Legal

Understanding the various aspects of Surety’s Liability

The Indian Contract Act, 1872 talks about the Surety’s liability & rights & in this, article, we will analyze the nature & extent of Surety’s liability with the aid of legal provisions & judicial precedents.

What is the provision for Surety’s liability & rights?

Under the Indian Contract Act, 1872 section 126^[1] defines the contact of guarantee. According to the section, the Surety is a person giving the guarantee to fulfil a promise or discharge liability of a third person, in case of default to the creditor.

Thus, it can be said that the Surety gives an assurance to the creditor for the Act of the principal debtor. It is clear that the Surety’s liability is collateral to liability of principal debtor.

The act aims to protect the interest of all the 3 parties involved in this contract of guarantee & especially the Surety’s interest, as they play a crucial role in the commercial transactions.

What is the nature & extent of Surety’s Liability?

Co – extensive Liability

Section 128 of the Act lays down the nature & extent of the Surety’s liability. It clearly mentioned in the said section that the Surety’s liability & the principal debtor’s liability is co – extensive.

Co- extensive means that the Surety is liable for the whole of the amount wherein the debtor is liable & the liability depends on the amount of the principal debt. This means that the liability of surety will have to be specified in the contract of guarantee.

In the case of Bank of India vs. Surendra Kumar Mishra, it was held that when a principal debtor acknowledges his liability & has extended the limitation period against him, then the Surety will also be affected by the same.

Limitation on Surety’s Liability

It is evident that the Surety’s liability is co – extensive with the principal debtor’s is not an absolute principle. There are various situations where the liability is limited to only some part of the debt.

As per the section 128 of the Act, it is achievable to limited Surety’s liability if it is expressly provided in the contract. It is pertinent to note that the burden is upon the Surety to prove that his liability is limited.

Condition precedent to Surety’s Liability

There is a possibility that the contract has specified certain conditions after which the Surety’s liability will begin. In simpler terms, it means that after fulfilling the following conditions only the Surety will become liable. Under Section 144 of the Act, the said principle is recognized.

The Surety can also add some conditions that is required to be fulfilled for the commencement of his liability. In the case of, Bank of Bihar Ltd. v. Dr. Damodar Prasad, it is held that when there is no such condition prescribedto be fulfilled, then the court cannot introduce such conditions to it.

What is the extent of Discharge or Termination of Surety’s Liability?

The discharge from liability means that the Surety’s liability to fulfil the promise when the debtor fails to perform.

The following provisions lays down various situations wherein the Surety’s liability is discharged.

• Discharge by revocation

Section 130 of the Act provides for the revocation of the contract of guarantee by giving notice to the creditor. This revocation is only for the future transactions & not for the transactions already entered into. Thus, where there is no future transactions which haven’t been entered into.

• Discharge by Death of Surety

Section 131 of the Act talks about the case wherein because of the Surety’s death. This discharge of liability is available only for the future transactions & not those that were entered into previously.

In the case of R.K Diwan v. State of UP, the liability can be enforced against the legal heirs of the Surety to the extent of the property inherited & not in the personal capacity.

• Discharge by Variance

Section 133 of the Act, entails the provision, wherein Surety is discharged from his liability if the creditor alters any terms or conditions of the contract with the principal debtor without the consent of Surety, as held in Pratap Singh v. Keshavlal.

It is understood that because of the alterations made in the terms or the contract by the creditor, the Surety will be discharged from its liability. However, in this case the situation must be analyzed correctly.

• Discharge by Release or Discharge of Principal Debtor

Section 134 of the Act provides that Surety is discharged from his liabilities & rights enlisted in any contract between the creditor & the principal debtor.

Privy Council in an old case, held that the Surety is discharged from the rights to pay the debt at any time & after the payment, the right to sue the principal in the name of the creditor.

The Supreme Court in Maharashtra SEB v. Official Liquidator, held that if any contract is entered into between the creditor & the principal debtor by which the debtor is released from the liabilities & the Surety will also be released. However, in this case, if the principal debtor is discharged by the insolvency laws, or through the liquidation case, the Surety’s liability will not be absolved.

• Discharge when the Surety’s Remedy is impaired

Section 139 of the Act enlists the situations where the liability of surety & rights can be discharged. When the creditor does any act which is not consistent with the rights and liabilities of the Surety, then the Surety’s remedy will be impaired.

Conclusion

The Indian Contract Act entails a wide range of circumstances wherein the Surety’s liability can be discharged to the creditor. The sections 130 -139 enlists these various scenarios.

The special features of the Surety’s liability that it is in co-existing with the debtor’s liability. The Surety can stipulate the conditions wherein his liability arises under the contract terms. It is quite clear from the provisions mentioned above that the interest of Surety must be protected.

Read our article: Limitation of Liability clause is important in Contracts