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RIGHTS OF SURETY IN A CONTRACT OF GUARANTEE

Introduction

In day-to-day life, we come across multiple contracts in varied senses and means. We have seen as kids, that are parents cover for us if we do harm to any of the things and take it upon themselves. Contract of Guarantee is also one such coverage that has legal significance. As per Section 126[1] of the Indian Contract Act, of 1872, “Contract of guarantee is a contract to perform the promise or discharge the liability of a third person, in case of his default. The person who gives the guarantee is called the surety; the person in respect of whose default the guarantee is given is called the Principal Debtor, and the person to whom the guarantee is given is called theCreditor.

For Example, A (Principal Debtor, hereon referred to as PD) buys sheets from B (Creditor) with a promise that he will pay for the sheets later. C (Surety), a friend of A further assures B that if A does not pay the amount, then he will pay the same.

AnalysisMulti-Personality of Surety

There are multiple parties to such a contract of guarantee as discussed above, wherein the role of surety is of huge significance. Herein the rights of surety against the other parties are discussed. 

Rights Against Creditor

A.1. Rights over Securities [Sec 141][2]

As put forth in the aforesaid section, the surety is entitled to all the benefits as the creditor as against Principal Debtor, over the securities. The knowledge of the existence of the securities is immaterial here. If the creditor loses/discharges any of the securities (or parts of it), without the consent of surety, then the surety will be discharged to the extent of the value of the security.

In the case of Central Bank of India v. C.L. Vimla,[3] the mere absence of knowledge about the mutual settlement reached by the Principal Debtor and the Lender bank, is of no consequence, unless stated otherwise in the terms of the contract.

In the case of Karnataka Bank Ltd. v. Gajanan Shankararao Kulkarni,[4] the court held that the surety cannot be released merely by the creditor’s passive negligence in failing to recognize the debt arising from collateral security. Additionally, in the case of Forbes v. Jackson,[5] it was told that if the securities are burdened with advances, then it’ll not affect any rights of the surety.

A.2. Right to share reduction

This right can be understood better by the case of Hobson v. Bass.[6] The liability of surety can be fixed to a certain sum amount/reduce the liability. He can pay part of the dividend as prescribed earlier as per the case of Bardwell v. Lydall.[7]

A.3. Set-off rights

The benefit of set-off that the principal debtor may have had against the creditor may be available to the surety if the latter is issued by the former. The surety may also make a counterclaim if the creditor owes him something or has in their possession that belonged to the debtor and for which they could have made a counterclaim.[8]

A.4. Discharge of Principal Debtor [Section 134][9]

Under section 128[10], the surety and principal debtor are jointly and severally liable. As a result, if the PD is released from culpability, the surety will likewise be released from responsibility as a legal consequence.

An effect of the same can also be seen in Section 135[11] of ICA, whereby if the PD is given a composition, extra time or a promise to not be sued by the surety, then the surety gets discharged from his liability unless consented otherwise.

Against Principal Debtor

B.1 Right of Subrogation [Sec 140][12]

Once all debts owed to the creditor have been settled by the surety on behalf of the PD, the right of ‘Subrogation’ allows the surety to take the position of the creditor.

In the case of Babu Rao Ramchandra Rao v. Babu Manaklal Nehmal[13] it was held that “If the liability of the surety is co-extensive with that of the Principal Debtor, his right is not less co-extensive with that of the creditor after he satisfies the creditor’s debt.” The language of section 140[14] using the word ‘invested’, makes the intention of the said provision lucid.

Unless the provisions of the contract specify otherwise, if the Principal Debtor admits his obligation and it affects the statute of limitations against him, then the surety also gets affected by the same. This can be derived from the case of Bank of India v. Surendra Kumar Mishra.[15] The surety can be bestowed with rights even before the transaction of payment occurs. The courts have time and again imposed injunctions to prohibit the PD from disposing of all his collaterals. This was seen in the case of Mamata Ghose v. United Industrial Bank Ltd.[16]

B.2. Right to claim indemnity [Sec 145][17]

As per this section, there is an implied contract between the surety and the PD (as stated above), that for whatever amount the surety will rightfully pay on behalf of the PD, he is entitled to be indemnified the same by the PD.

