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Central University of South Bihar

SCHOOL OF LAW AND GOVERNANCE

Under the guidance of Dr. Pradeep Kumar Das

Law of contract [II] Project on topic

Rights and Liabilities of Surety


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Name :
Shubham Abhijit
Course :
B.A. LL.B. (Hons)
Semester : III
Enrollment No.: CUSB1613125046
ACKNOWLEDGEMENT

The project work of “Law of Contract II” on the topic “rights And Liabilities of Surety”. This
project is given by our honorable subject professor “Dr. Pradeep Kumar Das” and first of all I
would like to thank him for providing me such a nice topic and making me aware as well
providing me a lot of ideas regarding the topic and the methods to complete the project.

I would like to thank all the Library staffs who helped me to find all the desired books
regarding the topic as the whole project revolves around the doctrinal methodology of
research. I would like to thank to my seniors as well as class mates who helped me in the
completion of this project. I would also like to thanks to Google and Wikipedia as well as
other web sites over web which helped me in the completion of this project. Last but not the
least, thanks to all who directly or indirectly helped me in completing of this project.

I have made this project with great care and tried to put each and every necessary
information regarding the topic. So at the beginning I hope that if once you will come inside
this project you will be surely glad.
Contents
1. Introduction

2. Surety’s Liability

3. Rights of the Surety

4. Surety’s Rights Against Debtor

5. Rights of a Surety Against Creditor

6. Rights of a Surety Against Co-Sureties (146-147)

7. When Surety is Discharged from Liability


RIGHTS & LIABILITY OF SURETY

1. Introduction
The liability of the surety is co-extensive with that of principal-debtor,
Unless it is otherwise provided by the contract. A surety’s liability to pay the debt is not
removed by reason of the creditor’s omission to sue the principle –debtor; nor is the creditor
bound to exhaust his remedy against the principle before suing the surety . A creditor cannot
be restrained from action against the surety, on the ground that the principle is solvent , or
that the creditor may have relief against the principle in some other proceedings .It is the
choice of the creditor to recover the amount either from the principal- debtor after his default,
or from the surety. The liability though co-extensive , is separate and not alternative , and
may not arise simultaneously.

Rights of surety on payment or performance – Where a guaranteed debt has become due , or
default of the principal –debtor 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. The surety is invested with all th rights which the
creditor has against the principal-debtor , after he has paid the guaranteed debt or performed
whatever he was liable for , upon the guaranteed debt becoming due , or the principal- debtor
defaulting in duty guaranteed.

Surety’s Liability

The first and the foremost point in the surety’s liability is that it is coextensive of the
debtor’s liability. When we say the coextensive of debtor’s liability it means surety liability is
as much as the debtor’s liability. Meaning thereby, in case the debtor makes a default in the
making the payment to the creditor, then whatever the creditor can recover from the debtor,
the same amount of the liability will fall on the shoulders of the surety. Surety will also be
responsible to same amount of the liability, because he has given the surety and his liability is
extensive to an extent of the debtor’s liability. For example, if a debtor is making a default in
making the payment to the surety and later on the surety has to make the
Payment of the amount along with the some cost and the interest also, then surety can recover
that principal amount along with the cost or interest from the debtor. So his liability will be
the coextensive of the debtor’s liability. The second point is surety’s liability may be limited.
A surety at the time of giving the surety can limits his liability in whole of the debt. For
example, if A is granted a loan by the B, of rupees 10,000/- but C who is a surety can limit his
liability by saying that he will be responsible only for 7,000/- rupees. So in the loan of
10,000/-, the surety has limited his liability by giving the guarantee of rupees 7,000/- only,
this is another nature and extent of surety’s liability. The third point is the surety’s liability
will arise on the default of the principal debtor. We know that whenever a default is made by
the principal debtor in the contract of guarantee then surety comes into the picture. If on the
due date when a debt is to be return by the debtor to the creditor, if the debtor returns the
money to the creditor, surety does not come in the picture, he comes in picture only when
debtor has made a default. So his liability arises on making a default by the debtor. On a due
date the creditor cannot directly come to the surety for the repayment of the loan. He has to
go to the debtor and in case he makes a default, then surety will come into the picture. And
the last point in the extent into the surety’s liability is; the surety will be liable if there is a
contract between principal debtor and that contract is void. So in case the main contract
between the principal debtor and the creditor is void, the surety’s liability will be the primary
liability. For example, A who is a minor has taken the loan from the B and B has given the
loan to the A of rupees 10,000/-but the contract between both of them is void. In this case the
primary liability will be the liability of the fee who has given the guarantee in the contract. So
if there is a void contract between the debtor and the creditor the liability of the surety will be
the prime liability. These are the points which are included in the nature and extent of
liability.of.surety.
Illustrative cases:
A guranted to B . The payment of rent becoming due from B to C and B failed to pay the rent
. A was held liable on true construction of the contract only for the rent , but not for the
interest on the rent , unless the bond contained such words as “with interest there on” . A
surety who had guaranteed as commission agent the supply of mustered oil of pure quality ,
to the plaintiff , was a surety for promise for supply of oil of that quality , and his liability
under this section would be co-extensive with that of the manufacturer .
Conversely , where the surety had guaranteed the payment of income tax by the principle
debtor , a charter of a ship the surety was not liable when the principle debtor was found not
liable to patment of income tax . 1

