A contract of guarantee refers to a contract to perform the promise or discharge the liability of a third person in case of any default by him. Surety is the person giving the guarantee. The person for whom the guarantee is given is the Principle Debtor. The person to whom the surety gives the guarantee is the Creditor. A guarantee may be oral or in writing. Here we will discuss the Discharge and Rights of Surety.
Discharge and Rights of Surety
A contract of guarantee shall also satisfy all the necessary conditions or elements of a valid contract. As per section 127, anything is done or any promise made for the benefit of the principal debtor provides sufficient consideration to the surety for giving the guarantee to the creditor.
For example, Bharat asks Anil to sell goods to him on credit and deliver them. Anil agrees to it on a condition that Charu will guarantee the payment of the price of the goods. Charu guarantees the payment in consideration of Anil’s promise to deliver the goods. This is sufficient consideration for Charu’s or Surety’s promise.
Rights of a Surety
A surety has the following rights:
1. Rights against the Creditor
As per section 141, a surety is eligible to the benefit of every security which the creditor has against the principal debtor. This holds true even if at the time of entering into the contract of guarantee the surety was unaware of the existence of such a security.
Also, when the creditor losses or parts with such security without the consent of the surety, this discharges the surety to the extent of the value of such security.
2. Rights against the Principal Debtor
Once the surety discharges the debt, he obtains the rights of a creditor against the principal debtor. He can now sue the principal debtor for the amount of debt paid by him to the creditor due to the default of the principal debtor.
In a case where the principal debtor on discovering that the debt has become due, starts disposing of his properties in order to prevent seizure by the surety, the surety can compel the debtor to pay the debt and discharge him from his liability to pay.
3. Surety’s rights against the co-sureties
When a surety pays more than his share to the creditor, he has a right of contribution from the co-sureties, who are equally liable to pay. For example, Anthony, Barkha, and Chaya are the co-sureties to David for a sum of ₹30000 lent to Erwin who made default in payment.
Thus, Anthony, Barkha, and Chaya are liable to pay ₹10000 each as between them. So, in this case, if anyone of them pays more than ₹10000, he can claim the excess from the other two co-sureties so as to reduce his payment to ₹10000 only. However, if one of the co-sureties becomes insolvent, the other co-sureties shall contribute his share equally.
Discharge of a Surety (Sec.130 – 141)
A surety is discharged from his liability on:
- The death of a surety as regards future transactions in case of a continuing guarantee in the absence of a contract to the contrary.
- Notice of revocation as regards future transactions in case of a continuing guarantee. For example, Anu gives a guarantee to Bela to the extent of ₹50000, that Freida will pay all the bills that Bela will draw upon her. Bela draws bills on Freida and she accepts the bill. Anu gives notice of revocation. Freida dishonours the bill at maturity. Anu is liable as it was a transaction before the notice of revocation.
- Any variation in the terms of the contract between the principal debtor and the creditor without surety’s consent.
- If the creditor releases the principal debtor, the surety also automatically discharges.
- When the creditor makes an arrangement for composition or promises to give time or not sue the principal debtor without surety’s consent, the surety will be discharged.
- Any act or omission to do an act by the creditor which results in harming the rights of the surety, and also impairs the eventual remedy of the surety himself against the principal debtor, discharges the surety.
- Where the creditor loses or parts with any security which he receives from the principal debtor without the consent of the surety, this discharges the surety to the extent of the value of such security.
Solved Example on Discharge and Rights of Surety
What is the extent of surety’s liability?
As per section 128, the liability of a surety is co-extensive with that of the principal debtor unless the contract provides to the contrary. As soon as the Principal Debtor makes any default in the payment of the debt, the surety becomes liable. Thus, a creditor is not bound to proceed against the principal debtor first. He can directly sue the surety without suing the principal debtor. However, until the principal debtor makes any default, the creditor cannot ask the surety to pay the debt. Hence, the surety’s liability is secondary and the liability of the principal debtor being primary.