1.

INTRODUCTION
Contract of Indemnity and Guarantee are the specific types of contracts provided under sections
124 to 147 of the Indian Contract Act, 1872. In addition to the specific provisions (i.e. Section 124
to Section 147 of the Indian Contract Act, 1872), the general principles of contracts are also
applicable to such contracts. Even though both the contracts are modes of compensation based on
similar principles, they differ considerably in several aspects.

In this unit, the law relating to indemnity and guarantee are discussed in detail.

2.CONTRACT OF INDEMNITY
The term “Indemnity” literally means “Security against loss” or “to make good the loss” or “to
compensate the party who has suffered some loss”.

The term “Contract of Indemnity” is defined under Section 124 of the Indian Contract Act, 1872.
It is “a contract by which one party promises to save the other from loss caused to him by
the conduct of the promisor himself, or by the conduct of any other person.”

Example 1: Mr. X contracts with the Government to return to India after completing his
studies (which were funded by the Government) at University of Cambridge and to serve the
Government for a period of 5 years. If Mr. X fails to return to India, he will
have to reimburse the Government. It is a contract of indemnity.

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There are two parties in this form of contract.

a. The party who promises to indemnify/ save the other party from loss- “indemnifier”,

b. The party who is promised to be saved against the loss- “indemnified” or “indemnity holder”.

Example 2: A may contract to indemnify B against the consequences of any proceedings which
C may take against B in respect of a sum of ` 5000/- advanced by C to B. In consequence,
when B who is called upon to pay the sum of money to C fails to do so, C would be able to
recover the amount from A as provided in Section 124.

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Example 3: X, a shareholder of a company lost his share certificate. He applied for the duplicate.
The company agreed to issue the same on the term that X will compensate the company against the
loss where any holder produces the original certificate. Here, there is contract of indemnity
between X and the company.

Example 4: X may agree to indemnify Y for any loss or damage that may occur if a tree on Y’s
neighboring property blows over. If the tree then blows over and damages Y’s fence, X will be liable
for the cost of fixing the fence.

Analysis

To indemnify means to compensate or make good the loss. Thus, under a contract of indemnity the
“existence of loss” is essential.Unless the promisee has suffered a loss, he cannot hold the promisor
liable on the contract of indemnity.

However, the above definition of indemnity restricts the scope of contracts of indemnity in as much
as it covers only the loss caused by:

(i) the conduct of the promisor himself, or

(ii) the conduct of any other person.

Thus, loss occasioned by an accident not caused by any person, or an act of God/ natural event,
is not covered.

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Mode of contract of indemnity: A contract of indemnity like any other contract may be express or
implied.

a. A contract of indemnity is said to be express when a person expressly promises to compensate

the other from loss.

b. A contract of indemnity is said to be implied when it is to be inferred from the conduct of the
parties or from the circumstances of the case

A contract of indemnity is like any other contract and must fulfil all the essentials of a valid
contract which includes:
a. Offer and acceptance

b. Intention to create legal obligation

c. Consideration

d. Competency to contract

e. Free consent

f. Lawful object

g. The agreement must not be expressly declared to be void- eg:

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an agreement in restraint of trade/ marriage etc.
h. The terms of the agreement must not be vague or uncertain

i. The agreement must be capable of performance- An agreement to do an impossible act is void.

j. Legal formalities

Example 5: A asks B to beat C promising to indemnify him against the consequences. The promise of
A cannot be enforced. Suppose, B beats C and is fined `1000, B cannot claim this amount from A
because the object of the agreement is unlawful.

A contract of Fire Insurance or Marine Insurance is always a contract of indemnity. But there is no
contract of indemnity in case of contract of Life Insurance.

