The Indian contract Act gives a mention of the contract of guarantee which is an important section of the act. There are three parties in a guaranteed contract the principal debtor, the creditor, and the surety. The person providing a guarantee to the creditor is called a surety who would pay the debt amount in case of any default by the debtor. The surety is liable to pay the amount to the creditor and the surety’s liability is invoked according to the specific conditions mentioned in the contract. A surety also has rights against the creditor, debtor, and other co sureties. The essence of the contract of guarantee is only when surety is present in it without surety contract of guarantee is incomplete.
The contract of guarantee provides a second option in case the person to whom the money is lent defaults in payment then the second recourse could be chosen by the creditor.
A contract of guarantee is done to get a performance of the promise or discharge of liability accomplished by a third party. In the case of default by one of the original parties to a contract. In the contract of guarantee, the word “surety” is defined as ‘the person who guarantees to perform the contract or pay the compensation for the breach or perform any act concerning cover the breach of the contract. The person to whom the guarantee is given on behalf of one of the parties, the other party who takes the guarantee is called a creditor. The party for whom the surety accepts to be ‘surety’ to perform the tasks in the case of default is called the principal debtor. The guarantee which is provided to the creditor on behalf of the principal debtor can either be written or oral.
SURETY IN INDIAN CONTRACT ACT
In ‘contract of guarantee we can conclude by saying that a surety is liable and solely responsible to a creditor for payment of the amount or discharging of duty in case of breach by the principal debtor.
As per sec 127 of the act, there is a decent amount of consideration given to the surety for giving the guarantee to the creditor for the thing that the principal debtor promises to the creditor. The importance of surety in the contract of guarantee is that he will be made ultimately liable for the amount of the principal debtor defaults in the payment and the surety has to pay the same amount to the creditor on behalf of the principal debtor.
Sec 128 of the Indian contract act provides for surety’s liability which is of coextensive nature with the liabilities of the principal debtor. Here also the creditor can directly sue the surety for default by ignoring the principal debtor. The liability arises for no one when there is a defect seen in the documents. The liabilities of surety are also discharged in certain cases which are being mentioned in sec 130- 144 of the act which provides situations for discharge of liability including the death of the surety, revocation by notice, etc.
Sec 128 very explicitly talks about the right of the surety. Under the contract of guarantee, the surety is made liable co-extensively that means with the principal debtor surety is also made liable on the principal debtor’s behalf. In the case of guarantee the liability of the surety arises at the very moment when the principal debtor makes default in the payment, unless anything contrary to this is mentioned in the contract this is the general rule stated by the act. Also, the Sec 146 of the Indian Contract Act mentions that if there is more than one surety then the debt amount which needs to pay must be equally divided between the sureties. The liabilities of the surety and the principal debtor are the same therefore the liability of the surety cannot be extended to an area for which the principal debtor is not liable. All the responsibility of repayment is taken by surety when the principal debtor will not be able to repay the money.
The terms of the contract define the liabilities of the parties. As the law stated in sec 128 talks about the liability of the surety. The surety has a coextensive liability. But this co-extensive liability is only there when there is no limit to the amount for which surety is liable also the surety’s liability cannot go past what he/she has agreed to take upon.
The commencement of the liability will also have its impact according to the terms of the contract. Also, to note that the liability of the surety is secondary and requires immediate call upon the surety when the principal debtor does default in payment. The cap on surety’s liability can be imposed by the saving words mentioned in Sec 128 that it ‘unless provided contrary in the contract’ this provides surety an opportunity to put a limit in the repayment amount for which the surety wants to be liable. This also gives the option to surety so that surety can fix a certain amount which is mentioned in the contract also the point to mention here is the liability of the surety cannot be more than that of the principal debtor. This gives priority to the terms of the contract for governing the contract.
RIGHTS OF THE SURETY
The surety also has certain rights in the contract that is right against the principal debtor. Against principal debtor, a surety has two rights right of subrogation and the right of indemnity. Right of subrogation is when the surety has paid the amount to a creditor in such a case after payment the surety’s right will be the same as a creditor on the principal debtor. Right of indemnity when the surety pays the amount of debt this makes surety to claim for indemnification which is mentioned in Sec 145 of the act. This gives surety equal rights against the principal debtor as the creditor has when the contract is being formed. Thus, the surety is also protected under the contract of guarantee and cannot be termed as an unprotected debtor as the surety’s liabilities also extend to the liability of the principal debtor and can be further controlled according to surety by mentioning the same in the contract.
Author(s) Name: Shubhangi Agrawal (Hidayatullah National Law University, Raipur)