RIGHTS OF SURETY

A surety is a person giving a guarantee in a contract of guarantee. A person who takes responsibility to pay a sum of money, perform any duty for another person in case that person fails to perform such work.

After making a payment and discharging the liability of the principal debtor, the surety gets various rights. These rights can be studied under three heads:

RIGHTS AGAINST PRINCIPAL DEBTOR

1) SECTION 140: THE RIGHT OF SURETY ON PAYMENT OF DEBT OR THE RIGHT OF SUBROGATION.

The right of subrogation means that since the surety had given a guarantee to the creditor and the creditor after getting the payment is out of the scene, the surety will now deal with the debtor as if he is a creditor. Hence the surety has the right to recover the amount which he has paid to the creditor which may include the principal amount, costs and the interest.

2) SECTION 145:THE RIGHT OF INDEMNITY

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. This is because the surety has suffered a loss due to the non-fullfillment of promise by the principal debtor and therefore the surety has a right to be compensated by the debtor.

Example:
Luthra and co has taken a loan from Khaitan and co where Amarchand acts as security on behalf of Luthra. Khaitan demands payment from Amarchand and on his refusal sues him for the amount, Amarchand defends the suit having reasonable grounds for doing so, but he is compelled to pay the amount of the debt with costs. He can recover from Luthra the amount paid by him for costs, as well as the principal debt.

RIGHTS AGAINST THE CREDITOR

1) SECTION 141: RIGHT TO SECURITIES GIVEN BY THE PRINCIPAL DEBTOR

On the default of payment by the principal debtor, when the surety pays off the debt of the principal debtor he becomes entitled to claim all the securities which were given by the principal debtor to the creditor. The Surety has the right to all securities whether received before or after the creation of the guarantee and it is also immaterial whether the surety has knowledge of those securities or not.

Example:
On the guarantee of Priya, Anita lent rs 100000 to Sita. This debt is also secured by security for the debt which is the lease of Sita’s house. Sita defaults in paying the debt and Priya has to pay the debt. On paying off Sita’s liabilities Priya is entitled to receive the lease deed in her favor.

2) RIGHT TO SET OFF

When the creditor sues the surety for the payment of principal debtor’s liabilities, the surety can claim set off, or counterclaim if any, which the principal debtor had against the creditor.

RIGHTS AGAINST CO-SURETIES

1) SECTION 138:RELEASE OF ONE CO-SURETY DOES NOT DISCHARGE OTHERS

When the repayment of debt of the principal debtor is guaranteed by more than one person they are called Co-sureties and they are liable to contribute as agreed towards the payment of guaranteed debt. The release by the creditor of one of the co-sureties does not discharge the others, nor does it free the released surety from his responsibility to the other sureties. Thus when the payment of a debt or performance of duty is guaranteed by co-sureties and the principal debtor has defaulted in fulfilling his obligation and thus the creditor compels only one or more of the co-sureties to perform the whole contract, the co-surety sureties performing the contract are entitled to claim contribution from the remaining co-sureties.

2) SECTION 146:CO-SURETIES TO CONTRIBUTE EQUALLY 

According to Section 146, in the absence of any contract to the contrary, the co-sureties are liable to contribute equally. This principle will apply even when the liability of co-sureties is joint or several, and whether under the same or different contracts, and whether with or without the knowledge of each other.

Example:
A, B, C, and D are co-sureties for a debt of Rs. 2,0000 lent by Z to R. R defaults in repaying the loan. A, B, C, and D are liable to contribute Rs. 5000 each.

3) SECTION 147: LIABILITY OF CO-SURETIES BOUND IN DIFFERENT SUMS

When the co-sureties have agreed to guarantee different sums, they have to contribute equally subject to the maximum of the amount guaranteed by each one.

Example
A, B and C, sureties for D, enter into three separate bonds, each in a different penalty, A for Rs. 10,000, B for Rs. 20,000 and C for Rs. 40,000. D makes default to the extent of Rs. 30,000. A B and C are liable to pay Rs. 10,000 each. Suppose this default was to the extent of Rs. 40,000. Then A would be liable for Rs. 10,000 and B and C Rs. 15,000 each.

DISCHARGE OF SURETY FROM LIABILITY

Under any of the following circumstances a surety is discharged from his liability:
i) By the revocation of the contract of guarantee,
ii) By the conduct of the creditor, or
iii) By the invalidation of the contract of guarantee

BY REVOCATION OF CONTRACT OF GUARANTEE

So far as a guarantee given for an existing debt is concerned, it cannot be revoked, as once an offer is accepted it becomes final. However, a continuing guarantee can be revoked for future transactions. In that case, the surety shall be liable for those transactions which have already taken place.

