Surety’s Liability Under Indian Contract Act

Under the Indian Contract Act of 1872, Section 126 specifies the contract of guarantee. According to the provision, a surety is a person who guarantees to fulfill a promise or discharge the liability of a third party in the event of a creditor's default.

As a result, the surety offers protection to the creditor for the major debtor's act. It is clear that the surety's liability is collateral to the principal debtor's liability. The act seeks to protect the interests of all three parties involved in the guarantee contract, particularly the surety, who plays a crucial role in commercial transactions.

Meaning of Surety

A surety, also known as ‘guarantor’, is someone who comes forward to pay the money if the main borrower fails to do so. A surety could be a person, firm, or any such organization, which has independent existence. In the case of a creditor's decree against the major debtor, the decree's wings might be extended against the sureties as their liability is coextensive with the principal debtor. But when a suit against the principal debtor is dismissed for default and the decision is final, the surety's liability is automatically terminated because no liability against the debtor remains.

Surety's Liability

Unless otherwise stated in the contract, the surety's liability is coextensive with that of the principal debtor. The provision that the surety's liability is coextensive with the principal debtor's liability means that his liability is exactly the same as the principal debtor's liability (Section 128 of Indian Contract Act). That means that if the principal debtor defaults, the creditors can recover from the surety all he could have recovered from the principal debtor. For instance, if the principal debtor fails to pay a Rs. 10,000 debts.

Co-Extensive Liability

This implies that the surety is directly liable for the whole amount owed to the creditor by the principal debtor, not a penny less or more. That is the most the surety can be held liable for in relation to his guarantee. In the case of Maharaja of Benaras v. Har Narain Singh, the surety is liable not only for the principal amount but also for interest on the principal amount and charges incurred in enforcing this liability under the agreement in this case and even otherwise.

The trial court erred in decreeing the suit against the surety for only the principal amount, excluding interest and costs, according to the court. As a result, we might conclude that the entire liability of the principal debtor becomes the liability of the surety if the debtor fails to pay. It must also be noted that liability is wholly dependent on the terms of the contract, which must be completely adhered to.

In Bank of India vs. Surendra Kumar Mishra, it was determined that when a principal debtor admits his liability and extends the limitation period against him, the surety is also affected.

Limitation on Surety’s Liability

It is clear that the surety's liability is coextensive with the principal debtors, but this is not an absolute principle. Various situations exist in which liability is limited to only a part of the debt.

According to Section 128 of the Act, it is possible to limit the surety's liability if it is expressly stated in the contract. It is important to note that the burden of proof is on the surety to prove that his liability is limited.

Condition Precedent to the Surety’s Liability

There is a possibility that the contract specifies the conditions under which the surety's liability starts. In lay terms, this means that only the surety will be held liable when the following conditions are fulfilled. The relevant principle is recognized by Section 144 of the Act.

The surety may also add some conditions that he must fulfill before his liability starts. In the matter of Bank of Bihar Ltd. v. Dr. Damodar Prasad, the court stated that if no such requirement is prescribed to be fulfilled, the court cannot introduce such conditions.

Discharge or Termination of the Surety’s Liability

When the debtor fails to perform, the surety's liability to fulfill the promise is discharged.

The following provisions outline various scenarios in which the surety's liability is discharged.

Discharge by Revocation

Section 130 of the Act allows for the revocation of a guarantee contract by giving notice to the creditor. This revocation applies solely to future transactions and not to transactions that have already occurred. As a result, if there are no future transactions that have not been entered into

Discharge by Death of Surety

Section 131 of the Act discusses the event in which the surety died. This discharge of liability is only available for future transactions, not for previous transactions.

In the case of R.K. Diwan v. State of UP, the liability can be enforced against the surety's legal heirs to the amount of the inherited property and not in a personal capacity.

Discharge by Variance

Section 133 of the Act has a provision that releases Surety from liability if the creditor alters any terms or conditions of the contract with the primary debtor without Surety's consent, as held in Pratap Singh v. Keshavlal.

It is understood that the surety will be released from liability as a result of the creditor's changes to the terms of the contract. Yet, in this case, the situation must be properly evaluated.

Discharge by Release or Discharge of Principal Debtor

According to Section 134 of the Act, the surety is released from all duties and rights stated in any contract between the creditor and the principal debtor.

In an old case, the Privy Council decided that the surety is discharged of the need to pay the debt at any time and of the right to sue the principal in the creditor's name after payment.

In Maharashtra SEB v. Official Liquidator, the Supreme Court stated that if a contract is entered into between the creditor and the principal debtor, the debtor is released from the liabilities and the surety is also released. Even so, if the principal debtor is discharged under insolvency laws or through a liquidation process, the surety's liability is not discharged.

Discharge when the Surety’s Remedy is impaired

Section 139 of the Act lists the situations in which the surety's liability and rights can be discharged. When a creditor does an act that is inconsistent with the surety's rights and liabilities, the surety's remedy is imperiled.

Conclusion

Several provisions of the Indian Contract Act specify a number of circumstances in which the surety's liability to the creditor may be discharged. These diverse scenarios are described under sections 130–139 of the Act.

One of the interesting features of the surety's liability is that it co-occurs with the debtor's liability. The surety might specify the conditions under which his liability under the contract terms arises. The provisions cited above make it very clear that sureties' interests must be protected.

Frequently Asked Questions (FAQs)

Q1. Who has surety liability under the Indian Contract Act?

Ans. The person who gives the guarantee is termed the 'surety," the person in respect of whose default the guarantee is given is called the 'principal debtor', and the person to whom the guarantee is issued is called the 'creditor'. A guarantee can be oral or written."

Q2. What are surety rights and liabilities?

Ans. The liability of surety is established in Section 128 of the Indian Contract Act of 1872. The surety's liability will be co-extensive, which means that the extent to which the principal debtor is liable is the same as the extent to which the surety is liable. The surety cannot be made responsible to the extent that the principal debtor is not.

Q3. What is limitation of surety liability?

Ans. Surety's right to limit or condition his responsibility Under the agreement, the surety may restrict the reach of his agreement. He can expressly limit his guarantee to a fixed sum, in which case the surety is not liable for any amount in addition to the fixed amount.