Critical Analysis of Rights and Liabilities of Surety

Submitted by- Payal Singh Submitted to- Dr. Sangeeta Taak

Charushila Gharu
22222, 22192 Assistant Professor of Law
1 year 2nd semester
st
at Rajiv Gandhi National University
of Law, Punjab

Rajiv Gandhi National University of Law

Punjab, Patiala
2023

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Table of Contents
DECLARATION......................................................................................................................2

SUPERVISOR’S CERTIFICATE..........................................................................................3

ACKNOWLEDGEMENT.......................................................................................................4

Statement of Problem...............................................................................................................5

Review of Literature................................................................................................................5

Research Objective...................................................................................................................5

Hypothesis Formed..................................................................................................................5

Research Methodology.............................................................................................................5

Introduction..............................................................................................................................6

Rights of surety.........................................................................................................................7

Right against principal debtor-...........................................................................................7

Rights against creditor.........................................................................................................9

Right to share Reduction....................................................................................................11

Right of set off-....................................................................................................................11

Rights against Co- sureties.................................................................................................12

Liabilities of Surety................................................................................................................13

Nature..................................................................................................................................13

Condition precedent...........................................................................................................15

Proceeding against surety without exhausting remedies against the debtor.................16

Suit against surety alone....................................................................................................16

Impossibility and Novation of main Contract..................................................................17

Liability under Continuing Guarantee.............................................................................18

Critical Analysis and Conclusion..........................................................................................19

REFERENCES.......................................................................................................................20

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 DECLARATION

I hereby declare that the project report entitled “Critical Analysis of Rights and Liabilities
of Surety”, submitted to Rajiv Gandhi University of Law, Punjab, Patiala is an outcome
of my original work carried out under the supervision of Dr. Sangeeta Taak. The Project is
entirely based on my own research work and has not been submitted elsewhere. All the ideas
and references have been duly acknowledged. To the best of my understanding , the project is
free from plagiarism.

Payal Singh

Rajiv Gandhi National University of Law, Punjab

Patiala

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 SUPERVISOR’S CERTIFICATE

This is to certify that the project assignment entitled “Critical Analysis of Rights and
Liabilities of Surety” submitted to Rajiv Gandhi National University of Law, is a research
work carried out by “Payal Singh” under my supervision and guidance for further
evaluation.

Dr. Sangeeta Taak

Assistant professor in Law

Rajiv Gandhi National University

Of Law, Punjab, Patiala

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 ACKNOWLEDGEMENT

This project is the result of many people constantly helping and guiding me through out this
effort. First of all, I owe a sincere debt of gratitude to professor Mr. Aashish Gaur who
provided me this wonderful opportunity to work on this project. I thank her for her
unwavering support and guidance throughout this effort. The completion of this project is
owed to her constant guidance and supervision. I am privileged to have this opportunity to
work on a project that has such an enriching and learning experience.

I would also express my heartfelt gratitude to respected vice chancellor Dr. Anand Pawar Sir
who provided us with such a wonderful and enriching opportunity to work and nurture our
skills. I am grateful for this opportunity where I could showcase my skills at an esteemed
university like RGNUL, PUNJAB.

A warm gratitude to the staff members of library and the It lab who helped me in my
researching and references of resources and content. The success of this project has been
possible by there ever extended help in accessing library books and e-resources.

Payal Singh

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Statement of Problem

The research paper aims to study the surety’s rights and liabilities and understand the nature,
extent and various other factors that make the surety’s position unambiguous in different
circumstances of this world of growing business and transaction.

Review of Literature

In this research paper, various secondary sources such as books, journals and web articles on
the topic have been referred and duly cited. Reference has been taken from sources like SCC
Online and Manupatra for getting details of the facts and the judgements of the Supreme
Court cases that we have mentioned in the paper. The books on contract law authored by
Avtar Singh and Dr. R.K. Bangia have been used for getting better clarity of the provisions of
law. Bare Act of The Indian Contract Act has also been used for taking reference of the
specific sections.

Research Objective
 To study various fundamental principles about rights and liabilities of a surety.
 To discuss various provisions of The Indian Contract Act 1872 which deal with
making the surety liable if he fails to perform his duty and
 To examine the provisions which provide him with rights that protect him from being
exploited.

