DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

LUCKNOW

Session: 2016-17

Law of Contracts

Liability of Surety under Contract of Guarantee

SUBMITTED BY:

UNDER THE GUIDANCE OF:

HARSH SINGH

MR. MAHENDRA SINGH PASWAN

ROLL NO: 174

ASSITANT PROFESSOR

SECTION B

DR. RAM MANOHAR LOHIYA

B.A. LLB (Hons.), SEMESTER III

NATIONAL LAW UNIVERSITY

ENROLLMENT NUMBER : 150101064

ACKNOWLEDGEMENT

Writing a project is one of the most significant academic challenges. Though this project has
been presented by me, but there are many people who remained in veil, who gave their support
and helped me to complete this project.
First of all I am very grateful to my subject teacher Mr. Mahendra Singh Paswan, without the
kind support of whom the completion of the project would have been a herculean task. He
donated his valuable time from his busy schedule and helped us from the very beginning.
I am very thankful to the librarian who provided us several books regarding the topic which
proved beneficial to us.
I acknowledge my friends who gave their valuable and meticulous advice which was very useful
and could not be ignored in writing the project. I want to convey my sincere thanks to all the
people who have helped me directly or indirectly throughout the project.
Thanking You.

TABLE OF CONTENTS
ACKNOWLEDGEMENT...2
INTRODUCTION...4
SURETYS LIABILITY..5
CO-EXTENSIVE
Condition precedent.5
Liability of Principal Debtor reduced by enactment6
Proceeding against Surety without exhausting remedies against Principal Debtor.6
Action against Principal Debtor Alone7
Action against Surety alone.7
Death of Principal Debtor8
SURETYS RIGHT TO LIMIT HIS LIABILITY OR MAKE IT CONDITIONAL..8
IMPOSSIBILITY OF MAIN CONTRACT9
LIABILITY UNDER CONTINUING GUARANTEE.10
BIBLIOGRAPHY..11
CONCLUSION..12

INTRODUCTION
A Guarantee can be many a things. It can be assurance of a particular outcome or that something
will be performed in a specified manner. A guarantee is a way of assuming responsibility for
paying anothers debts or fulfilling anothers responsibilities. It can be a promise for the
execution, completion, or existence of something. A guarantee can also be a promise or an
assurance attesting to the quality or durability of a product or service.
Section 126 of the Indian Contract Act, 1872 says that a Contract of Guarantee is a contract to
perform the promise or discharge the liability of a third person in case of his default.
Surety is the person that gives the guarantee, the Principal Debtor is one for whom the guarantee
is given and the creditor is the person to whom the guarantee is given. Contract Act uses the
word Surety which is same as Guarantor prima facie. The surety is not undertaking to perform
should the Principal Debtor fail; the surety is undertaking to see that the principal debtor does
perform his part of the bargain. A Contract of Guarantee pre-supposes a principal debt or an
obligation that the principal debtor has to discharge in favor of the creditor.
This project deals with the Liability of Surety under Contract of Guarantee given in Section 128
of the Indian Contract Act, 1872. This project will elaborate on all the aspects where liability of
surety is in question covering areas where such as:

When liability of Principal Debtor is reduced.

When Creditor files a suit against Surety without exhausting the remedies against

Principal Debtor.
When Creditor files a suit against only Principal Debtor or only Surety.
When Principal Debtor dies.

The project will also cover Section 129 of Indian Contract Act, 1872 which talks of Liability of
Surety under Continuing Guarantee.

SURETYS LIABILITY
4

Section 128 in the Indian Contract Act, 1872 says that the liability of the surety is co-extensive
with that of the principal debtor, unless it is otherwise provided by the contract.
Illustration: A guarantees to B the payment of a bill of exchange by C, the acceptor. 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. A guarantees to B the payment of a bill of exchange
by C, the acceptor. 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.

1. Co-Extensive
The first principle governing suretys liability is that it is co-extensive with that of the principal
debtor. The expression co-extensive with that of the principal debtor shows the maximum
extent of the suretys liability. He is liable for the whole of the amount for which the principal
dbtor is liable and he is liable for no more.1
If the payment of the loan bond is guaranteed, the surety is liable not only for the amount of the
loan, but also for any interest and charges which may have become due on it. 2 Where principal
debtor acknowledges liability and this has the effect of extending the period of limitation against
him the surety also becomes affected by it.3

Condition precedent

Where there is a condition precedent to the Suretys liability, he will not be liable unless that
condition is first fulfilled. In National Provincial Bank of England v Brackenbury 4, the defendant
signed a guarantee which on the face of it was intended to be a joint and several guarantee of
1 Maharaja of Benaras v Har Narain Singh ILR (1906-07) 28 All 25.
2 Nandlal Chogalal v Surajmal Gangaram AIR 1932 Nag 62.
3 Bnak of India v Surendra Kumar Mishra (2003) 1 BC 45 (Jhar).
4 (1906) 22 TLR 797.
5

three other persons with him. One of them did not sign. There being no agreement between the
bank and the co-guarantors to dispense with his signature, the defendant was held not liable.

