RIGHTS OF SURETIES-IS IT ENOUGH?

In fulfillment of the internal component

Law of Contracts-II

B.A.LL.B (Hons) Batch 2013-18

TAMIL NADU NATIONAL LAW SCHOOL


TRICHY

2017

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 CONTENTS
Intrudiction:

Surety:

Surety is a person who binds himself for the payments of a sum of money or for the
performance of something else, for another who is already bound for the same. The
law does not treat the surety and principal debtor as one and the same person. The
position of the surety cannot be equated for all purposes with that of mere debtor. His
special position is recognized by giving him favored treatment. He is considered with
favour both at law and equity. He enjoys many privileges. He is freed from his
liability by several acts of omission or commission by creditor. He is privileged
debtor. Thus, surety is favoured debtor. This fact is brought out by following
provisions contained in law of indemnity and guarantee:

1. Surety is not liable until the creditor has performed his part of the promise.
2. Surety is liable only for the unpaid balance.
3. Surety is not liable for fruitless litigation the creditor may bring against the
principal debtor before the creditor unless the creditor has given a sufficient
notice to this effect to the surety.
4. Surety is not bound by admissions and acknowledgments made by the
principal debtor before the creditor. Surety is also not liable for judgment
obtained against the principal debtor.
5. Surety’s liability is co-extensive with that of the principal debtor. His liability
cannot be more than that of the principal debtor.
6. The surety being a favoured debtor, the right of the contribution is recognized
as between co-sureties.
7. A surety is entitled to every remedy, which the creditor has against the
principal debtor.
8. The surety will be discharged from his liability if the terms of the original
contract are altered in any way without the consent of the surety.
As his position is very safe, he is rightly seen as an object of favour both law
and equity.

Rights of surety or guarantor:

Surety is a person who guaranteed the due discharge or performance of an
obligation outstanding against a third person. He is a privileged debtor. He is
favored by law. A contract of guarantee confers certain rights on the surety.
He has the following rights against the debtor, creditor and co-sureties:
I. Rights against the principal debtor:
The surety enjoys the following rights against the principal debtor.
1. Rights of subrogation

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 Regarding rights of surety on payment or performance, Section 140 of
the Contract Act, 1872 provides, “where a guaranteed debt has become
due, or default of the principal debtor to perform 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.” This right of
surety is called ‘the right of subrogation’. The surety steps into the
shoes of the creditor. The creditor has the right to sue the principal
debtor. By the same right, the surety may sue the principal debtor.
Similarly, if the creditor has the right to stop goods in transit, or has a
seller’s lien, the surety on payment of all that he is liable for would be
entitled to exercise these rights. This right of subrogation stands not
merely upon contract but also upon natural justice. Thus as soon as the
guarantor has paid off the creditor against the principal debtor unless
he has already waived the right.
2. Right to claim indemnity
Regarding to implied promise to indemnify surety, Section 145 of the
Contract Act provides “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
had rightfully paid under the guarantee, but no sums which he has pad
wrongfully.
Example:
‘B’ is indebted to ‘C’ and ‘A’ is surety for the debt. ‘C’ demands
payment from ‘A’ and on his refusal sues for the amount. ‘A’ defends
the suit, having reasonable grounds for doing so, but he is compelled to
pay the amount of debt with costs. He can recover from ‘B’ the amount
paid by him for costs, as well as the principal debt.

The guarantor’s right of indemnity entitled him to recover from the

principal debtor the full amount he has paid together with interest. The
reason is the surety is entitled to full indemnification. Until the
guarantor has paid the creditor, the guarantor’s right of indemnity
against the principal debtor does not constitute a debt owed by the
principal debtor to guarantor. The right of indemnity exists only as to
claims that the guarantor must pay because of his position as
guarantor. If he pays a claim for which the principal debtor is not
liable, he will have no right to be indemnified for such amount form
the principal debtor.
In C.K. Aboobacker v. K.P. Ayishu, principal debtor paid a substantial
portion of the loan and the guarantor has paid the balance due. It was
held that the principal debtor should indemnify the surety for
everything the surety has rightfully paid under the contract of
guarantee as per Section 145 of the Contract Act.

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 3. Right to demand for relief
Before making the payment, the surety can compel the debtor to
relieve him from liability by paying off the debt.
4. Right to issue notice to the debtor
The surety is entitled to issue a third party notice to the principal
debtor when, he is sued by the creditor.

