2. Discuss the nature, rights and liabilities of a surety.

INTRODUCTION:- The surety who is entitled to be reimbursed by the principal

debtor for the amount paid by him on his behalf. The liability of the surety is co-
extensive with that of the principal debtor unless it is otherwise provided by the
contract under section 128.
NATURE OF SURETY:- Section 128 surety liability is co-extensive with that of
the principal debtor which means that on a default having been made by the principal
debtor the creditor can recover from surety the all what he could have recovered
from the principal debtor.
Example:- The principal debtor makes a default in the payment of a debt of
Rs.10,000.00, the Creditor may recover from the surety the sum of Rs.10000/- plus
interest becoming due thereon as well as the amount spent by him in recovering that
amount.
LIABILITY OF SURETY:- A bare perusal of section 128 of the Contract Act
would make it clear that the liability of a surety is co-extensive with that of he
principal debtor. The word co-extensive denotes that extent and can relate only to
quantum of the principal debt. Refer a case of Industrial Financial Corporation of
India v/s Kannur Spinning & Weaving Mills Ltd, 2002: However the liability of
the surety does not cease merely because of discharge of the principal debtor from
liability.
Bank of Bihar Ltd. v/s Damodar Prasad, 1969: The Supreme Court held
that the liability of the surety is immediate and cannot be defended until the creditor
has exhausted all his remedies against the principal debtor.Maharashtra Electricity
Board Bombay v/s Official Liquidator and Another, 1982: under a letter of
guarantee the bank undertook to pay any amount not exceeding Rs.50000/- to the
Electricity Board. It was held that the Bank is bound to pay the amount due under
the letter of guarantee given by it to the Board.
RIGHTS OF SURETY:- The surety has certain rights against the principal debtor,
the creditor and the co-sureties. His right against each one of them are being
discussed as under :-
1. Right of Subrogation: Under section 140 when a principal debtor makes a default
in the performance of his duty and on such default the surety makes the necessary
payment or makes performance of all what he is liable. Firstly the surety can claim
indemnity from the principal debtor secondly he is also entitled to the benefits of
every security which the creditor has against the principal debtor. Case of Mukesh
Gupta v/s Sicorn Ltd. Mumbai, 2004.
2. Right of Indemnity against the principal debtor: Similarly as above when a
principal debtor makes a default the surety has to make the payment to the creditor.
After making the payment he can recover the same from him under section 145 of
the act.
3. Right against Creditor to take back the securities deposited by the Principal
debtor:- After making the dues the surety has all the rights which are available to
the creditor against the principal debtor under section 141 of the act. He is entitled
to the benefit of every security which the creditor has against the principal debtor.
4. Surety has no right to goods in hypothecation:- In case there is hypothecation of
the goods the goods remain in the possession of the borrower the surety cannot
invoke the provision of section 141 in such case. Refer a case of Bank of India v/s
Yogeshwar Kant Wahhera, 1987.
CONCLUSION:- Keeping in view the above facts it is revealed that the suretys
nature, liabilities and rights are of such types once he stands surety for any debt he
will remain bound till the amount is repaid by the principal debtor. Although the
surety has some rights such as right of subrogation, indemnity and to taking back the
securities but even though there are more complications in this regard. So one
should stand surety for a person who have some qualities of good pay master.

3 The liability of the surety is co-extensive with that of Principal debtor.

INTRODUCTION:- Suretys Liability : The liability of the surety is co-extensive
with that of the principal debtor, unless it otherwise provided by the contract for
example A guarantees to B for 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.
DEFINITION OF CO-EXTENSIVE:- Section 128 of the Indian contract Act
provides the following definition in respect of the surety liability:-
It says that the liability of the surety is co-extensive with that of the
principal debtor unless it otherwise provided by the Contract.
A case of law in this regard is of Andhra Bank Soryapeet v/s Anantnath Goel-
1991: It was held by the court that where there were joint promisors and
consideration was paid by only one of them the other piomisors were equally liable
to pay amount. The liability of son was co-extensive with his father who was
principal debtor in view of section 127 and 128 of the Indian contract Act.
The gist of some the leading cases in which the liability of the surety is co-
extensive are given below to strengthening the answer of the question:-
Kellappan Nambiar v/s Kanhi Raman-1957: In this case that if the principal
debtor happens to be a minor and the agreement made by him is void, the surety too
cannot be made liable in respect of the same because the liability of the surety is co-
extensive with that of principal debtor. It has been held that the guarantee of the
loan or an overdraft to an infant is void because the loan to the infant itself is void.
That in case of State Bank of India v/s V.N. Anantha Krishnam-2005: that in
view of the provision of section 128 of Act the Presiding officer was not correct in
 giving directions to the Bank to proceed against the property because cash credit
facility and the liability of surety was co-extensive with that of principal debtor.
In a case of Bank of Bihar Ltd. v/s Dr.Damodar Prasad -1969: The Supreme
Court held that the liability of the surety is immediate and cannot be defended until
the creditor has exhausted all his remedies against the principal debtor.
A case of Industrial Financial Corporation of India v/s Kannur Spining &
Weaving Mills Ltd.-2002: It was held that the liability of surety does not cease
merely because of discharge of the principal debtor from liability.
In a case of Harigobind Aggarwal v/s State Bank Of India-1956: It was held that
the principal debtor liability is reduced e.g. after the creditor has recovered a part of
the sum due from him out of his property the liability of the surety is also reduced
accordingly.

