Rights and liabilities of surety – Contract of Guarantee

Rights and liabilities of the surety

Introduction

As we hear in our daily routine that one person makes contact with another person. The concept of a contract is not new for us. It is coming from a long period. Earlier it is known as a Batar System. In the Bartar system, people give some things or goods as payment of any goods that he or she is buying from that person. But in 1872, finally, India got its codified statute which deals with contracts and which is known as the Indian Contract Act, 1872. There are various types of contracts are made between individuals, for example, contracts of guarantee, contracts of bailment, pledges, contracts of Agency, and many more.

The Indian contract act contains two parts, one is the General provision, which deals from section 1 to section 75 of the Indian contract act, 1872, and the second is known as the Special contract which deals from section 124 to section 239 of the Indian contract act, 1872. The first part which contains general provision talk about the various rules, terms, and conditions for entre into a contract. While the second is a special contract, it talks about different types of contracts as we have discussed earlier, it may be a contract of guarantee, contract of bailment, pledge, and contract of agency.

The second part deals with a special type of contract which is why it is known as a special contract. Some contracts are such of nature in which there is a need of guarantor or surety and these contracts are known as contract of guarantee. Basically some times we found that when we try to take a loan or any amount from any person, then another party said that you have to carry a surety who can take guarantee that I will pay you if the first party fails to pay in time, so the person who takes guarantee is known as a surety. Now, I would like to discuss the duties and liabilities of surety but before that, I wish to explain the concept of the contract of guarantee and the number of the party involved in it.

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Contract of Guarantee

A contract of guarantee is defined under section 126 of the Indian contract Act, 1872. According to section 126 of the Indian Contract Act 1872, A contract of guarantee is a contract to perform the promise or discharge the liabilities of the third person in the case of default of the third person.  Basically, a contract consist of minimum two parties but a contract of guarantee consist of three parties and also three contract form in the contract of guarantee that is why it is also known as tripartite agreement. It includes surety, principal debtor, and creditor and these three parties have their respective duties and liabilities towards each party. Now I would like to explain these three parties, and what are these three types of contracts.

Three parties included in the contract of guarantee

These parties are a surety, principal debtor, and creditor. These three terms are explained as below:-

  • Surity:- Surity is a person who gives the gurantee of the principal debtor to the creditor.
  • Principal debtor:- Principal debtor is a person in respect of whose default the guarantee is given. Or in the simple term, we can say that the principal debtor is the person for whom the guarantee is given.
  • Creditor:- The creditor is the person to whom the guarantee is given.

Three types of contract made between the surety, principal debtor, and creditor:

  1. Principal contract:- The contract made between the principal debtor and creditor is known as a principal contract.
  2. Secondary contract:- The contract made between the creditor and the surety is known as a secondary contract.
  3. Implied contract:- The contract made between the principal debtor and surety is known as an implied contract.

Now I would like to explain the liabilities of surety and rights of surety against the principal debtor and creditor respectively.

Surety liabilities

As per section 128 of Indian contract act 1872, The liability of the surety is co-extensive with that of the principal debtor, unless and until it is otherwise provided by the contract. This means that the liability of surety will be equal to the principal debtor till the principal debtor discharge from his liabilities and otherwise any terms or conditions mentioned in the contract. This means that if the principal debtor fails to fulfill his liabilities then the surety is liable to pay the liabilities of the principal debtor and the creditors can recover from the surety all that he could have to recover from the principal debtor.

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Rights of surety against Principal debtor

There are various rights of surety against the principal debtor. These rights are given as below:-

  1. Rights of Subrogation:- As per section 140 of the Indian Contract Act 1872, the surety will be set into the shoes of the creditor. This means after the performance of his duties, the same rights will have surety against the debtor as the creditor has towards the principal debtor. We can also say that if once the surety has done his duty by paying the amount of principal debtor then he has all the rights that the creditor had against the surety.
  2. As per section 145 of the Indian Contract Act 1872, there is an implied promise to indemnify the surety after the surety has done his responsibilities. It means there is an implied promise between the debtor and surety that the debtor is liable to pay all the sums that surety has paid rightfully but not for wrongfully paid.

Rights of surety against the creditor

There are various rights of surety against the creditor. These rights of surety are given as below:-

  1. As per section 141 of Indian Contract Act 1872, Surety’s right to benefit of creditor securities at the time of contract, means that the surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time of contract of suretyship is entered into, No matter whether the security is aware of or not and if the creditor loses or without the consents of surety, parts with such security, Then in this case the surety will discharged from his liabilities with the extent of the value of the security that was submitted in the creditor.
  2. The surety has the right to set off the debts which the debtor has against the creditor. This means that Sometimes, the principal debtor is entitled to certain counterclaims or deductions from the loan obtained from the creditor. In such cases, the surety is entitled to the benefit of such counterclaim or deductions, if the creditor files a suit against the surety.
  3. Rights in Case of Fidelity Guarantee:- In case of fidelity guarantee i.e., guarantee as to good behavior, honesty, etc., of the principal debtor, the surety can ask the employer to dispense with the services of the employee if the latter is proved to be dishonest.
  4. Before the Payment of the Debt Guaranteed:- A surety may after the debt has become due but before he is called upon to pay, require the creditor to sue the principal debtor to recover the debt. But, in such cases, the surety must undertake to indemnify the creditor for any risk, delay, or expense resulting therefrom.
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Conclusion

After seen the concept of the contract of guarantee and liabilities and various rights of surety towards the creditor and principal debtor, I would like to conclude that a contract of guarantee is a tripartite agreement that includes principal debtor, creditor, and surety. And surety is the person who came forward to pay the amount in case of borrower default. Because the liabilities of surety are equal to the principal debtor that is why the creditor has the right to make the surety liable for making the payment in case of default of the principal debtor. There are three types of agreement that take place in the contract of guarantee and these are principal contract, secondary contract, an implied contract. The contract of guarantee is revolving around the surety. Because if no one agrees to become the surety of principal debtor then in this situation the contract of guarantee will not take place. Hence surety has its rights and duties towards both the principal debtor and creditor.

Author: AMIT SHEORAN,
second year, Symbiosis Law School, Nagpur

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