This article will be discussing the concept of surety in a contract of guarantee containing the meaning of contract of guarantee, parties to it, rights of surety, liability of surety and the modes of discharge of surety.
1.
CONTRACT OF GUARANTEE:
Contract
of guarantee is defined in Section 126 of the Indian
Contract Act. It defines a "contract of guarantees" as a contract to
carry out the promise or release a third party's liability in the event of his
default. "Surety" is the name of the person providing the guarantee.
The "Principal Debtor" is the party whose default the guarantee is
provided for. The term "creditor" refers to the party who receives
the guarantee.
2. PARTIES TO A CONTRACT OF
GUARANTEE:
In every contract of
guarantee, there are three parties, such as,
i.
Creditor,
ii.
Principal Debtor, and
iii.
Surety.
A
surety is someone who offers to cover the debt in the event that the borrower
is unable to do so. In the event of a decree in the creditor's favour against
the principal borrower, the sureties may also be subject to the decree because
of their joint and several liability with the principal debtor. However, the
surety's liability automatically ends when a lawsuit against the principal
debtor was dismissed for default and the ruling became final, leaving no
liability remaining against the debtor.
3.
RIGHTS OF SURETY:
A
surety has certain rights against the principal debtor, the creditor and the
co-sureties. His rights against each one of them are being discussed here
under:
RIGHTS
AGAINST THE PRINCIPAL DEBTOR
i.
Right of Subrogation:
The
surety acquires all the rights that the creditor had against the principal
debtor when the principal debtor defaults on his obligations and, as a result,
surety makes the necessary payments or completes his obligations. In other
words, the surety assumes the role of the creditor and, through an action
against the principal debtor, is able to recover from him everything that the
creditor might have been able to recovered. The term "surety's right of
subrogation" refers to this. The rights of a surety on payment or
performance are provided for Section 140 of the Indian Contract Act.
According
to Section 145 of the Act, the surety is granted the same rights that the
creditor had against the principal debtor after making the payment or
fulfilling the duty in response to the default of the principal debtor. This
means that firstly, the surety can claim indemnity from principal debtor
for all the sums he has rightfully paid under the guarantee. And secondly,
he is also entitled to the benefit of every security which the creditor has
against the principal debtor when the contract of suretyship is entered into.
ii.
Right of indemnity against the principal debtor:
In
a contract
of guarantee, when the principal debtor makes a default, the surety
has to make the payment to the creditor. This payment is made by him on behalf
of the principal debtor. After making such payment, he can recover the same
from the principal debtor. Such a claim can be made by the surety only in
respect of the sums he has rightfully paid under the guarantee, but not the
sums which he has paid wrongfully.
Section
145 of the Act contains the following provisions on this regard as, 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.
Surety’s
right of indemnity is only in respect of the payment rightfully made by him.
In
C.K. Aboobacker vs. K.P. Ayishu, 2000, it has been held by the Kerala
High Court that a guarantor is liable for any payment or performance or any obligation
only to the extent the principal debtor has defaulted. If a sustainable portion
of the loan has been paid by the principal debtor, the guarantor is to pay only
the balance due. According to section
145, after the surety has paid the amount, the principal debtor should
indemnify the surety for everything the surety has rightfully paid under the
contract of guarantee.
RIGHT
AGAINST THE CREDITOR
Right
to securities with the creditor (Section 141):
As
was previously mentioned, the surety is subrogated to all rights available to
the creditor against the principal debtor once he fulfils his obligations under
the contract of guarantee. A further provision in this regard is found in
Section 141 of the Act, which states that a surety is entitled to the benefit
of any security that the creditor may have had against the principal debtor at
the time the contract for suretyship was entered into.
However,
it is not required that the surety knew about the creditor's securities at the
time the contract was made. It becomes the duty of the creditor not to lose or
part with the securities belonging to the principal debtor which he has
possesses at the time of making the contract of guarantee. If the creditor,
without the consent of the surety, loses or parts with such securities, this is
an act prejudicial to the interest of the surety and he is discharged
thereby.