Rights of Indemnity—holder when sued (Section 125): The promisee in a contract of indemnity,
acting within the scope of his authority, is entitled to recover from the promisor/indemnifier—

(1) all damages which he may be compelled to pay in any suit in respect of any matter
to which the promise to indemnify applies;

(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it,
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the orders of the promisor, and acted as it would have been prudent for him to act in the absence of
any contract of indemnity, or if the promisor authorised him to bring or defend the suit;
(3) all sums which he may have paid under the terms of any compromise of any such suit, if the
compromise was not contrary to the orders of the promisor, and was one which it would have been
prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor
authorised him to compromise the suit.
Analysis:
We can understand from the above provisions that, in a contract of indemnity, the promisee i.e.,
indemnity- holder acting within the scope of his authority is entitled to recover from the promisor
i.e., indemnifier the following rights:
(a) all damages which he may be compelled to pay in any suit
(b) all costs which he may have been compelled to pay in bringing/ defending the suit and
(c) all sums which he may have paid under the terms of any compromise of suit.

It may be understood that the rights contemplated under section 125 are not exhaustive.
The indemnity holder/ indemnified has other rights besides those mentioned above.
If he has incurred a liability and that liability is absolute, he is entitled to call upon
his indemnifier to save him from the liability and to pay it off.

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Please note that the Indian Contract Act is silent about the rights which the Indemnifier has on
carrying out his promise to indemnify. But they are similar to the rights of a surety under section
141 of the Indian Contract Act.
When does the liability of an indemnifier commence?

Although the Indian Contract Act, 1872, is silent on the time of commencement of liability of
indemnifier, however, on the basis of judicial pronouncements it can be stated that the liability of an
indemnifier commences as soon as the liability of the indemnity-holder becomes absolute and certain.
This principle has been followed by the courts in several cases.

Example 6: A promises to compensate X for any loss that he may suffer by filling a suit against Y.
The court orders X to pay Y damages of Rs. 10000. As the loss has become certain, X may claim the
amount of loss from A and pass it to Y.

3. CONTRACT OF GUARANTEE

“Contract of guarantee”, “surety”, “principal debtor” and

“creditor” [Section 126]
Contract of guarantee: A contract of guarantee is a contract to perform the
promise made or discharge the liability, of a third person in case of his default.
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Example 7: When A requests B to lend ` 10,000 to C and guarantees that C will repay the amount
within the agreed time and that on C falling to do so, he (A) will himself pay to B, there is a contract
of guarantee.
Here, B is the creditor, C the principal debtor and A the surety.

Example 8: Where ‘A’ obtains housing loan from LIC Housing and if ‘B’ promises to pay LIC Housing in
the event of ‘A’ failing to repay, it is a contract of guarantee.

Example 9: X and Y go into a car showroom where X says to the dealer to supply latest model of
Wagon R to Y, and agrees that if Y fails to pay he will. In case of Y’s failure to pay, the car
showroom will recover its money from X.
This is a contract of guarantee because X promises to discharge the liability of Y in case
of his defaults.

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Analysis

From the definition, it can be analysed that, Guarantee is a promise to pay a debt owed by a third
person in case the latter does not pay.

Any guarantee given may be oral or written.

From the above definition, it is clear that a contract of guarantee is a tripartite agreement between
principal debtor, creditor and surety. There are, in effect three contracts

(i) A principal contract between the principal debtor and the creditor.

(ii) A secondary contract between the creditor and the surety.

(iii) An implied contract between the surety and the principal debtor whereby principal debtor is
under an obligation to indemnify the surety; if the surety is made to pay or perform.

The right of surety is not affected by the fact that the creditor has refused to sue
the principal debtor or that he has not demanded the sum due from him.

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ESSENTIAL FEATURES OF A GUARANTEE

The following are the requisites of a valid guarantee:-

1. Principal Debt: The purpose of a guarantee being to secure the payment of a debt, the existence
of recoverable debt is necessary. It is of the essence of a guarantee that there should be someone
liable as a principal debtor and the surety undertakes to be liable on his default. If there is no
principal debt, there can be no valid guarantee.

2. Consideration: Like every other contract, a contract of guarantee should also be

supported by some consideration. A guarantee without consideration is void, but there
is no need for a direct consideration between the surety and the creditor.