Hypothesis Formed

The rights and liabilities given to a surety is a shield to protect him from the prejudice against
his presumed position in the contract of guarantee and to make sure that the purpose of the
contract of guarantee is met with.

Research Methodology
The research methodology used in this project mainly comprises the use of secondary
sources such as research papers, reports and web articles on the same issue and duly citing
them in the project. The emphasis laid is slightly more on the use of qualitative data than on
quantitative data. The use of books on Indian History and online resources like e-books,

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articles on the websites and e-journals are there. Subjective means like books, articles and
various blogs were used. The usage of secondary means like existing means like existing
surveys, thesis, and research papers were also referred to, all of which are properly cited in
the project. 
The main limitation of this study is no use of primary data such as sample surveys or
interviews and use of secondary sources such as pre-existing research papers and reports due
to inexperience and naiveness in the field of primary research.

Introduction
The Indian Contract Act 1872, provides specific provisions to deal with certain special
contracts. The sections above 124 deal with contracts of indemnity, guarantee, bailment, and
agency which are special in nature. The section 126 defines the contract of guarantee. The
contract of guarantee provides assurance for the payment of debt or any transaction by one
party to a third party. The contract of surety brings with itself the scope of certain rights and
liabilities that the surety has. The paper deals to study those rights and liabilities of the surety.
The surety contracts for the benefit of the principle debtor, it has no inherent benefit for its
own. Therefore, it becomes necessary to protect the rights of the surety and also ensure the
liabilities.

Surety

“Section 126- “Contract of guarantee”, “surety”, “principal debtor” and “creditor”.—A

“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 the “creditor”. A guarantee may be
either oral or written”1. Thus, suretyship is the result of growing economy and the increasing
transactions and upheavals in business world. The surety is a person who assures the interest
of the creditor, to probably indemnify it from any loss occurring due to the misdeeds of the
principal debtor. The surety guarantees the protection of principal debtor and the creditor by
bridging the scope of their potential losses.

1
Treitel GH, The Law of Contract (2003)

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“The contract of surety comprises of three different contracts. One between the principal
debtor and the creditor, second between principal debtor and the surety and the third between
the surety and the creditor. There are three different parties involved altogether2”.

Any contract without consideration is void as per the section2 clause d of the Indian Contract
Act 1872. This raises the question of the consideration of the guarantor in contract of
guarantee or surety. The guarantor has no intrinsic or personal benefit as consideration in
cases of guarantee. Here the benefit of the principal debtor acts as the interest of the surety
forming the consideration for the contract of guarantee. It is specified in the “Section 127 of
the Indian Contract Act 18723”.

Thus, a surety without any personal gain plays a role of indemnifier which makes it necessary
to protect it from a prejudiced position and exploitation. To satisfy this issue, the surety has
been granted certain rights in order to shield it against biases and exploitation. On the other
hand some liabilities have been incurred upon to bind him/her to fulfil the obligation agreed
under the contract of Guarantee.

This paper would study and analyse both the rights and liabilities of the surety through
illustrations and precedents.

Rights of surety
The surety has certain rights against the principal debtor, creditor and co-sureties.

Right against principal debtor-

Two different types of rights that a surety has against the principal debtor are outlined in
sections 140 and 145. First, right to subrogation is mentioned in section 140.

140. Rights of surety on payment or performance.— 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. —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."

2
Singh A, Contract & Specific Relief (Rajesh Kapoor and Abhinandan Malik eds, Thirteenth Edition, EBC
2022)

3
Supranote2

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All of the creditor's rights against the principal debtor are transferred to the surety once he
has paid all for which he is responsible. In place of the creditor, the surety assumes that role.
If the surety's liability is equal to that of the principal debtor, then when he pays the creditor's
debt, his right remains equal to that of the creditor. As a result, the surety has the right to file
a lawsuit against the principal debtor.