Case Ram Kishun Vs. UP


A right to hold property is a constitutional right as well as human right . A person cannot be
deprived of his property except in the accordance with the provisions of the statute .
Undoubtly , Public money should be recovered and recovery should be made expeditiously.
But it does not mean that the financial institution which are concerned only with the recovery
of loans , may be permitted to behave like property dealers and be permitted to further
dispose of the secured assets in any unreasonable or arbitrary manner in flaggerant violation
of statutory provisions . therefore , it becomes a legal obligation on the art of the authority
that be sold in such a manner that it may fetch the best price . Thus , essential ingridients of
such sell remain a correctevaluation reportand fixing the reserved price . for that there must
be an application of mind by the authority concerned while approving / Accepting the report
of the approved valuer and fixing the reserved price , as the failure to do so many cause
substantial injury to the borrowere /granter and that would amount to material irregularity and
ultimately vitiate . the subsequent proceedings . The authority is also duty bound to decide as
to whether sell of part of the property would meet the outstanding demand .2
Bank of Bihar Ltd. Vs Dr Damodar
The plaintiff bank lent money to defendant
1. On the gurantee of defendant
2. The gurantee was a collateral security . the demand for payment of the liability of the
principal debtor was the only condition of the enforcement of the bond . that condition
was fulfilled . Neither the principal debtor nor the surety discharged the admitted
liability of the principal debtor in spite of demands . the plaintiff filed a suit and
obtained a decree against both containing a direction that plaintiff should be a liberty

1
Pollock and mulla , The Indian Contract and Specific relief acts 14 th edition pg no. 1383 para 2
2
AIR 2002 supreme court 2288.
to enforece its due against the surety only after exhausting its remedy against
principal debtor.
3. Sec128 , save as provided in the contract , the liability of the surety is coextensive
with that of the principal debtor .the surety thus becomes to pay the entire amount .
His liability is immediate.It is not differed until the creditor exhausts his remedies
against the principle debtor .In the absence of some special equity the surety ha sno
right to restrain an action against him by the creditor on the ground that principal is
solvent or that the creditor may have relief against principal in some other
proceedings . Like wise where the creditor as obtained a decree against the surety and
the principle, the surety has no right to restrain execution against him until the
creditor has exhausted his remedies against the principle.
4. It was held that the direction for postponing the payment of the decretal amount must
be soecific and must give sufficient reasons . the direction here was of the vaguest
character.
5. It was the duty of the surety to pay the decretal amount . On such payment he would
be subrogated to the rights of the creditor under sec 140. The security woukd become
unless if rights against the surety could be so easily cut down. 3

3. Rights of the Surety

Now we move on to discuss the rights of the surety. As you know when we have explained
that there are three parties in a contract and there are three contracts. So the parties are the
debtor, creditor and the surety. So the surety has got some right against creditor. Surety has
got rights against debtor. But sometime in a contract of guarantee, the surety is not all alone.
There are more than one surety or there are more than two sureties. Then sometime one
surety can exercise his rights against the other co sureties. So the point of the co sureties will
also be touched. So the surety’s rights against the creditor, rights against debtor and rights
against co sureties will be discussed now.