CONCLUSION:- On deeply going into depth of provisions laid down in the Act it
is revealed that surety liability is co-extensive with that of principal debtor means
that his liability is exactly the same as that of the principal debtor. Suppose if the
default having made by the principal debtor the creditor can recover the same from
the surety all what he could have recovered from the principal debtor.

4. What do you understand by contract of guarantee? How does it differ from

contract of Indemnity?
INTRODUCTION: - The contract of guarantee may be an ordinary or some
different type of guarantee which is different from an ordinary guarantee. Guarantee
may be either oral or written. Basically it means that a contract to perform the
promise or discharge the liability of third person in case of his default and such type
of contracts are formed mainly to facilitate borrowing and lending money which
based on the following facts :-
i) Surety is the person by the whom the guarantee is given.
ii) Principal debtor is the person from whom the assurance is given.
iii) Creditor is the person to whom the guarantee is given.
DEFINITION: - A contract of guarantee is a contract to perform the promise or to
discharge the liabilities of a third person in case of his default. The person who gives
the guarantee is called surety, the person in respect of whose default the guarantee
is given is called Principal Debtor and the person to whom the guarantee is given is
called creditor. A guarantee may be either oral or written.
 ILLUSTRATION: - A promises to a shopkeeper C that A will pay for the items
being bought by B if B does not pay this is a contract of guarantee. In case if B fails
to pay C can sue A to recover the balance the same was held in the case of Birkmyr
v/s Darnell-1704, the court held that when two persons come to shop one person
buys and to give him credit the other person promises, if he does not pay, I will,
this type of a collateral undertaking o be liable for the default of another is called a
contract of guarantee.
ESSENTIALS: - The following are the essential elements of Guarantee:-
1. Existence of Creditor, Surety, and Principal debtor: - The economic function of
a guarantee is to enable a credit-less person to get a loan or employment or something
else. Thus there must exist a principal debtor for a recoverable debt for which the
surety is liable in case of the default of the principal debtor. In the case of Swan v/s
Bank of Scotland -1836, It was held that a contract of guarantee is a triplicate
agreement between the creditor, the principal debtor and the surety.
2. Distinct Promise of Surety: - There must be distinct promise by the surety to be
answerable for the liability of the Principal debtor.
3. Liability must be legally enforceable: - Only if the liability of the principal debtor
is legally enforceable, the surety can be made liable. For example a surety cannot be
made liable for a debt barred by Statute of Limitation.
4. Consideration: - As with any valid contract the contract of guarantee also must have
a consideration. The consideration in such contract is nothing but anything done or
the promise to do something for the benefit of the principal debtor. The section 127
of the Act clarify as under :-
Anything done or any promise made for the benefit of principal debtor is
sufficient consideration to the surety for giving the guarantee.
Illustrations: - 1. A agrees to sell to B certain goods if C guarantees for payment of
the price of the goods. C promises to guarantee the payment in consideration of As
promise to deliver goods to B. This is sufficient consideration for Cs promise.
2. A sells and delivers goods to B. C afterwards requests A to forbear to sue B for
an year and promise if A does so he will guarantee the payment if B not pay. A
forbears to sue B for one year. This is sufficient consideration for Cs guarantee.
5. It should be without misrepresentation or concealment: - Section 142 of the
Act specifies that a guarantee obtained by misrepresenting facts that are material to
the agreement is invalid, and section 143 specifies that a guarantee obtained by
concealing a material fact is invalid as well.
Illustration :- 1. A appoints B for collecting bills to account for some of the bills.
A asks B to get a guarantor for further employment. C guarantees Bs conduct but C
is not made aware of B previous mis-accounting by A. B afterwards defaults. C
cannot be held liable.
Illustration: 2- A promise to sell Iron to B if C guarantees payment. C guarantees
payment however, C is not made aware of the fact that A and B had contracted that
B will pay Rs.5/- higher that the market price. B defaults. C cannot be held liable
A case of London General Omnibus V/s Holloway- 1912: A person was invited
guarantee an employee, who was previously dismissed for dishonesty by some
employer. This fact was not told to the surety. Later on the employee embezzled
funds but the surety was not held liable.
CONCLUSION
It is noted from the above mentioned facts that the contract of guarantee is a triplicate
agreement between Creditor, Surety and the Principal debtor. A person who stands
for surety known as guarantor for a third person (principal debtor) who in case of his
default to fulfil his promise or to discharge the liabilities. The surety or guarantor
has to make a distinct promise for payment of the liabilities of the Principal debtor
which must be legally enforced.