Case law- “Kadamba Sugar Industries Pvt. Ltd. v Devru Ganpathi Hedge Bhairi4”

Facts- The instant appellant-1 Kadamba Sugar Industries Private Ltd., in Bastigalli in Sirsi,
received a loan of Rs. 3,00,000 from The Corporation Bank, which has its Administrative
Office in Mangalore and a Branch Office there as well. Both the present respondents and
appellant-2 have pledged their personal assets as surety bonds to guarantee loan repayment.
All of the Kadamba Sugar Industries Private Ltd.'s assets, including the machinery and real
estate owned by Kadamba Industries, were hypothecated and charged for the aforementioned
debt, and an equitable mortgage was also established by depositing the title deeds for the
relevant real estate. The Corporation Bank filed a lawsuit against Kadamba Sugar Industries
and all of the sureties because it appears that the principal debtor and the sureties failed to
repay the loan on time. The lawsuit seeks to recover the loan amount as well as any interest
that may have accumulated.

Judgement- By the aforementioned order, the court allowed defendants to be substituted for
the original plaintiff, the Corporation Bank, as plaintiffs.

Case Law- “Babu Rao Ramachandra Rao v Babu Manaklal Nehmal5”

Facts- In exchange for a loan of Rs. 1100 from the plaintiff, Rajmal received a promise from
the defendant to pay Rs. 400. The defendant made a payment of Rs. 220, leaving the
remaining Rs. 180 unpaid. Rajmal requested a debt settlement with the Debt Conciliation
Board. The plaintiff did not include his debt in his statement of indebtedness when he
appeared before the board because he planned to recover it from the surety (defendant). For
the purpose of recovering the expenses and interest, the plaintiff filed a lawsuit.

Judgement- If the surety's liability is equal to the principal debtor's, then after the surety pays
the creditor's debt, his right is still equal to the creditor's. This privilege includes the ability of

4
Kadamba Sugar Industries Pvt. Ltd. v Devru Ganpathi Hedge Bhairi ,AIR 1993 Kant 288, ILR 1993 KAR
679, 1993 (1) KarLJ 285
5
Rao Ramchandra Rao v. Babu Manaklal AIR 1938 Nag 413

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the surety to file a lawsuit against the principal debtor to obtain an indemnification equivalent
to that of a creditor.

The second kind of right of surety against the principal debtor is the right to indemnity which
has been defined under Section 145 of the Indian Contract Act.

S.145 “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.”

There is an implied contract of indemnity between the principal debtor and the surety in
every guarantee agreement. In this case, the principal debtor is obligated to reimburse the
surety for any contractual obligations that he has paid. It was further decided in the case of
Karnail Singh Randhawa v. Jagir Kaur that the surety is even entitled to interest payments on
the debt owed to him.

Case Law- “Chekkera Ponnamma v A.S. Thammayya6”

Facts- In order to purchase four motor vehicles, Thammayya entered into hire purchase
agreements with a company called Finance Corporation, Bangalore, whose sole owner was a
man named Sirdar Labsingh Kohli (hereafter referred to as the Corporation). As per the terms
and conditions of those hire purchase agreements, Machayya was required to pay the
Corporation a specific amount of money. However, he failed to do so. The plaintiff, who was
the guarantor, agreed to pay the amount on behalf of Machayya; that after negotiations with
the Corporation, he, the plaintiff, had obtained a reduction in the liability to Rs. 4,000; that
after negotiations with the Corporation, he, the plaintiff, had paid Rs. 4,350 in full
satisfaction of the debt owed to the Corporation; and that, under the circumstances, the
defendants were obligated to reimburse him for his payment.

Judgement- The surety was required by the court to provide evidence of the amount of money
gained from the sale of the cars, but he was unable to do so. It was decided that the surety's
payment was improper as a result. As a result, the surety's claim to indemnification was
rejected.

Rights against creditor-

6
Chekkera Ponnamma v A.S. Thammayya, AIR 1983 Kant 124, 1983 (1) KarLJ 44

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Surety’s rights against creditor include right to securities, right to share reduction and right of
set off. Firstly, right to securities has been defined under Section 141 of the Indian Contract
Act.

Sec.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.

When the creditor is satisfied, the surety assumes his position and gains the right to any
security that the creditor may have against the principal debtor. Whether the surety is aware
of the security's existence or not does not affect the existence of the right. The creditor has a
responsibility to safeguard the securities. The right of the surety will not be affected if the
securities are further encumbered with advances. It is true that Section 141 has changed the
English norm that the surety is entitled to the securities delivered to the creditor both before
and after the contract of guarantee and has limited the surety's right to the securities owned
by the creditor at the date of his becoming surety. But with this exception, Section 141 adopts
the English law principle that a surety is released from liability when the creditor loses or part
ways with the security that is held by him.

