In the 1897 case American Surety Company v. Pauly, the U.S Supreme Court ruled in favor of defendant and respondent William G. Pauly against plaintiff and appellant American Surety Company of New York. The dispute arose from a bond contract between both parties where American Surety agreed to be liable for any default by Mr. Pauly's company during its role as an assignee in bankruptcy proceedings for another firm, J.J White & Co., up to $20,000 limit set by the bond agreement. However, when losses exceeded this amount due to alleged negligence on part of Mr.Pauly's company while handling assets of J.J White & Co., American Surety refused liability beyond $20,000 arguing that they were not informed about potential risks exceeding this sum at time of entering into contract. The court held that since there was no evidence showing concealment or misrepresentation by Mr.Pauly regarding possible liabilities above $20,000 at time of signing bond agreement; it was responsibility of American Surety as professional guarantor to assess such risks before agreeing upon a fixed liability limit.

In the dissenting opinion for American Surety Company v. Pauly, Justice Harlan disagreed with the majority's interpretation of contract law and its application to this case. He argued that a surety company should not be held liable for losses incurred by a bank due to fraudulent activities committed by an employee after his bond had expired, even if those activities were related to transactions initiated during the term of his bond. According to Justice Harlan, such an interpretation would unfairly extend the liability of surety companies beyond what was agreed upon in their contracts and could potentially discourage them from providing bonds in future cases involving similar risks. Instead, he suggested that liability should only apply when there is clear evidence showing that fraudulent actions occurred within the period covered by a given bond.