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Nature and extent of Surety's liability

A guarantee can be taken as an arrangement in which one party becomes willfully responsible for the payment of debt of the other party in case of inability to do the same. In English law guarantee is considered as an answer for debt.[1] Section 126 of the Indian Contract Act explains the contract of guarantee. It basically is a contract that comes into function when the primary party fails in its objective. The third party in that case compensates for the primary party.

The contract of guarantee as mentioned above is a tri-party contract which basically means that it constitutes of three parties.

These parties are as follows:
  • Creditor
  • Principal debtor
  • Surety
The act comes into function when the principal debtor becomes inefficient in paying the debt to the owner or creditor. Creditor is a person who has lent his money. The guarantor or surety comes in scene when the principal debtor becomes inefficient. The surety compensates and pays off the obligations of principal debtor.

Also, later on the surety can demand his money back from the principal debtor. Clearly, the liability of the surety arises only if there is a principal debtor and only if the principal debtor is at default.[2]

It is important to ensure that the surety has given its guarantee without any misrepresentation or any external force.
As in any other contract, consideration for guarantee is an essential component for a guarantee. As mentioned in article 127, a guarantee without any sort of consideration is considered void.[3]

Research Questions:
  1. Can surety be sued if he becomes incapable of abiding to the contract?
  2. Can the surety ask for his money which he had paid on behalf of the principal debtor to the creditor? Is the principal debtor liable to pay it?

Body Of The Article
The principal of surety's liability is laid down in section 128 of the Indian Contract Act. Section 128 states that the liability of the surety is co-extensive with that of the principal debtor unless mentioned in the contract.

Co-extensive:
The term co-extensive refers to the fact that the surety who has agreed to pay the principal debtor's obligations in the event of default is only and only responsible for the sum for which the principal debtor is liable and nothing more unless they agreed to it earlier.[4]

The only extra payment which the surety is liable to pay is the interest which becomes due on the loan.[5]

In Bank of Bihar v. Damodar Prasad and another (AIR 1969 SC 297), the bank which was the plaintiff here lent money to Damodar Prasad and surety Paras Nath Sinha. In spite of multiple reminders, both the principal debtor and surety did not pay the dues. They were sued for non-payment in the first court of subordinate judge, Pune.

When the case was being looked into it was made a point that a plaintiff bank shall be at liberty to enforce its dues in question against surety only after all the remedies have been exhausted against the debtor. The rationale was that requiring the creditor to delay his remedies against the surety would negate the intent of contract of guarantee. It can also be said that guarantee is a banker's collateral protection and it becomes worthless if the banker's rights against the surety are too quickly revoked.

In contrast to the above case the case of State Bank of India vs Indexport Registered and Others (AIR 1992 SC 1740), 1992 has pointed and emphasized on the fact that it is not compulsory for the creditor to exhaust all the remedies against the debtor (defendant 1) to exercise his right to recover from the surety (defendant 2).

Condition precedent:
Condition precedent can in simple terms be defined as a condition which needs to be fulfilled beforehand if in case the surety is to be made liable.

The principal has been partially recognised in section 144[6]. It states that if a person offers a guarantee on a contract the creditor does not act under another person joins as a co-surety. If that other person does not join the contract, is void.

To further explain this, the case of National provincial bank of England v. Brackenbury[7] can be used. In this case the contract signed the contract of guarantee under the conclusion that it was a joint contract and three other people will join the guarantee.

The facts of the case were as follows: the plaintiff had a contract to supply timber to a company whose director was the defendant. Because the company was unable to meet its obligation to pay off the liability, the plaintiff agreed to suspend the claim against the company for a year on the condition that the amount of the guarantee be jointly and severely borne by the company's three directors.

The guarantee was duly taken, and the guarantee contract was formed; however, the company later went bankrupt, and the plaintiff sought to enforce the guarantee. Before the trial began, it was discovered that one of the directors' signatures had been forged[8].

As a result, the court in the preceding case stated that, when the situation of joint guarantee arises and it is demonstrated that the other guarantors were intended to be parties in the same, the contract of guarantee cannot be called upon for enforcement, because the parties to the guarantee were aware of the existence of the pre-condition, that there are other co sureties in the contract.

As a result, even if all of the previously expected parties to the contract join the same, the guarantee contract cannot be called valid, or, in other words, cannot be enforced against the co surety.

Section 138 talks about the rights of surety against the co surety. The release of the co-surety does not relieve the other co-sureties of their obligations. For instance, if one person withdraws from the contract the other parties will have to compensate the total debt. They will be compensated at the end for the extra amount they gave in the past.

Now, one question which can come in the minds of people is if the surety can ask for the money, he/she had paid to the creditor on behalf of the principal debtor back from him?
The answer to the question is simple and lies in section 145 of the Indian Contract Act which is which is rights of indemnity against the principal debtor. The surety may make such a claim only in respect of the sums, he has rightfully paid.

The right enables the surety to recover from the principal debtor whatever sum he has rightfully paid under the guarantee[9].

Conclusion
The surety's liability is coextensive with the principal debtor's liability, but the situation can change if the contract's terms change, as there is no limit to the scope of the liability. The borrower, on the other hand, has no claim to the counter protection that the principal debtor provides to the surety. However, the surety can be released from liability in a variety of situations, which are dealt with in subsequent sections such as 130135, and circumstances where the surety's liability can still be extended are dealt with in sections 136 and so on.

Also, the analysis clearly shows that the surety's liability is fully coextensive with the principal debtors. And the obligation is the same as the primary debtors. And if the principal debtor defaults in some way, the surety is obligated to do the same as the principal debtor, even if the consequences on the surety might not be the same if the terms of the arrangement are followed.

End-Notes:
  1. S. 4, Statute of Frauds 1677, 29 Car, II, C 3
  2. Punjab National Bank Ltd. v. Sri Bikram Cotton Mills Ltd, AIR 1970 SC 1973
  3. Janaki Paul v. Dhokar Mall Kidarbux, (1935) 156 IC 200 , Ram Narain vs Lt. Col. Hari Singh, AIR 1964 Raj 76
  4. Maharaja of Benares v. Har Narain Singh, ILR (1906-07) 28 All 25
  5. Nandlal Chogaial v. Surajmal Gangaram, AIR 1932 Nag '62,
  6. Global trade finance limited v. Sudarshan overseas ltd., (2010) 4 Mah LJ 367.
  7. (1906) 22 TLR 797.
  8. James Graham & Co. (Timber) Ltd v. Southgate Sands, 1968 QB 80
  9. Supreme Leasing v Low Chuan Heny, 1989 Current LJ 809 (Kuala Lumpur)

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