Case Law-“Wuff & Billing v. Jay7”

Facts- The defendant served as the surety for the £ 300 that the plaintiff lent to A and B and
provided to them. A and B are provided by an accomplishment during the loan period as
security for the sum that was obtained from the plaintiff. When A and B are in default, the
plaintiff was given the option to sell the security. The defendant did not acquire possession as
a result of the debtors' insolvency and default. Even though the plaintiff was aware of its
insolvency, it was still in possession.

Judgement- According to the court, "the plaintiffs had forfeited their right to assign the
security to the surety by failing to seize the property assigned on default." As a result, he was
released to the amount that the goods were actually worth.

Case Law-“Forbes v. Jackson8”

7
Wulff and Billing v. Jay (1872)7 Q.B. 756
8
Forbes v. Jackson (1882) 19 Ch. D. 615

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Facts- The defendant served as a surety for the major debtor who borrowed £200 by
mortgaging his leasehold property and a life insurance policy. The surety is unaware that the
principal debtor borrowed more funds from the creditor using the securities. That amount was
not paid by the principal debtor. The surety released £ 200 along with interest before claiming
both securities. The creditor also requested payment for the further advances.

Judgement- The court, however, ruled that "The surety's right to the securities was not
affected by the further advances and, therefore, the surety entitled to both the securities."

Right to share Reduction-

The protector has the right to request a proportionate reduction in its obligation based on the
dividend the creditor (the official receiver of the principal debtor) earned upon the debtor's
insolvency. Similar to how the law lessens the debtor's need to pay, the creditor has the right
to request a proportionate decrease in his obligations. Here, the decline results in insolvency.
For instance, if A lends to B, C is the guarantor. Later, B goes bankrupt. To recoup a loan that
B had accepted from A, B's property has been attached. In this situation, the major debtor, the
official receiver, is required to compile a list of creditors and pay each one in proportion to
the amount they lent. The surety may inquire of the major debtor on the sum paid to A

Right of set off-

If the creditor owes the debtor money, the amount owed might be weighed against the
defence offered by the creditor. The surety may charge the amount to be paid to the creditor if
the creditor is required to reimburse the debtor. The major debtor and surety are both relieved
from their obligations in the event that the creditor violated the terms of the agreement
against the debtor. However, if the creditor is unable to suit the principal debtor because he
failed to fulfil his obligations under that arrangement, the surety has no prospect of being held
liable. If the creditor violated the contract, the debtor won't be released from his obligations,
but he will have the right to file a counterclaim for damages. If the creditor sues the surety,
the surety may use any defence the principal debtor may have had to release him partially or
entirely from the creditor.

Right of set-off refers to the bank's authority to combine two accounts belonging to the same
individual, where one account has a credit balance and the other a debit balance, to pay for a
missed loan payment. Lenders are only permitted to use their right of set-off when they are
owed a specific sum that is past due and there is no express or implied agreement to the
contrary. For instance, a borrower's loan agreement with the bank where they maintain other

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collateral, such as cash in a check, money in a savings or money market account, or money in
a deposit certificate, also has a lending setoff clause. The creditor decides to make certain
assets available to the lender in the event of default. If the assets are maintained there, the
lender will have easier access to them in the event of a missed payment. However, a set-off
clause can also call for asset rights to be kept at other institutions. Even if the lender still has
access to these assets, the setoff clause will give the lender the legal power to seize them in
the event of a default.

Rights against Co- sureties-

Co-sureties are defined as multiple people who have agreed to guarantee a loan. The rights of
the surety extend beyond the creditor and major debtor, with whom he has direct contact, to
the co-sureties, with whom he may or may not have a direct contractual relationship.
Sections 138, 146, and 147 are the provisions that address these rights.

Section 138. “Release of one co-surety does not discharge others.—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 sureties.1 —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 sureties”

This indicates that the creditor has the right to release any co-surety from his guarantee at his
discretion. This does not imply that all of the other sureties are also released and that their
obligation still exists. However, the creditor's discharge does not release the same surety from
his obligation to the co-sureties.

Section 146. “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 remains unpaid by the principal debtor.”

