Rights of Surety under the Indian Contract Act 1872

RIGHTS OF SURETY In my part I am going to deal with what is the right of a surety. In what conditions he can be held liable and in what conditions he can discharge from his duties. Before coming to rights of surety I am again going to give the definition of surety. According to THE INDIAN CONTRACT ACT, 1872 in section 126 it is defined as “the person who gives the guarantee is called the ‘surety’.”

Rights of the surety

There are three rights provided to the surety according to the Indian contract act

1. Rights against principal debtor
2. Right against creditor
3. Right against the sureties.

1. Right against principal debtor: According to the Indian contract act there are two to rights provided to the surety against the principal debtor.

1. Right of Subrogation.
2. Right to indemnity.

Right of subrogation: According to the section 140 of the Indian contract Act 1872 “Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.” When the surety has paid all that he is liable for he is invested with all the rights which the creditor had against the principal debtor.[1] The surety steps into the shoes of the creditor.[2] “If the liability of the surety is co-extensive with that of the principal debtor, his right is not less coextensive with that of the creditor after he satisfies the creditor`s debt”.[3] The surety may, therefore, sue the principal debtor in the rights of the creditor. The surety may, therefore, sue the principal debtor in the rights of the creditor. For example in Iron Ore Co Re:[4] Right to indemnity: According to section 145 of the Indian Contract Act “ in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully.” Thus in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety.[5] The rights enables the surety to recover from the principal debtor whatever some sum he rightfully paid under the guarantee.[6] Surety`s right of indemnity is only in respect of the payments, rightfully made by him.[7]

2. Right against creditor: Surety has the following rights against the creditor which are:

1. Right to securities.

Right to securities: According to section 141 of the Indian contract act, “A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of surety ship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of security.” The section recognizes and incorporates the general rule of equity as expounded in Craythrone v Swinburne[8] that the surety is entitled to every remedy which creditor has against the principal debtor, including enforcement of every security.[9]

3. Right against the Co-sureties: where debt has been guaranteed by more than one person, they are called co-sureties.[10] These co-sureties has right against each other also which are as follows:

1. Effect of releasing a surety.
2. Right to contribution.

Effect of releasing a surety: According to section 138 of Indian contract act “ Where there are co-sureties a release by the creditor of one of them does not discharge the others , neither does it free the surety so released from his responsibility to the other.” The creditor may at his will release any of the co-sureties from his liability.[11] But it does not meant that the other co-sureties are his discharge from his duty towards the creditor and the principal debtor. However, the released co-surety will remain liable to the others for contribution in the event of default.[12] Right to contribution: according to section 146 of Indian contract act “where two or more persons are co-sureties for the same debt or duty, either jointly or severally, and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remain unpaid by the principal debtor Illustration: A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in payment. A, B and C are liable as between themselves, to pay 1,000 rupees each.[13] According to section 147 of Indian contract act “Co-sureties who are bound in the different sums are liable to pay equally as far as the limits of their respective obligations permit.” In this type of contract it does not mean that creditor`s right to recover the money is affected. In this contract also creditor can recover the money from any of the surety in spite of the fact that he knows about this contract between the sureties. But it does not meant that co-sureties right is infringed in this case later on he can recover his money form the other co-sureties. Liability of Surety: According to section 128 of Indian Contract Act “The Liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.” The provision that the surety`s liability is co-extensive with that of the principal means that the principal debtor means that his liability is exactly the same as that of the principal debtor.[14] It means that on default having been made by the principal debtor, the creditor can recover from the surety all what he could have recovered from the principal debtor.[15] If the principal debtor`s liability is reduced, e.g., after the creditor has recovered a part of the sum due from him out of his property, the liability of surety is reduced accordingly.[16] The liability of the principal debtor is held to be enforceable on the ground of the contract being illegal, there is no question of surety being liable.[17] If the principal debtor happens to be minor and the agreement made by him is void, the surety too cannot be made liable in respect of the same because the liability of surety is co-extensive with that of the principal debtor.[18] A guarantee which extends to a series of transactions, is called a ‘continuing guarantee’.[19] For example, surety guarantees the repayment of loan of Rs. 5000 which the principal debtor may take from the creditor from the creditor, or he may undertake to be answerable for the conduct of the principal debtor in respect of series of transactions.[20]

Discharge of surety from the liability

There are seven ways in which surety can be discharged from his liability.