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As per Section 127 consideration received by the principal debtor is sufficient consideration to the
surety for giving the guarantee, but past consideration is no consideration for the contract of
guarantee. Even if the principal debtor is incompetent to contract, the guarantee is valid. But, if
surety is incompetent to contract, the guarantee is void.

Example 10: B requests A to sell and deliver to him goods on credit. A agrees to do so provided C
will guarantee the payment of the price of the goods. C promises to guarantee the payment in
consideration of A ‘s promise to deliver the goods. As per Section 127, there is a sufficient
consideration for C’s promise. Therefore, the guarantee is valid.

Example 11: A sell and delivers goods to B. C afterwards requests A to forbear to sue B for the
debt for a year, and promises that if he does so, C will pay for them in default of payment by B. A
agrees to forbear as requested. This is a sufficient consideration for C’s promise.

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Example 12: A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for
them in default of B. The agreement is void.
3. Existence of a liability: There must be an existing liability or a promise whose performance is
guaranteed. Such liability or promise must be enforceable by law. The liability must be legally
enforceable and not time barred.
4. No misrepresentation or concealment (section 142 and 143): Any guarantee which has been
obtained by the means of misrepresentation made by the creditor, or with his knowledge and assent,
concerning a material part of the transaction, is invalid (section 142) Any guarantee which the creditor
has obtained by means of keeping silence as to material circumstances, is invalid (section 143).
Example 13: A engages B as clerk to collect money for him. B fails to account for some of his receipts,
and A in consequence calls upon him to furnish security for his duly accounting. C gives his guarantee
for B’s duly accounting. A does not acquaint C, with his previous conduct. B afterwards make default.
The guarantee is invalid.
Example 14: A guarantees to C payment for iron to be supplied by him to B to the amount
of 2,000 tons. B and C have privately agreed that B should pay rupee five per ton beyond
the market price, such excess to be applied in liquidation of an old debt. This agreement is
concealed from A. A is not liable as a surety
5. Writing not necessary: Section 126 expressly declares that a guarantee may
be either oral or written.

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6. Joining of the other co-sureties (Section 144): Where a person gives a guarantee upon a
contract that the creditor shall not act upon it until another person has joined in it as co-surety, the
guarantee is not valid if that other person does not join. That implies, the guarantee by a surety is
not valid if a condition is imposed by a surety that some other person must also join as a co-surety,
but such other person does not join as a co-surety.

4. TYPES OF GUARANTEES
Guarantee may be classified under two categories:

A. Specific Guarantee- A guarantee which extends to a single debt/ specific transaction is called a
specific guarantee. The surety’s liability comes to an end when the guaranteed debt is duly
discharged or the promise is duly performed.

Example 15: A guarantees payment to B of the price of the five bags of rice to be delivered by B to
C and to be paid for in a month. B delivers five bags to C. C pays for them. This is a contract for
specific guarantee because A intended to guarantee only for the payment of price of the first five
bags of rice to be delivered one time [Kay v Groves]

B. Continuing Guarantee [Section 129] - A guarantee which extends to a series of

transaction is called a continuing guarantee. A surety’s liability continues until the revocation
of the guarantee.

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The essence of continuing guarantee is that it applies not to a specific number of transactions but to
any number of transactions and makes the surety liable for the unpaid balance at the end of the
guarantee.

Example 16: On A’s recommendation B, a wealthy landlord employs C as his estate manager. It was
the duty of C to collect rent on 1st of every month from the tenant of B and remit the same to B
before 5th of every month. A, guarantee this arrangement and promises to make good any default
made by C. This is a contract of continuing guarantee.

Example 17: A guarantees payment to B, a tea-dealer, to the amount of ` 10,000, for any tea he
may from time-to-time supply to C. B supplies C with tea to above the value of ` 10,000, and C pays B
for it. Afterwards B supplies C with tea to the value of ` 20,000. C fails to pay. The guarantee given
by A was a continuing guarantee, and he is accordingly liable to B to the extent of ` 10,000.