Section 147. “ Co-sureties who are bound in different sums are liable to pay equally as far as
the limits of their respective obligations permit.”

When there are many sureties backing a debt and the principal debtor defaults, each surety is
responsible for contributing equally to the default's extent. In order to divide the damage
equally among them, if one of them was forced to pay more than his fair part, he can reclaim

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payments from his co-sureties. The maximum limit, if any, set by a surety to his duty affects
the principal of equal contribution.

Liabilities of Surety
The liability of a surety is defined under the section 128 of Indian contract act.

“Section 128- The liability of the surety is co-extensive with that of the principal debtor,
unless it is otherwise provided by the contract” 9. The surety can be described as a secondary
payee who’s role becomes activated as soon as the primary debtor, i.e. the principal debtor
defaults on the payment. The surety then steps into the shoes of the principal debtor to pay
the amount to the creditor. Therefore, it has been rightly specified under “the Indian Contract
Act 1872, that the surety has a liability co-extensive to that of the principal debtor”10.

Illustrations

Case law- “Bank of Bihar v. Damodar Prasad”11

Facts- The High Court decided the case after the appellant-creditor provided money to the
first respondent without the second respondent's guarantee. The appeal was rejected by the
court despite the appellant's challenge. Without special equity, the surety is not entitled to
stop a creditor's execution until the creditor has used all of his remedies against the principal.
The creditor was given the most ambiguous directive not to pursue the severity until after
using all of its available legal options to pursue the principal. If the creditor is urged to delay
exercising their rights against them, the guarantee's fundamental purpose is destroyed, and
upon such payment, he will become a subrogee of the complainant's rights under section 140
of the Indian Contract Act.

Judgement- It was held that a creditor does not need to exhaust all of his options before suing
a surety, and once a judgement is obtained against a surety, it can be enforced just like any
other judgement for a debt.

9
Editor IL, “Bare Act-Indian Contract Act 1872 Archives” (IBC Laws, September 30, 2016)
https://ibclaw.in/category/bare-acts/bare-act-indian-contract-act-1872/

10
Supranote2
11
Bank of Bihar Ltd. v. Dr. Damodar Prasad, (1969) 1 SCR 620

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Nature
“The nature of the liability is co extensive to the liabilities of the principal debtor. The surety
is only liable for the amount that the principal debtor is liable for. The guarantee cannot be
beyond the terms of the guarantee. The surety is to be made liable only till the extent the
debtor is liable and no more”.12 By signing into a specific contract, the surety may place
restrictions or declarations that will reduce the scope of their liability. The surety's liability is
secondary or incidental, thus the creditor cannot hold them accountable or bring a lawsuit
against them unless there has been a default on the behalf of the primary debtor.. The contract
has requirements that must be satisfied in order for it to be enforceable.

Case law- “Maharaja of Benares v. Har Narain Singh”13

Facts- In the case that gave rise to the appeal, the plaintiff asserted a claim against the
defendants who were sureties or agents of sureties for the timely payment of rent by
Jadunandan Singh for an amount that represented rent arrears plus interest but which the
plaintiff was unable to obtain in spite of having a judgement. The defendants argued that they
were exempt from paying interest on past-due rent by their major debtor under the terms of
the agreement.

Issue: Whether the plaintiff must sue the sureties to get interest in arrears. According to the
ruling, just the arrears were the surety's responsibility, and interest on the rent was not
mentioned.

Judgement- If the Kabuliat and security bond are correctly interpreted, the appellant is
entitled to recover interest on the past-due rent, and any payments made by the lessee should
be used to the interest rather than the principal balance. A surety's liability is coextensive
with the debtor's under section 128 of the Indian Contract Act. The sarkar, or sureties, are
able to directly or indirectly recover the arrears from the defendant. Only in accordance with
their obligation have the executants consented to pay the arrears. The executants are
responsible for paying the annual rent until the farm's entire term of tenure expires, as stated
in the final clause of the surety bond.