Liability of Principal Debtor reduced by enactment

As liability of Surety is co-extensive, if the liability of principal debtor is reduced by enactment

(law), surety is also only liable for the reduced amount.
In the case of Naraya Singh v Chhattar Singh5, the liability of principal debtor was reduced
under The Rajasthan Relief of Agricultural Indebtness Act, 1957. The default was omitted by
principal debtor and he was impleaded by the banker. Banker brought an action against surety
and said that relief is only granted to principal debtor and not surety. However, Rajasthan HC
confirmed Section 128 and held that liability is co-extensive in this case. Reduction of liability of
principal debtor is also applicable on surety.

Proceeding against Surety without exhausting remedies against Principal Debtor.

Where the liability is otherwise unconditional, the court cannot of its own introduce a condition
into it. This was pointed out by the Supreme Court in Bank of Bihar Ltd v Damodar Prasad6.
The defendant guaranteed a banks loan. A default having taken place, the defendant was sued.
The trial court decreed that the bank shall enforce the guarantee in question only after having
exhausted its remedies against the principal debtor. The Patna High Court confirmed the decree.
But the Supreme Court overruled it.
Explaining that a condition of this kind would defeat the parties intention, the court said: The
very object of the guarantee is defeated if the creditor is asked to postpone his remedies against
the surety. Is the creditor to ask for the imprisonment of the principal? Is he bound to discover at
his peril all the properties of the principal and sell them? If he cannot does he lose his remedy
against the surety? Has he to file an insolvency petition against the principal? The trial court
5 1973 Raj HC
6 AIR 1969 SC 297.
6

gave no reason for this extraordinary direction. It said the principal was solvent. But the solvency
of the principal is not a sufficient ground for restraining execution of the decree against the
surety. It is the duty of the surety to pay the decretal amount. On such payment he will be
subrogated to the rights of the creditors.
And as so subrogated may exhaust his remedies against the creditor. Before payment the surety
has no right to dictate terms to the creditor and ask him to pursue his remedies against the
principal in the first instance. The surety is the guarantor; and it is his business to see that the
principal pays and not that of the creditor.
The Allahabad High Court in UP Financial Corpn v Garlon Polyyfeb Industries 7 has also taken a
similar view although without reference to the SC ruling. The loans of a company were
guaranteed. The guarantee stipulated that the liability of the surety would arise on demand. There
was no condition that the financial corporation should first proceed to recover the amount from
the hypothecated property. The corporation could straightaway proceed against the surety
without first proceeding against the company. The order directing the corporation to first proceed
against the company was held to be not proper.

Action against Principal Debtor Alone.

The liability of the Surety is several as well as joint. Dismissal of the suit against the principal
debtor does not of itself absolve the surety of his liability under the contract of guarantee.8
In the case of Union of India v Noor Dairy Farms 9, it was held that The creditor can proceed
against the principal debtor alone. His suit cannot be rejected on the ground that he has not
joined the guarantor as a defendant to the suit.

7 AIR 2001 All 286

8 Karnataka State Industrial Investment and Development Corpn Ltd v State Bank of India
(2004) 4 Kant LJ 266 (DB).
9 (1997) 3 Bom CR 126
7

Action against Surety alone.

Action against surety alone does not give the right to surety to say that he is exempted from
liability. In the case of Kailash Chand Jain v UP Financial Corpn10, it was observed that a
contract of guarantee was made enforceable by its terms against the guarantors severally and
jointly with that of the principal debtor company. The creditor had the option to sue the company
along with guarantors a co-defendants and guarantors alone.
A suit against the surety without even impleading the principal debtor has been held to be
maintainable. In this case, the creditor in his affidavit, had shown sufficient reasons for not
proceeding against the principal debtor.11
This makes the position of sureties especially vulnerable. The court may rescue the surety where
he was prevailed upon and, therefore, his consent was not free. A surety may be described as
vulnerable where there is a relationship of trust and confidence between him and the debtor.12

Death of Principal Debtor

In the case of Syndicate Bank v AP Manjunath13, a suit was filed against the principal debtor and
surety. The suit against the principal debtor was found to be void ab initio because of his death
even before the institution of the suit. The surety was held to be not discharged. The suit could
proceed against him. It was in the interest of the surety to implead under Order 1, rule 10, CPC,
and the legal representatives of the deceased principal debtor, because if the suit was decreed
against him, the surety could enforce against the legal representatives his rights under Section
145.