Example 18: A guarantees payment to B of the price of five sacks of flour to be

delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them.
Afterwards B delivers four sacks to C, which C does not pay for. The guarantee given by
A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.

In the continuing guarantee, the liability of surety continues till the performance
or the discharge of all the transactions entered into or the guarantee is withdrawn.

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5. DISTINCTION BETWEEN A CONTRACT OF INDEMNITY AND A
CONTRACT OF GUARANTEE

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6. NATURE AND EXTENT OF SURETY’S LIABILITY [SECTION 128]
The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise
provided by the contract. [Section 128]

Analysis:

(i) The term “co-extensive with that of principal debtor” means that the surety is liable for what
the principal debtor is liable. However, the liability of the surety may be made less than that of the
principal debtor by an express contract to that effect.

(ii) The liability of a surety arises only on default by the principal debtor. But as soon as the
principal debtor defaults, the liability of the surety begins and runs co-extensive with the liability
of the principal debtor, in the sense that the surety will be liable for all those sums for
which the principal debtor is liable. If there is a condition precedent for surety’s liability,
the surety would be liable only when such condition is fulfilled. A partial recognition
of this principal is found in Section 144 (Joining of co-surety).

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(iii) Where a debtor cannot be held liable on account of any defect in the document, the liability of
the surety also ceases.

(iv) Surety’s liability continues even if the principal debtor has not been sued or is omitted from
being sued. In other words, a creditor may choose to proceed against a surety first, unless there is
an agreement to the contrary.

Example 19: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is
dishonoured by C. A is liable not only for the amount of the bill but also for any interest and charges
which may have become due on it.

Nature of Surety’s liability can be summed up as:

(a) Liability of surety is of secondary nature as he is liable only on default of principal debtor.

(b) His liability arises immediately on the default by the principal debtor.

(c) The creditor has a right to sue the surety directly without first proceeding
against principal debtor.

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7. LIABILITY OF TWO PERSONS, PRIMARILY LIABLE, NOT
AFFECTED BY ARRANGEMENT BETWEEN THEM THAT ONE SHALL
BE SURETY ON OTHER’S DEFAULT
Where two persons contract with a third person to undertake a certain liability, and also contract
with each other that one of them shall be liable only on the default of the other, the third person
not being a party to such contract, the liability of each of such two persons to the third person
under the first contract is not affected by the existence of the second contract, although such
third person may have been aware of its existence. (Section 132)

Example 20: A and B make a joint and several promissory note to C. A makes it, in fact, as surety
for B, and C knows this at the time when the note is made. The fact that A, to the knowledge of C,
made the note as surety for B, is no answer to a suit by C against A upon the note.

8. DISCHARGE OF A SURETY A
surety is said to be discharged when his liability as surety comes to an end.
The various modes of discharge of surety are discussed below:

(i) By revocation of the contract of guarantee.

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(ii) By the conduct of the creditor, or

(iii) By the invalidation of the contract of guarantee.

By revocation of the Contract of Guarantee

(a) Revocation of continuing guarantee by Notice (Section 130): The continuing guarantee
may at any time be revoked by the surety as to future transactions by notice to the creditors.
Once the guarantee is revoked, the surety is not liable for any future transaction however
he is liable for all the transactions that happened before the notice was given.

A specific guarantee can be revoked only if liability to principal debtor has not accrued.

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Example 21: Arun promises to pay Rama for all groceries bought by Carol for a period of 12 months
if Carol fails to pay. In the next three months, Carol buys ` 2000/- worth of groceries. After 3
months, Arun revokes the guarantee by giving a notice to Rama. Carol further purchases ` 1000 of
groceries. Carol fails to pay. Arun is not liable for ` 1000/- of purchase that was made after the
notice but he is liable for ` 2000/- of purchase made before the notice.