No amount that has been wrongfully paid can be restored. This was also held in the case of Supreme Leasing v. Low Chuan Heny.[18]

B.3. By Variance [Section 133][19]

This provision is made in the interest of the surety so to as uphold his rights in good faith. According to this, the surety has the right to be released from his obligation going forward if the creditor and principal debtor make any changes to the guarantee contract without notifying the surety first.

As per the case of Pratapsing Moholalbhai v. Keshavlal Harilal Setalwad,[20] the contract of guarantee comes to an end immediately after the terms are altered, without the consent of the Surety.

Against Co-Sureties

The term ‘co-sureties’ refers to a group of people who each jointly guarantee a debt.[21] The rights that they have against each other are enlisted as follows:

C.1. Effect of Releasing a Surety [Section 138][22]

The release of one surety does not absolve the other sureties of their obligations when there are many sureties involved. The further interpretation of it is enlisted under the judicial interpretations.

C.2. Right to Contribution [Sec 146 -147][23]

“Where two or more persons are co-sureties for the same debt or duty, either jointly or severally, whether under the same or different contracts, 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 that part of it that remains unpaid by the principal debtor.”

If one of the co-sureties has had to pay more than his share, he may be able to recover money from the other co-sureties to divide the loss equally among them, as per the case of Shirley v. Burdett.[24]

C.3. Bound by different sums

As far as their individual obligations’ limits permit, the co-sureties are required to pay equally.[25] As in the case of SBI v. Prem Dass,[26] If more than one party is a surety for a debt and the principal debtor defaults, each surety is liable for an equal share of the default amount.

Conclusion

The multi-personality of surety is depicted via various ways of his, rights, and role in the contract of Guarantee. Multiple Judicial Precedents have been set in adherence to and further explaining the same. This critical appraisal sought to consolidate the provisions and give them a way of interpretation.

Author(s) Name: Bandana Mishra (Symbiosis Law School, Pune)

[1] Indian Contracts Act, 1872, § 126, No. 09, Acts of Parliament, 1872 (India).

[2] Indian Contracts Act, 1872, § 141, No. 09, Acts of Parliament, 1872 (India).

[3] Central Bank of India v. C.L. Vimla, (2015) 7 SCC 337.

[4] Karnataka Bank Ltd. v. Gajanan Shankararao Kulkarni, AIR 177 Kant 14.

[5] Forbes v. Jackson, (1882) LR 19 Ch D 615.

[6] Hobson v. Bass, (1871) LR 6 Ch App 792.

[7] Bardwell v. Lydall, (1831) 131 ER 189.

[8] Bechervaise v. Lewis, (1872) LR 7 CP 372.

[9] Indian Contracts Act, 1872, § 134, No. 09, Acts of Parliament, 1872 (India).

[10] Indian Contracts Act, 1872, § 128, No. 09, Acts of Parliament, 1872 (India).

[11] Indian Contracts Act, 1872, § 135, No. 09, Acts of Parliament, 1872 (India).

[12] Indian Contracts Act, 1872, § 140, No. 09, Acts of Parliament, 1872 (India).

[13] Babu Rao Ramchandra Rao v. Babu Manaklal Nehmal, AIR 1938 Nag 413.

[14] Indian Contracts Act, 1872, § 140, No. 09, Acts of Parliament, 1872 (India).

[15] Bank of India v. Surendra Kumar Mishra, (2003) 1 BC 45 (Jhar).

[16] Mamata Ghose v. United Industrial Bank Ltd, AIR 1987 Cal 280, 283.

[17] Indian Contracts Act, 1872, §, 145 No. 09, Acts of Parliament, 1872 (India).

[18] Supreme Leasing v. Low Chuan Heny, 1989 Current LJ 809.

[19] Indian Contracts Act, 1872, § 133, No. 09, Acts of Parliament, 1872 (India).

[20] Pratapsing Moholalbhai v. Keshavlal Harilal Setalwad, AIR 1935 PC 21.

[21] Indian Contracts Act, 1872, § 146, No. 09, Acts of Parliament, 1872 (India).

[22] Indian Contracts Act, 1872, § 138, No. 09, Acts of Parliament, 1872 (India).

[23] Indian Contracts Act, 1872, § 146, No. 09, Acts of Parliament, 1872 (India).

[24] Shirley v. Burdett, (1911) 2 Ch 418

[25] 12 Avatar Singh, Contract and Specific Relief 600-670, (Eastern Book Company 2017).

[26] SBI v. Prem Dass, AIR 1998 Del 49.