RIGHT
AGAINST CO-SURETIES
Right
of contribution against co-sureties (section 146 & 147):
Section
146 makes the following provisions regarding the liabilities of the co-sureties
for the same debt. As per section 146 of the Indian Contract Act, “when two or
more persons are co-sureties for the same debt or duty, either jointly and
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 the
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.”
The
co-sureties have a responsibility to contribute equally. This is so when they
are co-sureties for the same debt. It doesn't matter if they performed a duty
jointly or separately, under one contract or several, or with or without one
another's knowledge.
For
instance, X, Z, and W are sureties to Y for the sum 6,000 rupees lent to E. E
makes default in payment. X, Z and W are
liable, as between themselves to pay, 2,000 rupees each.
Sometimes
the sureties may fix the maximum sum up to which their liability can go. There
may be different limits as to the amount for which the sureties are to be
liable. As per 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.”
4.
LIABILITY OF SURETY:
The
liability
of a surety is co-extensive with that of principal debtors unless the
contract specifies otherwise, according to section 128 of the Indian Contract
Act, 1872.
DISCHARGE
OF SURETY FROM LIABILITY:
When
the liability of surety, which he had undertaken under a contract of guarantee,
is extinguished or comes to an end, he is said to be discharged from liability.
The Indian Contract Act recognizes the following methods of discharge of a
surety from liability;
- Revocation by the surety (section 130).
- By surety’s death (section 131).
- By variance in the term of the contract (section 133).
- By release or discharge or principal debtor (section 134).
- When creditor compounds with, gives time to, agrees not to sue, the principal debtor (section 135).
The
above stated modes of discharge of surety are being discussed below:
i.
By revocation by the surety (section 130).
According
to section 130, “A contract
of guarantee may at any time be revoked by the surety, as to future
transaction, by notice to the creditor.”
This
section permits revocation of guarantee by surety:
a.
when it is a continuing guarantee, and
b.
as regards future transaction only.
This
can be accomplished by giving the creditor a notice to that effect from the
surety. Once a notice revoking a guarantee is issued, the surety's liability
only applies up until that point and not after.
For
example, X, in consideration of Z’s discounting at X’s request, bill of
exchange for W guarantees to Z, for twelve months, due payment of all such
bills to the extent of 5,000 rupees. Z discounts bill for W to the extent of
2,000 rupees. Afterwards, at the end of three months, X revokes the guarantee.
This revocation discharge W from all liability to Z for any subsequent
discount. But X is liable to Z for the 2,000 rupees on default of W.
ii.
By surety’s death (section 131):
As
per section 131, “The death of a surety operates, in the absence of any
contract to the contrary, as a revocation of a continuing guarantee, so far as
regards future transaction.”
The
continuing guarantee for future transactions is automatically revoked as a
result of the surety's death. However, if there is a contract to the contrary, the
guarantee may not be revoked upon the death of the surety. For instance, it may
be provided in a guarantee agreement that, in the event of the surety's demise,
the liability shall pass to his property or to his personal representatives. In
such a case, the guarantee is not revoked even if the surety dies.
iii.
By variance in the term of the contract (section 133):
when
the surety has undertaken liability on such terms, it is expected that they
will remain unchanged during the whole period of guarantee. If there is any
variance in the term of the contract between the principal debtor and the
creditor, without the consent of the surety, the surety gets discharged as
regards transactions subsequent to such a change. The reason for such a
discharge is that the surety agreed to be liable for a contract which is no
more there, and he is not liable on the altered contract because it is
different from the contract made by him.
iv.
By release or discharge or principal debtor (section 134):
The
provision containing the discharge of the surety on the release or discharge as
contained in section 134, “The surety is discharged by any contract between the
creditor and the principal debtor, by which the principal debtor is released,
by an act or omission of the creditor, the legal consequence of which is the
discharge of the principal debtor.”