Example 22: A guarantees to B, to the extent of ` 100,000, that C shall pay all the bills that B shall
draw upon him. B draws the bill upon C. C accepts the bill. A gives notice of revocation after the bill
is drawn and accepted. C dishonors the bill at maturity. A is liable upon his guarantee.

Example 23: X gives guarantee to the extent of ` 50,000 for the loans given from time to time by A
to B. A gave a loan of ` 10,000 to B. Afterwards, X gives notice of revocation. X is discharged from
all liability to A for any loan granted after the revocation of guarantee but he is liable to A for `
10,000 on default of B.

(b) Revocation of continuing guarantee by surety’s death (Section 131): In the absence
of any contract to the contrary, the death of surety operates as a revocation of a continuing
guarantee as to the future transactions taking place after the death of surety. However,
the surety’s estate remains liable for the past transactions which have already
taken place before the death of the surety.
(c) By novation [Section 62]: The surety under original contract is discharged if a
fresh contract is entered into either between the same parties or between the other parties,

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or between the other parties, the consideration being the mutual discharge of the old contract.

By conduct of the creditor

(a) By variance in terms of contract (Section 133): Where there is any variance in the terms of
contract between the principal debtor and creditor without surety’s consent, it would discharge the
surety in respect of all transactions taking place subsequent to such variance.

Example 24: A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C
contract, without A’s consent, that B’s salary shall be raised, and that he shall become liable for one-
fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of
money. A is discharged from his suretyship by the variance made without his consent, and is not
liable to make good this loss.

Example 25: A guarantees C against the misconduct of B in an office to which B is appointed by

C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act, the
nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged
by the change from future liability under his guarantee, though the misconduct of B is
in respect of a duty not affected by the later Act.

Example 26: C agrees to appoint B as his clerk to sell goods at a yearly salary,
upon A’s becoming surety to C for B’s duly accounting for moneys received by him as such clerk.

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Afterwards, without A’s knowledge or consent, C and B agree that B should be paid by a commission
on the goods sold by him and not by a fixed salary. A is not liable for subsequent misconduct of B.

Example 27: A gives to C a continuing guarantee to the extent of ` 3,00,000 for any oil supplied by
C to B on credit. Afterwards B becomes embarrassed, and, without the knowledge of A, B and C
contract that C shall continue to supply B with oil for ready money, and that the payments shall be
applied to the then existing debts between B and C. A is not liable on his guarantee for any goods
supplied after this new arrangement.

Example 28: C contracts to lend B ` 5,00,000 on the 1st March. A guarantees repayment. C pays the
` 5,00,000 to B on the 1st January. A is discharged from his liability, as the contract has been
varied, in as much as C might sue B for the money before the 1st March.

Variation which is not substantial or material or which is beneficial to the surety will not
discharge him of his liability. In M.S Anirudhan v Thomco’s Bank Ltd. AIR 1963 SC 746,
the surety guaranteed the repayment of loan provided by the bank to the principal
debtor of only upto ` 25,000. Subsequently, since the bank was willing to provide loan only upto `
20,000, the principal debtor reduced the amount to ` 20,000 in the guarantee form and without
intimation to the surety gave it to the bank which was then accepted. On default by the
principal debtor, the court held that the surety’s liability was not discharged as the
alteration was beneficial to him and not substantial.

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(b) By release or discharge of principal debtor (Section 134): The surety is discharged if the
creditor:

i. enters into a fresh/ new contract with principal debtor; by which the principal debtor is released,
or

ii. does any act or omission, the legal consequence of which is the discharge of the principal debtor.

Example 29: A contracts with B for a fixed price to build a house for B within a stipulated time, B
supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the
timber. C is discharged from his suretyship.

Example 30: A gives a guarantee to C for goods to be delivered to B. Later on, B contracts with C to
assign his property to C in lieu of the debt. B is discharged of his liability and A is discharged of his
liability.

(c) Discharge of surety when creditor compounds with, gives time to, or agrees not to sue,
principal debtor [Sector 135]: A contract between the creditor and the principal
debtor, by which the creditor makes a composition with, or promises to give time to, or
promises not to sue, the principal debtor, discharges the surety, unless the surety
assents to such contract.