3
AIR 1969supreme court 297
I.F.C.I Ltd .vs Cannanore Spg.and Wvg.Mills Ltd
The expression “if creditor losses its security in section 141 means” and implies a voluntary
act by reason where of losese the security and which thus tantamount to be without the
consent of the surety the expression or in between the words creditor loses and without the
consent of the surety comma read in its proper sphere after the words loses and surety stands
ought to be significant since the the same qualifies only the latter part of the second limb ,
namely , parting with such security . the expression creditor losses cannot mean an imply and
involuntary but be reason of an act which is attributable to the creditor. The second
alternative , parting with security without the knowledge of the surity is a contra situation ,
but afford some meaning to the words used in the 1 st para , to wit, ;the creditor loses .section
141 would lose its efficacy and the act would render itself totally nugatory if the expression is
held as contemplating both voluntary and involuntary acts of the creditor . A definite
violation is required to come within the ambit of section of 141 . The heading of section 141
also lends though not normally apart of the statutory provision , assistance in interpreting the
statutory intent since heading always serves as guide to depict the intention. The contract of
gurantee though it is not a contravt regarding a primary transation : but it is an independent
transaction containing independent and reciprocal obligatons . It is on principle to principle
basis and by reason where for the statutory as provided bothe the creditor and granter some
relief as specified in section 130- 141 of contract act.section 141 thus involves an issue of
delebrate action on the part of the creditor and not a mere for fortuous situation beyond the
control of the creditor.4

4. Surety’s Rights Against Debtor

First of all we discuss the right of the surety against debtor. The rights of the surety against
debtor are and that first right is the “right of subrogation.” Now what is the meaning of the
right of subrogation? Right of subrogation says that when a surety makes the payment to the
creditor and creditor is out of the scene now, therefore now surety will deal with the debtor in
a manner as if he is a creditor. The surety after making the payment to the creditor will step
into the shoes of the creditor. Because after making the payment to the creditor, the creditor is
out of the scene now. Surety have given the guarantee to the creditor and creditor after getting
the payment is out of scene and now the surety will step into the shoes. He will occupy the
same position which was available with the creditor. He will step into the shoes of the
creditor and will deal with the debtor as if he is a creditor. So his role will change he will not
4
AIR2002, Supreme Court 1841
remain simply as a surety. He will become now creditor for the debtor. So stepping into the
shoes of somebody is a right of the subrogation. So now surety has got a right to recover the
amount which he has paid to the creditor. It may include the principal amount, it may include
the interest and it may include the cost also.