12
Supranote2

13
Maharaja of Benares v. Har Narain Singh, 1905 SCC OnLine All 115

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Condition precedent
“144. Contract guaranteeing that the creditor won't act until the co-surety joins.—Where a
person gives a guarantee upon a contract that the creditor shall not act until another person
has joined in it as co-surety, the guarantee is not valid if that other person does not join”.14
The surety may stipulate a prerequisite to his culpability in the guarantee contract, saying that
he will not be held accountable until and until the precondition is satisfied. “Section 144 of
the act, which specifies that anyone who offers a guarantee on a contract is void until another
person joins in as a co-surety before the creditor may act on the contract, partially
acknowledges this concept. An example of this idea in practise is the case of Brackenbury v.
National Provincial Bank of England”.15

In this case, the defendant signed a promise with three other parties that at first glance
seemed to be a joint and several guarantee. Only one of them signed. The defendant was
declared not liable since there was no agreement between the bank and the co-guarantors to
waive his signature.

Case law- National Provincial Bank of England v. Brackenbury16

Facts- A company whose director was the defendant had a deal with the plaintiff to deliver
timber under that contract. As a result of the company's inability to pay off the debt, the
plaintiff consented to put a year's worth of litigation against it on hold in exchange for the
company's three directors bearing the full burden of the guarantee.

The company properly accepted the guarantee, and a guarantee contract was created;
nevertheless, the company eventually declared bankruptcy, and the plaintiff tried to enforce
the guarantee. One of the directors' signatures was found to be falsified before the trial even
started.

Judgement: The court in the preceding case stated that the guarantee contract cannot be
enforced when a joint guarantee situation arises and it is established that the other guarantors

14
Indian Contract Act, 1872 (India).

15
“Nature and Extent of Liability of Surety - iPleaders” (iPleaders, December 22, 2021)
https://blog.ipleaders.in/nature-extent-liability-surety/

16
National Provincial Bank of England v Brackenbury, (1906) 22 TLR 797 » 215

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were intended to be parties in the same, as the parties to the guarantee were aware of the
existence of the pre-condition that there are other co-sureties in the guarantee.

Proceeding against surety without exhausting remedies against the debtor

A bank loan was guaranteed by the defendant. The defendant was sued after a default
occurred. The trial court ruled that the bank may only execute the disputed guarantee after
exhausting all of its other options for dealing with the major debtor. The Supreme Court
overturned it, saying that if the creditor is encouraged to put off taking legal action against
the surety, the fundamental purpose of the guarantee is destroyed. Solvency of the principal is
not a good enough reason to stop the surety's judgement from being executed.

Case law- “Nikunja Kishore Pradhan v SBI”17

Facts- The State Bank of India filed Money Suit against Nikunja Kishore Pradhan, Bidhu
Bhusan Pattnaik, and Krishna Singh in order to recover Rs. 1,70,447.69 based on a Rs. 4,500
short-term loan made to the opposing party No. 2 in the case. The defendants (defendants
Nos. 2 and 3) who signed the decretal amount were deemed jointly and severally accountable
by the court, and the claim that their signatures were fraudulently obtained by defendants
Nos. 2 and 3 was rejected. The bank also filed Execution Case No. 2 of 1984, proceeded with
the sale of the hypothecated vehicle, adjusted the amount of Rs. 70,301 received as selling
proceeds, and attached the petitioner's truck with registration No. OSS 5796 for the purpose
of realising the remaining debt. The petitioner requested that the decree holder be ordered to
collect the defretal debts from all three defendants who are judgement debtors. The
petitioner's attorney claimed that the guarantor's liability only became enforceable upon the
major debtor's default, whilst the bank on the other side claimed that the degree holders were
free to pursue either the principal debt or any one of them.

Judgement- The learned Subordinate Judge rejected the petitioner's contention that the
defendants, the principal debtor and the guarantors, were jointly and severally liable for the
amount due to the bank. There was no agreement between the parties that the liability of the
latter would come into existence only after the bank failed to realise the decretal dues from
the principal debtor.

17
Nikunja Kishore Pradhan vs State Bank Of India And Ors. on 20 April, 1990

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Suit against surety alone
Without even bringing charges against the principal debtor, a claim against the surety has
been deemed viable. “In this instance, the creditor's affidavit provided compelling
justification for refraining from taking legal action against the major debtor. The sureties'
mortgaged property may be the target of the proceedings”.18

Death of Principal debtor

The main debtor and surety are the targets of a lawsuit. Since the primary debtor passed away
before the lawsuit could be started, it was determined that the lawsuit against him was void
from the start. The surety was determined to be in good standing19.