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i. Composition: If the creditor makes a composition with the principal debtor, without consulting
the surety, the latter is discharged. Composition inevitably involves variation of the original contract,
and, therefore, the surety is discharged

ii. Promise to give time: When the time for the payment of the guaranteed debt comes, the surety
has the right to require the principal debtor to pay off the debt. Accordingly, it is one of the duties
of the creditor towards the surety not to allow the principal debtor more time for payment.

iii. Promise not to sue: If the creditor under an agreement with the principal debtor promises not to
sue him, the surety is discharged. The main reason is that the surety is entitled at any time to
require the creditor to call upon the principal debtor to pay off the debt when it is due and this
right is positively violated when the creditor promises not to sue the principal debtor.

Cases where surety not discharged

i. Surety not discharged when agreement made with third person to give
time to principal debtor [Section 136]: Where a contract to give time to the principal
debtor is made by the creditor with a third person, and not with the principal debtor,
the surety is not discharged.

Example 31: C, the holder of an overdue bill of exchange drawn by A as

surety for B, and accepted by B, contracts with M to give time to B. A is not discharged.

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ii. Creditor’s forbearance to sue does not discharge surety [Section 137]: Mere forbearance on
the part of the creditor to sue the principal debtor or to enforce any other remedy against him does
not in the absence of any provision in the guarantee to the contrary, discharge the surety.

Example 32: B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a
year after the debt has become payable. A is not discharged from his suretyship.

(d) Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy
[Section 139]: If the creditor does any act which is inconsistent with the rights of the surety, or
omits to do any 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. It is the
plain duty of the creditor not to do anything inconsistent with the rights of the surety. A surety is
entitled after paying off the creditor, to his indemnity from the principal debtor. If the creditors
act or omission deprives the surety of the benefit of this remedy, the surety is discharged.

In a case before the Supreme Court of India, “A bank granted a loan on the security of
the stock in the godown. The loan was also guaranteed by the surety. The goods were
lost from the godown on account of the negligence of the bank officials. The surety
was discharged to the extent of the value of the stock so lost.” [State bank of
Saurashtra V Chitranjan Rangnath Raja (1980) 4 SCC 516]

Example 33: C contracts with B to build a ship the payment of which is to be made in

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installments at various stages of completion. A guarantee's C's performance. B prepays last two
installments. A is discharged of his liability. A is discharged by this prepayment.

Example 34: A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B promises on
his part that he will, at least once a month, see that M make up the cash. B omits to see this done as
promised, and M embezzles. A is not liable to B on his guarantee.

By the invalidation of the contract of guarantee

(a) Guarantee obtained by misrepresentation invalid [Section 142]: Any guarantee which has
been obtained by means of misrepresentation made by the creditor, or with his knowledge and
assent, concerning a material part of the transaction, is invalid.

(b) Guarantee obtained by concealment invalid [Section 143]: Any guarantee which the creditor
has obtained by means of keeping silence as to material circumstances is invalid.

Example 35: A engages B as a clerk to collect money for him, B fails to account for some of his
receipts, and A in consequence calls upon him to furnish security for his duly accounting.
C gives his guarantee for B’s duly accounting. A does not acquaint C with B’s previous conduct.
B afterwards makes default. The guarantee is invalid.

Example 36: A guarantees to C payment for iron to be supplied by him to B for the amount
of 2,00,000 tons. B and C have privately agreed that B should pay five rupees per ton beyond

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the market price, such excess to be applied in liquidation of an old debt. This agreement is concealed
from A. A is not liable as a surety.

(c) Guarantee on contract that creditor shall not act on it until co-surety joins (Section 144):
Where a person gives a guarantee upon a contract that the creditor shall not act upon it until
another person has joined in it as cosurety, the guarantee is not valid if that other person does not
join.

9. RIGHTS OF A SURETY
The surety enjoys the following rights against the creditor:

(a) Rights against the creditor,

(b) Rights against the principal debtor,

(c) Rights against co-sureties.

