Q. Write a short note on the liabilities of surety.

  

_{Note: this post is a part of our important question answer series on Contract Law. You can read other questions by clicking here.}

 

Answer

A "contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default.

The person who gives the guarantee is called 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 given is called the “Creditor”. A guarantee may be either oral or written. 

 

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Rights of Surety

1.      Rights against the principal debtor:

i.       Rights of surety on payment or performance (Right of Subrogation)  section 140:

When the surety pays off the debt on default by the principal debtor, he is invested with all the rights which the creditor had against the principal debtor. The surety is said to step into the shoes of the creditor and can exercise the remedies which the creditor could have enforced against the principal debtor.

 

ii.     Implied promise to indemnify surety (Right to indemnity): section 145

In every contract of guarantee, there is an implicit promise by the principal debtor to save the surety from harm. The surety is entitled to claim from the principal debtor whatever sum he had agreed to pay under the guarantee, but no sums which he wasn’t obligated to pay under the contract. 

 

2.      Surety’s rights against the creditor:

i.       Right to securities: section 141

Surety has a right over the security which the creditor has in his possession at the time when the contract of guarantee was constructed. It doesn’t matter whether surety was aware of the security or not. The surety is entitled to the benefit of the securities only after paying the debt in full. A part payment of the debt does not give him the benefit of securities.

ii.     Right to claim set-off:

The surety is also entitled to any claim of set-off which the principal might possess against the creditor in respect of the same transaction.

 

3.      Right against Co-sureties:

Where a debt has been guaranteed by more than one person, they are called co-sureties.

i.       Right to contribution: Section 146

This Section says, if there is no inconsistent agreement between the co-sureties, and when there are two or more co-sureties then each has to contribute equally to the debt or a part of the debt.

Illustration: Abhi and Aayush are co-sureties for the sum of 2000 rupees which has been given to Nishant by the bank. Nishant defaults, Abhi and Aayush are liable 1000 rupees each among themselves.

Also read:

1. Q. Define contract of Guarantee.
2. Q. “Liability of the surety is co-extensive with that of the principal debtor.” Explain the statement.

 

 

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