10 AIR 2002 All 302.

11 N Narasimahaiah v Karnataka State Finanial Corpn AIR 2004 Kant 46.
12 Barclays Bank Plc v OBrien (1994) 1 AC 180.
13 (1992) 2 Kant LJ 362.
8

2. Suretys Right To Limit His Liability Or Make It Conditional

It is open to the surety to place a limit upon his liability. He may expressly declare his guarantee
to be limited to a fixed amount for example that my liability under this guarantee shall not at
any time exceed the sum of 250 In such a case whatever may be owing from the principal
debtor the liability of the surety cannot go beyond the sum so specified. Thus in a case before the
Andhra Pradesh High Court14 a clause in a contract of suretyship making the surety liable upto
Rs 15000 further declared that he would be liable for any amount that might be finally decreed. It
was held that the clause should be construed as meaning not exceeding Rs 15000.
A surety can attach any other condition to his liability. Thus where the letter of guarantee made it
a condition precedent to the guarantors liability that on default on the part of the borrower a
demand for payment should be made upon the guarantor, it was held that an independent demand
was necessary and the mere service on the guarantor of the carbon copies of the demand meant
for the borrower was not sufficient.15

Impossibility of main contract

A loan for development and maintenance of bee culture was guaranteed. The surety undertook to
be liable jointly and severally to pay off instalments in case of failure on the part of debtor. The
bees died in consequence of a viral infection. There was a total failure of business. The debtor
became disabled from paying instalments. The surety could not escape liability under the
doctrine of impossibility of performance.16
The liability of the surety does not depend upon possibility of the surety being able to realize the
amount from the principal debtor The law on this point was settled by the decision of the
Supreme Court in a case where it was observed that the right of the creditor to recover from the
14Yarlagadda Bapanna v Devata China Yerkayya AIR 1966 AP 151.
15Orang Kaya Menteri Paduka Wan Ahmad Isa Shakur v Kwong Yik Bank Berhad Bhd (1989) 3
MLJ 155 (SC Kuala Lumpur).
16 Lakshmi Vilas Bank v Shreechakra Enterprise AIR 2003 Mad 1.
9

guarantor arises out of the terms of the deed of guarantee which are not in any way superseded or
brought to nullity merely because the creditor may not be able to recover anything from the
principal debtor.17
The guarantors of the companys loans could not escape liability by reason only of the fact that
the companys management has totally changed.18

Liability Under Continuing Guarantee

Section 129 of Indian Contracts Act, 1872 defines Continuing Guarantee as a guarantee which
extends to a series of transactions. A guarantee of this kind is intended to cover a number of
transactions over a period of time. The surety undertakes to be answerable to the creditor for his
dealings with the debtor for a certain time. A guarantee for a single specific transaction comes to
an end as soon as the liability under that transaction ends.
In the old case of Kay v Groves19, the guarantee was in the terms: I hereby agree to be
answerable to K for the amount of five sacks of flour to be delivered to T, payable in one
month. Five sacks were actually supplied and T paid for them. Further supplies were made
during the same month, for which T failed to pay. The Surety was then sued. The court held that
it was not a continuing guarantee and, therefore, there was no liability for parcels delivered for
various subsequent periods.
The essence of a continuing guarantee is that it applies not to a specific number of transactions,
but to any number of them and makes the surety liable for the unpaid balance at the end of the
guarantee.20
17 Industrial Finance Corp of India Ltd v Cannanore Spg & WVG Mills Ltd (2002) 5 SCC 54.
18 Punjab National Bank v Lakshmi Industrial and Trading Co Ltd AIR 2001 All 28.
19 (1829) 6 Bing 276
20 Union Bank of India v TK Stephen AIR 1990 Ker 180
10

CONCLUSION
A guarantee is a way of assuming responsibility for paying anothers debts or fulfilling anothers
responsibilities. A Guarantee can be many a things. It can be assurance of a particular outcome or
that something will be performed in a specified manner. It can be a promise for the execution,
completion, or existence of something. A guarantee can also be a promise or an assurance
attesting to the quality or durability of a product or service.
Section 126 of the Indian Contract Act, 1872 says that a Contract of Guarantee is a contract to
perform the promise or discharge the liability of a third person in case of his default.
Surety is the person that gives the guarantee, the Principal Debtor is one for whom the guarantee
is given and the creditor is the person to whom the guarantee is given. Contract Act uses the
word Surety which is same as Guarantor prima facie. The surety is not undertaking to perform
should the Principal Debtor fail; the surety is undertaking to see that the principal debtor does
perform his part of the bargain. A Contract of Guarantee pre-supposes a principal debt or an
obligation that the principal debtor has to discharge in favor of the creditor.
This project has dealt with the Liability of Surety under Contract of Guarantee given in Section
128 of the Indian Contract Act, 1872. This project has elaborated on all the aspects where
11

liability of surety is in question covering areas where such as- When liability of Principal Debtor
is reduced, when Creditor files a suit against Surety without exhausting the remedies against
Principal Debtor, when Creditor files a suit against only Principal Debtor or only Surety, when
Principal Debtor dies. The project has also covered Section 129 of Indian Contract Act, 1872
which talks of Liability of Surety under Continuing Guarantee and the liability when the contract
becomes impossible.

BIBLIOGRAPHY
Websites:

https://www.academia.edu/9012692/Contract_of_Indemnity_and_Guarantee?

auto=download
https://indiankanoon.org/doc/1377136/
http://14.139.60.114:8080/jspui/bitstream/123456789/718/17/The%20Indian%20Law
%20of%20Guaranties%20and%20Securities%20i.pdf

Books:

12

Contract and Specific Relief by Avtar Singh.