After discussing the right of subrogation we move on to discuss another right of the surety
and that is “right to indemnifier”. As you know when we have discussed the contract of
indemnity, the contract of indemnity stands for, to make good the loss. In the contract of
indemnity we have studied that indemnifier will compensate the indemnity holder in case the
indemnity holder suffers from some loss. So, indemnity stands for compensating the loss,
making good to the loss. If we apply the same concept which we have studied in the contract
of indemnity, in the
contract of guarantee then we find that the surety has got a right to indemnify himself if,
because of the fault of the debtor, if the surety has suffered from some loss or if he has been
damaged because of the non fulfilment of the words or non fulfilment of his promise and the
surety has received some dent or he has suffered from some loss so making good to the loss,
the contract of indemnity will be applying here will apply here and surety has got a right to
get indemnity against the debtor. He will be compensated by the debtor. Right to be relief
from the liability, is another right available to the surety. Surety can go to the debtor and can
say to him that he should fulfil or he should perform the contract and that is on the due date
he should make the payment to the creditor. These are the rights of surety against debtor.
Bare provision
140. Rights of surety on payment or performance.—Where a guaranteed debt has become
due, or default of the principal debtor 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. —Where a guaranteed debt has become
due, or default of the principal debtor 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.
Section 145- right of indemnity against the principal debtor
145. Implied promise to indemnify surety.—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. —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." Illustrations
(a) B is indebted to C, and A is surety for the debt. C demands payment from A, and on his
refusal sues him 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. (a) B is indebted to C, and A is surety for
the debt. C demands payment from A, and on his refusal sues him 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."
(b) C lends B a sum of money, and A, at the request of B, accepts a bill of exchange drawn by
B upon A to secure the amount. C, the holder of the bill, demands payment of it from A, and,
on A’s refusal to pay, sues him upon the bill. A, not having reasonable grounds for so doing,
defends the suit, and has to pay the amount of the bill and costs. He can recover from B the
amount of the bill, but not the sum paid for costs, as there was no real ground for defending
the action. (b) C lends B a sum of money, and A, at the request of B, accepts a bill of
exchange drawn by B upon A to secure the amount. C, the holder of the bill, demands
payment of it from A, and, on A’s refusal to pay, sues him upon the bill. A, not having
reasonable grounds for so doing, defends the suit, and has to pay the amount of the bill and
costs. He can recover from B the amount of the bill, but not the sum paid for costs, as there
was no real ground for defending the action."
(c) A guarantees to C, to the extent of 2,000 rupees, payment for rice to be supplied by C to
B. C supplies to B rice to a less amount than 2,000 rupees, but obtains from A payment of the
sum of 2,000 rupees in respect of the rice supplied. A cannot recover from B more than the
price of the rice actually supplied. (c) A guarantees to C, to the extent of 2,000 rupees,
payment for rice to be supplied by C to B. C supplies to B rice to a less amount than 2,000
rupees, but obtains from A payment of the sum of 2,000 rupees in respect of the rice supplied.
A cannot recover from B more than the price of the rice actually supplied."
Case laws
C.K. Aboobacker v. K.P.Ayishu
It has been held by the kerela High Court that a guarantor is lible for any payment or
performance or any obligation only to the extent the principal debtor has defaulted.If a
substantial 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.

5. Rights of a Surety Against Creditor

Now we move on to discuss the rights of the surety against creditor, because there is a
contract between the creditor and the surety also. So when surety has got a right against the
debtor he has got certain rights against the creditor also. The first and the foremost right is
that he can claim certain securities from the creditor. At the time of entering into the contract
of guarantee, if debtor has given certain securities to the creditor to get the loan he has pledge
certain things with the creditor. Though pledge words which I am using I will explain it,
elaborate it when we will talk about the contract of bailment and the pledge. But here the
pledge means for the security of the loan if the debtor has kept certain securities with the
creditor and when surety is making a payment to the creditor, creditor at the time of getting
the payment when he is getting the payment the automatically, it gives a rise to the sureties
right and that is surety can say to the creditor that those securities which were kept with him
is to be released now because he is getting the complete loan so his right is to claim those
securities which were kept by the debtor with the creditor at the time of getting the loan.
Because creditor is being compensated or creditor is being given the full payment by the
surety and surety have got a right to get back those securities. Right to set off, right to set off
is another right available with the surety against creditor, set off says the counter claim. In the
contract of guarantee if the debtor has or debtor
Sec 141. Surety’s right to benefit of creditor’s securities.—
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 loses, or without the consent of the
surety, parts with such security, the surety is discharged to the extent of the value of the
security. —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 suretyship is entered into, whether the
surety knows of the existence of such security or not; and if the creditor loses, or without the
consent of the surety, parts with such security, the surety is discharged to the extent of the
value of the security.
owes some money to the creditor also. Though creditors have give money to the debtor but
debtor also owes some money to the creditor. In that case at the time of making the payment
the surety has got a right to claim the set off. Let us take an example, A is a person he has
borrowed rupees 5,000/- from the B and C has given the surety in this contract. But A is also
in demand or A also owes some money of rupees one thousand from the B, meaning thereby
when the loan was granted by the B to the A rupees 5,000/- were given to him. But A also
owes some money to the B that is A also wants some money or A has given the loan to the B
of rupees 1,000/- and suppose on the due date A becomes a defaulter. Now surety has to make
the payment now in this case the surety has got a right to set off that is the surety at the time
of making the payment of 1,000/- rupees will ask the creditor that he should deduct the
rupees 1,000/- out of that payment. This is known as the right to set off.