Surety’s right to limit his liability or make it conditional

In the contract, the surety may place limitations on his liability. He can achieve this by
explicitly stating that his assurance is restricted to a specific sum. In this situation, the surety
is not responsible for any sum in excess of that specified in the contract. Although it's
possible that the principal debtor owes more money than is specified in the agreement, the
surety won't be held liable for the difference20.

Impossibility and Novation of main Contract

Loans for the upkeep and growth of bee cultures were insured. The surety agreed to be held
jointly and severally liable to pay the debtor's installments in the event of default. The bees
died as a result of a viral infection. The business was a total failure. The debtor was no longer
able to pay in installments. The surety could not release itself from responsibility in
accordance with the idea of impossibility of performance.

Case law- “Satish Chandra Jain v National Small Industry”21

Facts- Rajiv Jain, the son of the appellant, and respondent No. 1 entered into a hire-purchase
arrangement to finance a venture for his proprietorship company, M/s. S.R.S. Sunfix
Company. The proprietorship concern's operations were then taken over by the appellant's
18
Supranote2
19
Supranote2
20
Supranote2
21
Satish Chandra Jain vs National Small Industries AIR 2003 SC 623, JT 2001 (10) SC 416, RLW 2002 (2) SC
225

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son, who had then formed a private limited company called Shiraj Sunfix Company Private
Limited. Respondent No. 1 authorised the acquisition of the firm by the new organisation and
then brought a lawsuit in the Delhi High Court to recover Rs. 54,15,001.04 per. The lawsuit
was brought on April 2, 1986, and it was decided on September 12, 1996.

The proprietorship firm was converted to a private limited company through the execution of
a new agreement by the guarantors, Rajiv Jain and Ajit Prasad Jain. The house No. l91-A.
Saket, Meerut, which belonged to the appellant was stated in Annexure-D however the
appellant was not mentioned in the certificate of recovery. The writ petition was denied by
the High Court, which led to the filing of this appeal with special leave.

Judgement- On April 2, 1986, a new hire-purchase agreement that did not refer to the former
guarantee agreement replaced the one between the parties in June 1983. Rajiv Jain and Ajit
Prasad Jain were impleaded as defendants principally on the grounds that they were
guarantors under the new agreement because respondent No. 1 declined to name the appellant
as one of the defendants. The certificate of recovery did not include the appellant's name and
he was not listed as a director of the business. The second agreement of April 2, 1986, was a
novation of the contract and did not rely on the U.P. Public Moneys (Recovery of Dues) Act,
1972.

Liability under Continuing Guarantee

“Section 129- Continuing Guarantee- A guarantee which operates on a number of
transactions within a particular period, is called a ‘’Continuing Guarantee’’22.

This kind of guarantee entails numerous transactions spread out across time. For transactions
that take place over a certain amount of time, a creditor may hold the surety liable for the
principal debtor's failure to make payments.

A continuing guarantee covers a fluctuating account, like an ordinary current account at a

bank, and secures the balance owing at any time within the guarantee's parameters. A specific
guarantee provides for the securing of a specific advance or for advances up to a fixed sum,
and ceases to be effective on the repayment thereof.

Case Law- “Sita Ram Gupta v Punjab National Bank and Others”23
22
Supranote4
23
Sita Ram Gupta v. Punjab National Bank, (2008) 5 SCC 711

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Fact- The Bank's suit against the original defendant Nos. 1 to 4 was decreed for an amount of
Rs. 42,874/-, plus interest at the rate of 19.5 per year with quarterly rests. The appellant was
questioned about whether the High Court had good cause to rule that the appellant was
responsible for paying the decree amount even though they had cancelled the guarantee prior
to receiving the loan.

Judgement- Due to his agreement to treat this assurance as a continuing guarantee, the court
determined that the appellant cannot rescind it. As a result, he is additionally obliged by the
legislation, which specifies that there must be no conflicting agreements in order for the
notice of revocation to be honoured.

Critical Analysis and Conclusion

Contracts are among the most important components of corporate governance as well as for
all businesspeople and other professionals because they are constructed specifically in
accordance with the interests of the parties, sealing off their liabilities in the process. When
there is a debt and the creditor needs assurance that the debt will be repaid by either the
principal debtor or the surety to the creditor, a contract of guarantee is particularly drafted.