5. What is continuing Guarantee? Under what circumstances it can be

revoked?
INTRODUCTION: - A guarantee which extends to a series of transactions is called
continuing guarantee. A guarantee may be an ordinary guarantee or a continuing
guarantee is almost different from an ordinary guarantee.
EXAMPLE:- A in consideration that B will employ C in collecting of Rent of Bs
Zamidari. B promises that he is responsible to the amount of Rs.5000/- for due
collection and payment by C of those rents. This is a continuing guarantee.
2. A guarantees payment to B, a tea-dealer, for any tea that C may buy from him
from time to time amount of Rs.100/-. Afterwards, B supplies C tea for the amount
of Rs.200/- and C fails to pay. As guarantee is a continuing guarantee and so A is
liable for Rs.100/-.
It is clearly noted from the above examples that continuing guarantee is given to
allow multiple transactions without having to create a new guarantee for each
transaction.
DEFINITION:- Section 129 of the Contact Act, continuing guarantee means a
guarantee which extends to a series of transactions without creating a new guarantee
for another transaction is called continuing guarantee.
Illustration:- A guarantees payment to B for 5 sacks of rice to be delivered by B to
C over the period of one month. B delivers sacks to C and C pays for it. Later on B
delivers 4 more sacks but C fails to pay. As guarantee is not a continuing guarantee
and so he is not liable to pay for the 4 sacks.
 REVOCATION OF CONTINUING GUARANTEE:- Section 130 of the Act a
continuing guarantee can be revoked at any time by the surety by a notice to the
creditor. 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 of revocation is given.
1. A promises to pay B for all groceries bought by C for a period of 12 months if he
fails to pay. In the next three months C buys 2000/- worth of groceries. After 3
months, A revokes the guarantee by giving a notice to B. C further purchases 1000
Rs of groceries. C fails to pay. A is not liable for 1000/- rupees of purchase that
was made after the notice but he is liable for 2000/- of purchase made before the
notice
2. Lloyds v/s Harper-1880: It was held that employment of a servant is one
transaction. The guarantee for a servant is thus not a continuing guarantee and
cannot be revoked as long as the servant is the same employment. Wingfield v/s De
St Cron-1919: it was held that a person who guaranteed the rent payment for his
servant but revoked it after the servant left his employment was not liable for the
rents after revocation.
3. A guarantees to B to the amount of Rs.10,000/- that C shall pay for the bills that B
may draw upon him. B draws upon C and C accepts the bills. Now A revokes the
guarantee. C fails to pay the bill upon its maturity. A is liable for the amount upto
Rs. 10,000.00.
4. As per provisions laid down in Section 131 of the Act that the death of the surety
acts as a revocation of continuing guarantee with regards to future transactions if
there is no contract to the contrary.
It is pertinent to mention here that there must not be any contract that
keeps the guarantee alive even after the death. In the case ofDurga Priya v/s Durga
Pada -1928 : It was held by the court that in each case the contract of guarantee
between the parties must be looked into to determine whether the contract has been
revoked due to the death of the surety or not. It there is a provision that says that
death does not cause the revocation then the contract of guarantee must be held to
continue even after the death of the surety.
Conclusion:- A guarantee which extends to a series of transactions is called
continuing guarantee. A guarantee may be an ordinary guarantee or a continuing
guarantee is almost different from an ordinary guarantee. In Contract of guarantee
between the parties must be looked into to determine whether the contract has been
revoked due to the death of the surety or not. It there is a provision that says that
death does not cause the revocation then the contract of guarantee must be held to
continue even after the death of the surety.