Another right available with the surety against creditor is that he can share the reduction.
Here the meaning of share of reduction is that after getting the loan if the debtor becomes
insolvent. We presume it that again and again I would not like to explain that contract, that
how contract took place and how the contract was entered into, we presume that all the
essentials were present in the contract and loan was sanctioned. Now directly I am coming to
the point that guarantee was given in a contract by the C, A has got the loan B has sanctioned
the loan, C has given the guarantee. And in this case, suppose A becomes an insolvent and as
you know when a person become insolvent his property goes in the hands of official receiver
and assigner. When the property of the A went into the hands or goes in the hands of the
official receiver assignee and list of the creditor is prepared. In the list of the creditor the
name of the B will stand and B will receive something in proportion from the assets of the A.
Now surety at the time of making the payment to the creditor will ask to the creditor that
whatever the amount he has received according to the proportion of the distribution of the
assets of the A, that amount should also be deducted. So this is known as right to share
reduction.
For example, A was given the loan by the B of rupees 10,000/-, C who is a surety in a
contract gave a guarantee. A became insolvent and when his property and assets was realised,
when it was distributed by the official receiver and assignee, B got 1,000/- rupees. Now
surety who is C in this case when he will make a payment to the B of rupees 10,000/-will ask
the B to deduct the rupees 1,000/- which he have received from the official receiver and
assignee. This right is the right available with the surety and it is known as a right to share
reduction.
State of M.P v. Kaluram
The surety was discharged by the loss of security by the creditor . The respondent , Kaluram ,
was a surety for the payment of felled of the trees was to make the payment in four
instalments .he paid under the contract to prevent the purchaser from removing the trees
when he was in default.the appellant failed to do so . the court held that the appellant, by
allowing the buyer to take away the trees , had allowed the security to be lost , and the surety
was , therefore, discharged to that extent.5

5
http/:www.quora.com
6. Rights of a Surety Against Co-Sureties (146-147)

Now we move on to discuss the right of the surety against co sureties. When we say co
sureties it means in a contract of guarantee there are more than one surety. Sometime in the
contract, it happens that one person does not want to take the complete liability in terms of
the surety in a contract. There has to be a more than or sometime there are more than one
surety in that case what are rights available with the surety. Right of the surety in this case
will be that he has got a right to contribute. Rights of contribution stands for that suppose on
the due date or in a contract of guarantee one surety is making the complete payment on
behalf of the other co sureties. Then, he has got a right to claim the contribution from the
other co sureties.

Sec 146. Co-sureties liable to contribute equally.—Where two or more persons are co-
sureties for the same debt or duty, either jointly or 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 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.1 —Where two or more persons are co-sureties for the same debt or duty, either jointly
or 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 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.

Sec 147. Liability of co-sureties bound in different sums.—Co-sureties who are bound in
different sums are liable to pay equally as far as the limits of their respective obligations
permit. —Co-sureties who are bound in different sums are liable to pay equally as far as the
limits of their respective obligations permit.

e.g. A is a person and he has been sanction the loan by the B of rupees 10,000/- the guarantee
was given by the C and D. They have decided to share the equal amount of rupees 5,000/-
each. If the A become a defaulter on a due date, let us extend this example and presume that A
on a due date becomes a defaulter and he doesn’t make the payment to the B of rupees
10,000/- and suppose in this case C makes the full payment to the B and that is of rupees
10,000/- than C has got a right against the D to recover the 5,000/- rupees. Here the D has to
give the contribution which he agreed to give in the contract of guarantee and that is rupees
5,000/- will be given by the D to the C because C has made the full payment so C has got a
right against another co surety that is D.