A contract of guarantee can be revoked in the following two ways:

1) BY GIVING A NOTICE (SECTION 130)

Continuing guarantees can be revoked by giving notice to the Creditor but this applies only to future transactions. Just by giving a notice the surety cannot waive off his responsibility and still remains liable for all the transactions that have been placed before the notice was given by him. If the contract of guarantee includes a clause that a notice of a certain period of time is required before the contract can be revoked, then the surety must comply with the same as said in Offord v Davies (1862).

Illustration

A guarantees to B to the extent of Rs. 10,000, that C shall pay for all the goods bought by him during the next three months. B sells goods worth Rs. 6,000 to C. A gives notice of revocation, C is liable for Rs. 6,000. If any goods are sold to C after the notice of revocation, A shall not be, liable for that.

2) BY DEATH OF SURETY (SECTION 131)

Unless there is a contract to the contrary, the death of surety operates as a revocation of the continuing guarantee in respect to the transactions taking place after the death of surety due to the absence of a contract. However, his legal representatives will continue to be liable for transactions entered into before his death. The estate of deceased surety is, however, liable for those transactions which had already taken place during the lifetime of the deceased. Surety’s estate will not be liable for the transactions taking after the death of surety’even if the creditor had no knowledge of surety’s death.

BY CONDUCT OF THE CREDITOR

1) VARIANCE IN TERMS OF THE CONTRACT: (SECTION 133)

When a contract of guarantee has been materially altered through an agreement between the creditor and principal debtor, the surety is discharged from his liability. This is because a surety is liable only for what he has undertaken in the guarantee and any alteration made without the surety’s consent will discharge the surety as to transactions subsequent to the variation.

Illustration

A becomes surety to C for B’s conduct as a manager in C’s bank. Afterward, 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 over-draw, 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.

2) RELEASE OR DISCHARGE OF THE PRINCIPAL DEBTOR: (SECTION 134)

A surety is discharged if the creditor makes a contract with the principal debtor by which the principal debtor is released, or by any act or omission of the creditor, which results in the discharge of the principal debtor.

Illustration
A supplies goods to B on the guarantee of C. Afterwards B becomes unable to pay and contracts with A to assign some property to A in consideration of his releasing him from his demands on the goods supplied. Here, B is released from his debt, and C is also discharged
from his suretyship. But, where the principal debtor is discharged of his debt by operation of law,
say, on insolvency, this will not operate as a discharge of the surety.

3) ARRANGEMENT BETWEEN PRINCIPAL DEBTOR AND CREDITOR: (SECTION 135 & 136)

According to section 135 when the creditor, without the consent of the surety, makes an arrangement with the principal debtor for composition, or promise to give him time to, or not to sue him, the surety will be discharged.
However, when the contract to allow more time to the principal debtor is made between the creditor and a third party, and not with the principal debtor, the
surety is not discharged.

Illustration
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.

4) LOSS OF SECURITY: (SECTION 141)

If the creditor parts with or loses any security given to him at the time of the guarantee, without the consent of the surety, the surety is discharged from liability to the extent of the value of the security.

Illustration
A, as surety for B, makes a bond jointly with 3 to C to secure a loan from C to B. Later on, C obtains from B further security for the same debt. Subsequently, C gives up further security. A is not discharged.

BY INVALIDATION OF THE CONTRACT

A contract of guarantee, like any other contract, may be avoided if it becomes void or voidable at the option of the surety. A surety may be discharged from liability in the following cases:

1) GUARANTEE OBTAINED BY MISREPRESENTATION: (SECTION 142)

When a misrepresentation is made by the creditor or with his knowledge or consent, relating to a material fact in the contract of guarantee, the contract is invalid

2) GUARANTEE OBTAINED BY CONCEALMENT: (SECTION 143)

When a guarantee is obtained by the creditor by means of keeping silence regarding some material part of circumstances relating to the contracts, the contract is invalid

3) FAILURE OF CO-SURETY TO JOIN A SURETY: (SECTION 144)

When a contract of guarantee provides that a creditor shall not act on it until another person has joined in it as a co-surety, the guarantee is not valid if that other person does not join.

EXTENT OF A SURETY’S LIABILITY

In the absence of a contract to the contrary, the liability of a surety is co-extensive with that of the liability of the principal debtor. It means that the surety is liable to the same extent to which the principal debtor is liable.

Illustration
A guarantees to B the payment of a bill of exchange by C, the acceptor. On the due date, the bill is dishonored 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.

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