For
example, X gives a guarantee to W for goods to be supplied by W to Z. W
supplies good to Z, and afterwards Z becomes embarrassed and contracts with his
creditors (including W) to assign to them his property in consideration of
their releasing him from their demands. Here Z is released from his debt by the
contract with W, and X is discharged from his suretyship.
As
per section 128, the liability of surety is coextensive with that of the
principal debtor. Therefore, if by any contract between the creditor and the
principal debtor, the principal debtor is released, or by any act or omission
of the creditor, the principal debtor is discharged, the surety will also be
discharge from his liability accordingly.
Another
reason for discharge of the surety on the release of discharge of the principal
debtor is as follows. According to section 140 of the Act, after payment or
performance of his obligation, the surety can seek reimbursement from the
principal debtor. If the principal debtor is no more liable, the surety’s
remedy against the principal debtor is affected, that should also result in the
discharge of the surety.
Where
there are co-sureties, a release by the creditor of one of them does not
discharge the others. Even if one of the co-sureties is released by the
creditor, he does not thereby become released from his responsibility to
contribute to the other sureties.
v.
When creditor compounds with, gives time to, agrees not to sue, the principal
debtor (section 135):
Section
135 mentions further circumstances when a contract between the creditor and the
principal debtor can result in the discharge of the surety.
According
o this section, a contact between the creditor and the principal debtor
discharges the surety in the following three circumstances: -
a.
When the creditor makes composition with the principal debtor,
b.
When the creditor promises to give time to the principal debtor, and
c.
When the creditor promises not to sue the principal debtor.
It
should be noted that in the aforementioned situations, the surety is released if
the creditor and the principal debtor enter into the agreement without the
surety's permission.
vi.
By creditors act or omission impairing surety’s eventual remedy (section 139):
Section
139 of the Indian Contract Act, incorporates the rules that when the act or
omission on the pert of the creditor is inconsistent with the interest of the
surety, and the same result in impairing surety’s eventual remedy against the
principal debtor, the surety is discharged thereby.
For
example, X contracts to build a ship for W for a given sum, to be paid by
instalments as the work reaches certain stages. Z becomes surety to W for X’s
due performance of the contract. W, without the knowledge of Z, prepays to X
the last two instalments. Z is discharged by the repayment.
vii.
By loss of the security by the creditor (section 141):
According
to section 141 of the Indian Contract Act, the surety is entitled to all the
securities which the creditor has against the principal debtor at the time when
the contract of suretyship is entered into. If the creditor loses, or without
the consent of surety, part with the security, the surety is discharged to the
extent of the value of the security. For instance, the seller of the goods
allows the buyer to take away the goods without insisting for the payment of
the price for the same, the surety who guarantees the payment of the price by
the buyer, is discharged from his liability.
5.
CONCLUSION:
In
daily life, there is chances of uncertain contingency due to which we may
trouble a lot. And often we got engage with other through the different
curriculum likewise, borrowing money, levy loan and so on. In order to regulate
such action between persons different rules and regulations took place time to
time in the name of legislation, for example, Indian Contract Act 1872. This
Act contains an important provision that is contract
of guarantee, which means a contract to carry out the promise or
release a third party's liability in the event of his default. In a contract of
guarantee there is need to be three parties such as Creditor, Principal debtor
and the surety. The person who gives the guarantee is called ‘surety’.
The person of whose default the guarantee is given is called the ‘Principal
debtor’. The person to whom the guarantee is given is called the ‘creditor’.
Here the surety is conferred with the liability over the contract of guarantee
and also having different modes to get discharged from such liabilities.
At
last, from the above evaluation, we may say that a surety is someone who
offers to cover the debt in the event that the borrower is unable to do so. In
the event of a decree in the creditor's favour against the principal borrower,
the sureties may also be subject to the decree because of their joint and several
liability with the principal debtor. However, the surety's liability
automatically ends when a lawsuit against the principal debtor was dismissed
for default and the ruling became final, leaving no liability remaining against
the debtor.
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