose for unpaid balance while Hospicio counterclaimed for damages due to substandard work. After Machetti's insolvency, Hospicio pursued the surety company for the full guarantee amount. The Supreme Court reversed the lower court, establishing important precedent distinguishing guaranty from suretyship under English law principles. The Court held that a guarantor's liability arises only when the principal debtor cannot pay, not merely when they do not pay, and that insolvency declaration alone is insufficient proof of inability to pay without final estate liquidation. This decision clarified surety law principles and protected guarantors from premature liability.