II. Rights of surety against the creditor:

This surety enjoys the following rights against the creditor.
1. Right to securities
Regarding the surety’s right to benefit of creditor’s securities, Section
141 of the Contract Act provides, “ 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 surety ship is entered into whether the surety
knows of the existence of such security or not and if the creditor loss or
without the consent of surety, parts with such surety, the surety is
discharged to the extent of the value of the security.
Example:
‘C’, a creditor, whose advance to ‘B’ is secured by a decree, receives
also a guarantee for that advance from ‘A’. ‘C’ afterwards takes B’s
goods in execution under the decree and then without the knowledge of
‘A’, withdraws the execution. ‘A’ is discharged.

Section 141 of the Contract Act incorporates the rule of English Law
relating to the discharge from liability of a surety when the creditor
parts with or loses the security held by him. He will be discharged to
the extent of the value of the security lost or parted with. It also deals
with the protection of guarantor and the reduction of his liability in
proportion to the security lost or parted with by the creditor without the
guarantor’s consent. It does not apply to loss due to act of God or
enemies of the State or unavoidable accident. It makes a provision in
that regard, according to which a surety is entitled to the benefit of
every security which the creditor has against the principal debtor at the
time when he contract of surety ship is entered into. It is, however, not
necessary that at the time of making the contract, the surety should be
aware of the securities which the creditor had.
In Forbes v. Jackson, it was held that a surety on payment of the debts
is entitled to all debts is entitled to all securities held by the creditor,
whether he was aware of their existence or not. It becomes the duty of
the creditor not to lose or part with such securities belongings to
principal debtor which he posses at the time of making of the contact of
guarantee. If the creditor, without the consent of the surety, loses or arts
with such securities, this is an act prejudicial to the interest of the surely
and he is discharged thereby.

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 2. Right to claim set-off
The surety is also entitle to the benefit of any set-off or counter-claim
which the principal debtor might posses against the creditor in respect
of the same transaction. For example, if the creditor owed some money
to the debtor, the latter would certainly put forth his right of set-off
against the creditor. The same right of the debtor would be available to
the surety.
3. Right of subrogation
According of Section 140 of the Contact Act, on payment or on
performance of all that surety is liable for, he will be invested with all
those rights, which the creditor had against the principal debtor.
4. Right of request to sue the debtor
The surety has a right to request the creditor to sue debtor in case the
principal debtor fails to pay the debt on the date. But he cannot compel
the creditor to do so.
5. Right to insist upon the termination of services
In the case of fidelity guarantees like a guarantee of conduct, honesty,
etc., of the principal debtor, the surety can, in case of established
dishonesty of the principal debtor, insist upon the creditor terminating
the services and avoid further loss.
6. Rights to information
While guarantee is in force, the surety has the right to ask the creditor at
any time for particulars of the extent of his liability and the creditor is
bound to give the necessary information. The creditor should not
disclose to the surety the details of his dealings with the principal
debtor but he may tell the surety how much he would have to pay if the
guarantee were to be cancelled immediately.

III. Rights against Co-sureties:

When, two or more persons stands as sureties for the same debt or obligation,
they are called, ‘co-sureties’. A surety enjoys the following rights against the
co-sureties:

1. Right to contribution

Section 146 of the Contract Act provides for a right of contribution between co-
guarantors. Where there are several guarantors for the same debt and the principal
debtor has committed a default, each guarantor is liable to contribute equally to the
extent of the default. When a guarantor has paid more than his share of the debt to the
creditor or a decree has been passed against him at the suit of the creditor, for more
than his share, he has right of contribution from the co-guarantors in equal proportion.

For example, A, B and C are sureties to D for the sum of Rs.3,000 lent to E. E makes
default in payment. A, B and C are liable to pay Rs.1,000 each. If any one of them is

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required to pay more than Rs.1,000 he can claim contribution from other co-sureties
to reduce his liability to Rs.1,000 only. The right of contribution is available only
when all the sureties have guaranteed one and the same debt. The right to contribution
cannot be exercised where more person than one becomes sureties by distinct and
separate obligations for different portions of a debt.

Where the co-guarantor have agreed to guarantee different sums, they are bound to
contribute equally upto the maximum of the obligations of each one. According to
English Law, the co-sureties are liable to contribute proportionately and equally.

For example, A, B and C are sureties for a debt due by D to E. A undertakes to be

liable for Rs.10,000, B for Rs.20,000 and C for Rs.40,000. D makes default to extent
of Rs.30,000. A, B and C are liable to the extent of Rs.10,000 under the Indian Law.
But under English Law, A, B and C are liable to contribute in the ratio of 1:2:4

2. Right for the benefits of securities

All the securities are entitled to the benefit of any security, which any one of
them may have obtained form the principal debtor whether the sureties were
aware of it or not.

Liability of surety:

According to Section 128 of the Contract Act, “the liability of the surety is co-
extensive with that of the principal debtor, unless it is otherwise provided by the
contract.

Suggestion:

Conclusion: