LIABILITY OF SURETY
BY: Bishrant Khatiwada, SLS, Pune, Email: bishrantkhatiwada0@gmail.com
In this article, we talk about the liability that can be imposed on you if you decide to become a surety to a contract.
According to Section 126 of Indian Contract Act, 1872, “A contract of Guarantee is a contract to perform the promise or discharge of liability of a third person. In a contract of guarantee, the person who gives guarantee is called the surety whereas the person in respect of whose default the guarantee is given is called principle debtor. The person to whom the guarantee is given is called the creditor.EG: A with his friend B enter a trader’s shop and A asks the trader to supply the articles required by B and if B does not pay the money for the articles A will. This is a contract of guarantee. The primary liability to pay is that of B but if he fails to pay, A becomes liable to pay. If the contracting parties should be compete to contract, suppose in the above mentioned example B is a minor hence incompetent to contract. In this situation A would be considered as the principal debtor and he will become personally liable to pay. The incapacity of the principle debtor does not affect the validity of a contract of guarantee. The requirement is that the Creditor and the Surety must be competent to contract. Like all other contracts, a contract of guarantee should fulfil all the necessary requirements of a valid contract mentioned in Section 10 of Indian contract act, 1872.
Concurring to section 128 of Indian Contract Act, 1872, the liability of a surety is co-extensive with that of foremost debtor's unless the contract gives. Surety gets to be obligated to create instalment quickly when the central indebted person makes default in such instalment. Liability of surety is same as that of the principal debtor. A lender can straightforwardly continue against the surety. A leaser can sue the surety specifically without suing central indebted person. Surety gets to be obligated to create instalment quickly when the foremost indebted person makes default in such instalment.
In the absence of a contract to the company, the liability of a surety is coextensive with that of the liability the principal debtor which means that the surety is liable to the same extent to which the principal debtor is liable. If the principal debtor is liable for rs.100 then the surety should also be liable for the same. Not rs. 99 and not rs. 101 but only rs. 100.
In State of MP V Kaliparsad, the plaintiff guaranteed to the defendant the payment of bill of exchange by the third party, who was the acceptor. On the due date the bill was dishonoured by the acceptor. The Plaintiff was held liable not only for the amount of bill, but also for any interchanges which occurred on it. It was observed that the liability of surety is equal to that of the principal debtor. But if at the time of giving the guarantee, the surety has given guarantee for a fixed amount, in that situation the liability of surety can, in no case be more than the fixed amount.
Surety’s Right to limit his liability: In spite of the fact that the obligation of the surety is co-extensive with that of the foremost indebted person, he may constrain his risk. He may explicitly announce his ensure to be constrained to a settled sum. In other words, the obligation of a surety can be made less by an uncommon contract but his risk cannot be made more prominent than that of the central indebted person.
Surety’s liability arises immediately on default of the principal debtor: Surety’s risk is secondary and not primary. The surety’s risk emerges quickly on default by the principal debtor. He cannot be called upon to pay unless the central indebted person has committed the default. But in case of default by the central indebted person the lender isn't required to deliver a take note of default to the surety. Bank isn't bound to continue to begin with against the foremost indebted person some time recently suing the surety unless the contract so gives.
Surety’s liability where the original contract between creditor and principal debtor is void or voidable: The contract between the surety and the creditor is an autonomous contract. In this way, where the initial contract between the bank and the foremost indebted person is void the surety will be obligated as on the off chance that he is the vital indebted person. So also, where the contract between the lender and the vital indebted person is voidable, the surety may not be released from risk.
Section 146 of Indian contract act 1872, is related to co-sureties liability to contribute equally. It states,” 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.” Whereas section 132 of Indian Contract Act, 1872 deals with the liability of two person, primary liable, not affected by arrangement between them that one shall be surety on other’s default. It states,” Where two persons contract with a third person to undertake a certain liability, and also contract with each other that one of them shall be liable only on the default of the other, the third person not being a party to such contract the liability of each of such two persons to the third person under the first contract is not affected by the existence of the second contract, although such third person may have been aware of its existence.” For e.g.: A and B make a joint and several promissory note to C. A makes it, in fact, as surety for B, and C knows this at the time when the note is made. The fact that A, to the knowledge of C, made the note as surety for B, is no answer, to a suit by C against A upon the note.
In Bank of Bihar v. Damodar Prasad, the Hon’ble Court held that an action against the surety cannot be prevented solely on the ground that the creditor has an alternative relief against the principal borrower. It was held that asking the creditor to exhaust his remedies against the principal debtor first and only then move against the surety would defeat the purpose of the guarantee. Whereas n State Bank of India v. Indexport Registered, the Hon’ble Supreme Court held that surety cannot insist that the creditor should first exhaust his remedies against the principal debtor. The same was reaffirmed in Ram Bahadur Singh v. Tehsildar Bisli. In the case of, N. Narasimhaiah v. Karnataka State Financial Corpn, it was held that a suit against the surety is maintainable even if the creditor has not sued the principal debtor.
In conclusion: The liability of a surety is secondary and co-extensive with that of the principle debtor as stated in section 128 of Indian contract act,1872, but the surety shouldn’t be held liable for more. He can only be held liable as same as agreed or what the principal debtor is liable for. The term ‘co-extensive’ under section 128 of Indian Contract Act, 1872, infers that the obligation of the surety is at standard with the foremost indebted person. Risk of surety is the same as vital indebted person and not more than that. In Maharaja of Benaras v. Har Narain Singh, it was held that on the off chance that the foremost indebted person is at risk to pay intrigued, the surety can too be held obligated to pay the intrigued. So, it could be a settled rule within the law of contracts that in case the foremost is at risk for the foremost sum furthermore the intrigued and other charges, at that point the lender has the alternative to move against either the surety or the central indebted person to recoup that amount.
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