1. Revocation by the surety: “A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.”[21] But it does not mean that the his liability is not for the past transactions is also discharged. He is liable for the past transactions.
2. By Surety`s death: “The death of the surety operates, in the absence of any contract to the contrary, as revocation of a continuing guarantee, so far as regards future transactions.”[22] But if there is contract to the contrary than liability of surety is not discharge.
3. By variance in the terms of contract: “Any variance, made without the surety`s consent, in the terms of the contract between the principal [23][debtor] and the creditor, discharges the surety as to transactions subsequent to variance.”[24] But if the consent is given by the surety in relation to the variance in terms of contract he is not discharge from his liability.
4. By release or discharge of the principal debtor: “the surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any or omission of the creditor, the legal consequence of which is the discharge of the principal debtor”[25] it is also understood in the light of section 128 that the liability of Surety is co-extensive with that of the principal debtor. So from this also he is discharged from the liability.
5. By creditor’s compound with, gives time to , or agrees not to sue, the principal debtor: “A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to , or not to sue, the principal debtor, discharges the surety, unless assents to such contract.”[26] But if the consent is given by the surety to such contract than he is not discharged from the liability.
6. By creditor`s act or omission impairing surety`s eventual remedy: “if the creditor does any act which is inconsistent with the rights of the surety`s, or omits to do act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor.is thereby impaired, the surety is discharged.”[27] But if creditor do an act which has nothing to do with the surety than in this case surety is not discharged.
7. By loss of security by the creditor: “ A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security”[28] but if there is no fault of the creditor in the loss of security than in this case surety is not discharged.

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[1] Avtar singh , contract and specific relief act. Pub eastern book company. Pp. 635 [2] ibid [3] Babu rao Ramchandra rao v. babu manakal nehmal, AIR 1938 Nag 413 [4] (1927) 1 Ch 308 [5] Avtar singh , contract and specific relief act. Pub eastern book company. Pp. 635 [6] Karnail Singh Randhawa v. Jagir Kaur, (2008) 66AIC 539(P&H),entitled to recover the same amount from the principal, can also recover interest on it [7] R.K. Bangia , law of contract-II, Allahabad Law Agency pp. 38 [8] (1807)14 Ves Jun 160: 33 ER 482. [9] Industrial Finance Corpn Of India Ltd v Cannanore Spg & Wvg Mills Ltd,(2002) 5 SCC 54: AIR 2002 SC 1841(2002) 110 Comp Cas 685. [10] Avtar singh , contract and specific relief act. Pub eastern book company. Pp. 643 [11] ibid [12] Sri Chand v Jagdish Parshad Kishan Chand, AIR 1966 SC 1427: (1966) 3 SCR 451, 456-7; Rajamma v C. Puttachari, (2005) AIR Kant 1542. [13] Indian contract Act, 1872. Pp.46 [14] R.K. Bangia , law of contract-II, Allahabad Law Agency pp. 17 [15] ibid [16] A.I.R 1973 Raj. 347. [17] Harigopal Agrawal v. State Bank Of Inida, A.I.R 1956 Mad. 413, at 419 [18] Kelappan Nambair v.kunhi Raman, A.I.R 1957 Mad. 164. [19] Section 129 . ICA, 1872. Pp.41 [20] R.K. Bangia , law of contract-II, Allahabad Law Agency pp.22 [21] Section 130. ICA, 1872. Pp.41 [22] Section 131. ICA, 1872. Pp.42 [23] Ins by Act 24 of 1917, sec. 2 and Sch.I [24] Section 133. ICA, 1872. Pp.42 [25] Section 134. ICA, 1872. Pp.43 [26]Section 135. ICA, 1872. Pp.43 [27] Section 139. ICA, 1872. Pp.44 [28] Section 141. ICA, 1872. Pp.44

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