Another right of surety is right to share the benefit of securities as we mention when we were
having, we were discussing the rights of the surety against creditor, we mention that
sometime the securities were kept by the debtor with creditor

and the creditor is bound to return those securities to the surety when he is being
compensated by the surety. Suppose there are more than one surety in the case, Than
whatever the securities the sureties are getting they have got a right to share those securities
in an equal amount or in equal ratio or in the agreed ratio. For example, ‘A’ at the time of
getting the loan of rupees 10,000/-, kept the securities of rupees 2,000/- with B. And C and D
have given the guarantee. Now on the due date A becomes a defaulter and C and D has made
the payment of rupees 10,000/-to the B and has got the securities of 2,000/- rupees. Now in
this case the co sureties will distribute those securities of 2,000/- amount themselves in either
in equal ratio or whatever the ratio they had decided. So with this, we end our discussion on
the rights of securities and I sum up by saying the surety has got a right against debtor, the
surety has got a right against creditor and surety has got a right against the co sureties.
7. When Surety is Discharged from Liability

Now we move on to discuss a very sensitive point or a very sensitive issue in the contract of
guarantee. And we will take up what are the points or what are the situations when surety is
completely discharged from the liability.

The position of the surety is a very delicate in the contract of guarantee. Therefore, the law
says there are certain circumstances in which the surety will be completely free from his
liability and the first and foremost point is that surety will be free from the responsibility by
giving a notice to the creditor. Now this right is available with the surety only in case of
continuing guarantee. And in my previous discussion, I mention that continuous guarantee is
a guarantee which is given for series of transaction. Now surety can revocate his liability by
giving a notice of revocation to the creditor. Another point when the surety will be free from
responsibility is by death of the surety. As you know death itself is a notice, so surety will be
free if he dies, but he will be free from the transaction or from the liability, which occur after
his death, the another point when the surety will be free from the liability is the variance in
terms of contract.
When we say the variance in terms of contract means, if debtor and the creditor after entering
into a contract change the contract without the consent of the surety, I would like to
emphasise this point by saying again and again that surety’s liability is very delicate in the
contract of guarantee. If anything is done by the debtor and the creditor in the contract of
guarantee and without the consent of the surety, please underline this point without the
consent of the surety, surety will be free from responsibility. Now in this contract, when I was
mentioning there are variance in the contract of guarantee, debtor and the creditor enters into
the contract and the surety has given the guarantee and without the knowledge of the surety,
without the consent of the surety if later on they change the terms and condition of the
contract, surety will be free from responsibility.

For example, A and B enter into the contract A is a debtor B is a creditor, enters into a
contract in which the B is giving the loan of rupees 10,000/- to the A and C is a person who is
a surety to the B, for the loan which is sanctioned to the A. Later on A and B convert the
rupees 10,000/- into rupees 1 lakhs or they make an agreement in which without the
knowledge of the surety, they do not inform the surety and enters into a contract and make it
one lakh rupees, they add one more zero in front of the 10,000/- rupees and without the
knowledge of the surety, the surety will be free from responsibility. As I mention without the
consent if anything is taking place between debtor and the creditor, surety will be free from
the responsibility. And another point when the surety will be free from the responsibility is
when creditor discharges the debtor from the liability. If he releases the debtor from the
liability, the liability of the surety will arise at the default of the debtor and if the creditor says
to the debtor that he is free from liability, then surety will be automatically will be free from
the liability. Because the creditor has not gone to the debtor and he has not made a default he
has released him, the surety will be automatically free from the liability. Another point is the
point of composition. It says that if the debtor and the creditor enter into a composition,
composition meaning thereby they enter into the contract change the main contract and make
an amicable settlement between the two. And that too without the consent of the surety,
surety will be free from the liability.
Let us take an example, A has been sanction the loan of rupees 10,000/- by the B and C is a
person who has given the surety. Later on B says to the A, that you don’t pay me the 10,000/-
rupees, pay me only 2,000/- rupees and here the surety has not given the consent or his
consent was not sort, surety will be free from the liability. Another point which is related is
that by impairing surety’s remedy. Impairing surety’s remedy means if creditor does
something which diminishes the right of the surety, which reduces right of the surety, in that
case surety will also be free from the liability. Surety is discharged from the liability when
creditor looses the securities kept with him by the debtor. Sometime in the contract of
guarantee, it happens that debtor keeps certain securities with the creditor at the time of
getting the loan and surety has got the knowledge of that, on the due date, if the debtor
becomes a defaulter, then surety will be free from the responsibility, if creditor looses those
securities.