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Right against the principal debtor

(a) Rights of subrogation [Section 140]: 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.

This right is known as right of subrogation. It means that on payment of the guaranteed debt, or
performance of the guaranteed duty, the surety steps into the shoes of the creditor.
(b) Implied promise to indemnify surety [Section 145]: In every contract of guarantee there is an
implied promise by the principal debtor to indemnify the surety. The surety is entitled to recover
from the principal debtor whatever sum he has rightfully paid under the guarantee, but not sums
which he paid wrongfully.

Example 37: B is indebted to C, and A is surety for the debt. C demands payment from A, and on his
refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is
compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him
for costs, as well as the principal debt.
Example 38: B is indebted to C and A is surety for the debt. Upon default, C sues A.
A defends the suit on reasonable grounds but is compelled to pay the amount. A is entitled to
recover from B the cost as well as the principal debt.

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In the same case above, if A did not have reasonable grounds for defence, A would still be entitled
to recover principal debt from B but not any other costs.
Example 39: A guarantees to C, to the extent of 2,00,000 rupees, payment for rice to be supplied
by C to B. C supplies to B rice to a less amount than 2,00,000 rupees, but obtains from A payment of
the sum of 2,00,000 rupees in respect of the rice supplied. A cannot recover from B more than the
price of the rice actually supplied.
Right against the Creditor

Surety’s right to benefit of creditor’s securities [Section 141]: 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.

Example 40: C advances to B, his tenant, 2,00,000 rupees on the guarantee of A. C

has also a further security for the 2,00,000 rupees by a mortgage of B’s furniture.
C cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is
discharged from liability to the amount of the value of the furniture.
Example 41: C, a creditor, whose advance to B is secured by a decree, receives also
a guarantee for that advance from A. C afterwards takes B’s goods in execution under
the decree, and then, without the knowledge of A, withdraws the execution. A is discharged.
CA Indresh Gandhi
Example 42: A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B.
Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives the up the
further security, A is not discharged.

Right to set off: If the creditor sues the surety, for payment of principal debtor’s liability, the
surety may have the benefit of the set off, if any, that the principal debtor had against the
creditor.

Right to share reduction: The surety has right to claim proportionate reduction in his liability if the
principal debtor becomes insolvent.

Rights against co-sureties

“Co-sureties (meaning)- When the same debt or duty is guaranteed by two or more persons,
such persons are called co-sureties”

(a) Co-sureties liable to contribute equally (Section 146): Equality of burden

is the basis of Co-suretyship. This is contained in section 146 which states that “when 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 remains unpaid by the principal debtor”.

CA Indresh Gandhi
Example 43: A, B and C are sureties to D for the sum of 3,00,000 rupees lent to E. E makes default
in payment. A, B and C are liable, as between themselves, to pay 1,00,000 rupees each.

Example 44: A, B and C are sureties to D for the sum of 1,00,000 rupees lent to E, and there is a
contract between A, B and C that A is to be responsible to the extent of one-quarter, B to the
extent of one-quarter, and C to the extent of one- half. E makes default in payment. As between the
sureties, A is liable to pay 25,000 rupees, B 25,000 rupees, and C 50,000 rupees.

(b) Liability of co-sureties bound in different sums (Section 147): The principal of equal
contribution is, however, subject to the maximum limit fixed by a surety to his liability. Co-sureties
who are bound in different sums are liable to pay equally as far as the limits of their respective
obligations permit.

Example 45: A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of
4,00,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of
3,00,000 rupees. A, B and C are each liable to pay 1,00,000 rupees.

Example 46: A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of
4,00,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of
4,00,000 rupees; A is liable to pay 1,00,000 rupees, and B and C 1,50,000 rupees each.

CA Indresh Gandhi
Example 47: A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of
4,00,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of
7,00,000 rupees. A, B and C have to pay each the full penalty of his bond.

CA Indresh Gandhi