To sum up, figuring out a surety's responsibility when the  parties would be free to set certain
constraints on the surety's liability while maintaining true to the guarantee contract's genuine
nature. The promises in the actual created document would regulate the specific degree and
extent of the surety's obligation. The guarantee clauses that were used to draught the
instrument will always regulate the precise and exact extent, and the parties may impose
additional restrictions on the surety's liability, if any. The minor status of the major debtor
remains a challenging issue.

There is some disagreement over whether or not proceedings ought to start before the major
debtor's available options have been used up. The Supreme Court decided in the Damodar
Prasad case that the surety may be sued before all other available remedies have been used. In
various cases over the years, the judiciary has repeatedly reiterated this fundamental concept,
clearing up any pertinent misunderstandings and questions about the extent of the surety's
liability. Even though each instance made the principle's application clearer, there is still
potential for development. In light of the complexities of the moment, the courts will
continue to consider and elaborate on the legitimacy of the principle.

Conclusion

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I would want to draw the conclusion that a contract of guarantee is a tripartite arrangement
that comprises the principle debtor, creditor, and surety after having seen the concept of the
contract of guarantee, liabilities, and various rights of surety towards the creditor and
principal debtor. And a guarantor is someone who has offered to cover the debt should the
borrower default. Because the surety's liabilities are equal to those of the principle debtor, the
creditor has the right to hold the surety accountable for making the payment in the event that
the principal debtor defaults. The contract of guarantee has three different sorts of
agreements: a principal contract, a subsidiary contract, and an implicit contract. The surety is
the centre of the guarantee agreement. Because the contract of guarantee will not be executed
in this case if no one agrees to act as the major debtor's surety. So, the surety has obligations
to the principal debtor as well as creditors.

In a guarantee contract, a surety is considered to have just liability to settle the primary
debtor's obligations in the event of default. The surety, however, is not only liable; he also has
some rights. The nature of these rights varies depending on whose party to the contract they
belong to. They are hostile to both the major debtor and the principal creditor in a contract.

The co-sureties may not necessarily need to be included in the same contract for a surety to
have certain rights against them. By giving the surety rights over the securities that the
creditor is holding against the principle debtor, or by having the principal debtor pay the
surety, these rights ensure that the surety is protected against the surety paid by him.

REFERENCES

1. Treitel GH, The Law of Contract (2003)

2. Singh A, Contract & Specific Relief (Rajesh Kapoor and Abhinandan Malik eds,
Thirteenth Edition, EBC 2022)
3. Editor IL, “Bare Act-Indian Contract Act 1872 Archives” (IBC Laws, September 30,
2016) https://ibclaw.in/category/bare-acts/bare-act-indian-contract-act-1872/
4. Bank of Bihar Ltd. v. Dr. Damodar Prasad, (1969) 1 SCR 620
5. Maharaja of Benares v. Har Narain Singh, 1905 SCC OnLine All 115
6. Indian Contract Act, 1872 (India).

7. “Nature and Extent of Liability of Surety - iPleaders” (iPleaders, December 22, 2021)
https://blog.ipleaders.in/nature-extent-liability-surety/
8. National Provincial Bank of England v Brackenbury, (1906) 22 TLR 797 » 215

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9. Nikunja Kishore Pradhan vs State Bank Of India And Ors. on 20 April, 1990
10. Satish Chandra Jain vs National Small Industries AIR 2003 SC 623, JT 2001 (10) SC
416, RLW 2002 (2) SC 225

11. Sita Ram Gupta v. Punjab National Bank, (2008) 5 SCC 711
12. Kadamba Sugar Industries Pvt. Ltd. v Devru Ganpathi Hedge Bhairi ,AIR 1993 Kant
288, ILR 1993 KAR 679, 1993 (1) KarLJ 285
13. Rao Ramchandra Rao v. Babu Manaklal AIR 1938 Nag 413
14. Chekkera Ponnamma v A.S. Thammayya, AIR 1983 Kant 124, 1983 (1) KarLJ 44
15. Wulff and Billing v. Jay (1872)7 Q.B. 756
16. Forbes v. Jackson (1882) 19 Ch. D. 615

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