Let us take an example, A is debtor and has got the loan from the B of rupees 10,000/- at the
time of getting the loan he has kept the securities of rupees 2000/-with the creditor and on a
due date, if the debtor become a defaulter and C who is a surety in this contract returns the
money to the creditor, in that case he can demand those securities which were kept by the
debtor with him. But if on the due date, at the time of getting payment from the surety,
creditor says that he has lost the securities, say in this case when the loan was given of rupees
10,000/-. A has kept the securities of rupees 2,000/- now creditor says that he has lost the
securities of rupees 2,000/- without the consent of the surety, if he loses it, then surety will be
free from his responsibility. Another point is when the surety will be free from the
responsibility is when creditor gives more time to the debtor. Now giving a more time is
included in the contract in which the debtor and the creditor has made a variance in terms and
condition. And if without the consultant of the surety, the time was extended, the surety will
be free from responsibility. And in the last, the surety was kept in the dark and he was
concealed about certain points, the surety was not aware about certain facts which were very
prominent in the contract of guarantee and the contract was entered into by the debtor and the
creditor. They enter into the contract with the each other by misrepresenting the fact to the
surety, and then surety will also be free. Surety will be free from responsibility if there is a
misrepresentations in the contract of guarantee, surety will be free from the responsibility if
there is concealment of certain facts.

Relevant cases
Offord v. Davies
A promised in favour of B that if B discounted bill for C , A would guarantee the payment of
bills to the extent of $600, during a period of 12 calendar months .some bills were discounted
by B and the payment for the same was made . thereafter, A gave notice to B that A would no
more guarantee the discounting of any bills . In spite of the notice , B continued to bills. The
bills not having been paid , B sued A for the same . It was held that A could not be made
liable as a surety for the bills discounted by B , After A’s notice to B .
Revocation as to future transactions is possible , when there are separate distinct transactions
contemplated in the contract . when the consideration is single and indivisible , for instance ,
where a continued relationship is established on faith of a certain guarantee , no revocation of
the same is possible . Thus , if a servant is employed on the basis of a guarantee as to his
good conduct , the guarantee is not revocable so long as the servant continues in service .6

6
Lloyds v. Harper , (1806) 16 Ch .D 290 ; Hasan Ali v. wali ullah , (1930)28
CONCLUSION
All the rights and liabilities inferred from the project. The surety has many rights and
liabilities againt principle debtor, creditor and co-surety. The several rights are explained by
facts that after the payment of the debt to the creditor, the surety is subrogated to the rights of
the creditor i.e., he has the same rights as those of the creditors. Therefore, he can sue the
principal debtor to exercise those rights. Thus if the surety has performed his promise
towards the creditor, all the rights of the principal debtor against the creditor devolve upon
him. In every contract of guarantee, there is an implied promise by the principal debtor to
indemnify the surety i.e., to compensate the surety. Therefore, upon the payment of debt of
the principal debtor, the surety becomes entitled to recover from the principal debtor, all the
amount including interest plus costs rightly paid to the creditor under the guarantee. The
reason is that the surety is entitled to full indemnification. A surety can, even before making
any payment, compel the debtor to relieve him from liability by paying off the debt. But,
before doing so, the debt should be ascertained. If two or more persons are co-sureties for the
same debt either jointly or severally, or whether under the same or different contracts and
whether with or without the knowledge of each other, the co-sureties in the absence of any
contract to the contrary, are liable as between themselves, to pay each, an equal shares of the
whole debt, or that part of it which remains unpaid by the principal debtor. If the co-sureties
are bound in different sums, they are liable to pay equally but not more than the maximum
amount guaranteed by each one of them. 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. However the liability of the surety does not cease merely because of discharge
of the principal debtor from liability. Keeping in view the above facts it is revealed that the
surety’s 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.