RIGHTS & LIABILITY OF SURETY

1. INTRODUCTION

Dear students welcome to the lecture series on Business Regulatory

Framework. In my previous lecture I have discussed the “contract of
indemnity” and began the discussion on the “contract of guarantee”.
When we were discussing the contract of indemnity we discussed the
meaning of the contract of indemnity and the essentials of the
contract of indemnity, along with the rights of the indemnity holder.
Then we moved on to discuss the concept of the contract of indemnity
along with the definition of the contract given in the Indian Contract
Act.

Then we went on to discuss the essentials of the contract of

guarantee. Today, we are going to discuss the remaining part of the
contract of guarantee. It includes the rights of the surety against the
principal debtor, against principal creditor and against co sureties.
Nature and extent of the surety, liability and then under what
circumstances the surety will be free from the responsibilities. We will
end our discussion with the difference between the contract of
indemnity and the contract of guarantee. So today I begin my
discussion with the concept of the nature and extent of surety‟s
liability.

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 2. SURETY’S LIABILITY

The first and the foremost point in the surety‟s liability is that it is
coextensive of the debtor‟s liability. When we say the coextensive of
debtor‟s liability it means surety liability is as much as the debtor‟s
liability. Meaning thereby, in case the debtor makes a default in the
making the payment to the creditor, then whatever the creditor can
recover from the debtor, the same amount of the liability will fall on
the shoulders of the surety. Surety will also be responsible to same
amount of the liability, because he has given the surety and his
liability is extensive to an extent of the debtor‟s liability.

For example, if a debtor is making a default in making the payment to

the surety and later on the surety has to make the payment of the
amount along with the some cost and the interest also, then surety can
recover that principal amount along with the cost or interest from the
debtor. So his liability will be the coextensive of the debtor‟s liability.
The second point is surety‟s liability may be limited. A surety at the
time of giving the surety can limit his liability in whole of the debt. For
example, if A is granted a loan by the B, of rupees 10,000/- but C who
is a surety can limit his liability by saying that he will be responsible
only for 7,000/- rupees. So in the loan of 10,000/-, the surety has
limited his liability by giving the guarantee of rupees 7,000/- only, this
is another nature and extent of surety‟s liability. The third point is the
surety‟s liability will arise on the default of the principal debtor. We
know that whenever a default is made by the principal debtor in the
contract of guarantee then surety comes into the picture.

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If on the due date when a debt is to be return by the debtor to the
creditor, if the debtor returns the money to the creditor, surety does
not come in the picture, he comes in picture only when debtor has
made a default. So his liability arises on making a default by the
debtor. On a due date the creditor cannot directly come to the surety
for the repayment of the loan. He has to go to the debtor and in case
he makes a default, then surety will come into the picture. And the
last point in the extent into the surety‟s liability is; the surety will be
liable if there is a contract between principal debtor and that contract
is void.

So in case the main contract between the principal debtor and the
creditor is void, the surety‟s liability will be the primary liability. For
example, A who is a minor has taken the loan from the B and B has
given the loan to the A of rupees 10,000/- but the contract between
both of them is void. In this case the primary liability will be the
liability of the fee who has given the guarantee in the contract. So if
there is a void contract between the debtor and the creditor the
liability of the surety will be the prime liability. These are the points
which are included in the nature and extent of surety‟s liability.

3. RIGHTS OF THE SURETY

Now we move on to discuss the rights of the surety. As you know when
we have explained that there are three parties in a contract and there
are three contracts. So the parties are the debtor, creditor and the
surety. So the surety has got some right against creditor. Surety has
got rights against debtor.
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But sometime in a contract of guarantee, the surety is not all alone.
There are more than one surety or there are more than two sureties.
Then sometime one surety can exercise his rights against the other co
sureties. So the point of the co- sureties will also be touched. So the
surety‟s rights against the creditor, rights against debtor and rights
against co sureties will be discussed now.

4. SURETY’S RIGHTS AGAINST DEBTOR

First of all we discuss the right of the surety against debtor. The rights
of the surety against debtor are and that first right is the “right of
subrogation.” Now what is the meaning of the right of subrogation?
Right of subrogation says that when a surety makes the payment to the
creditor and creditor is out of the scene now, therefore now surety will
deal with the debtor in a manner as if he is a creditor. The surety after
making the payment to the creditor will step into the shoes of the
creditor. Because after making the payment to the creditor, the
creditor is out of the scene now.

Surety have given the guarantee to the creditor and creditor after
getting the payment is out of scene and now the surety will step into
the shoes. He will occupy the same position which was available with
the creditor. He will step into the shoes of the creditor and will deal
with the debtor as if he is a creditor. So his role will change he will not
remain simply as a surety. He will become now creditor for the debtor.
So stepping into the shoes of somebody is a right of the subrogation.

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So now surety has got a right to recover the amount which he has paid
to the creditor. It may include the principal amount, it may include
the interest and it may include the cost also.

After discussing the right of subrogation we move on to discuss another

right of the surety and that is “right to indemnifier”. As you know
when we have discussed the contract of indemnity, the contract of
indemnity stands for, to make good the loss. In the contract of
indemnity we have studied that indemnifier will compensate the
indemnity holder in case the indemnity holder suffers from some loss.
So, indemnity stands for compensating the loss, making good to the
loss.

If we apply the same concept which we have studied in the contract of

indemnity, in the contract of guarantee then we find that the surety
has got a right to indemnify himself if, because of the fault of the
debtor, if the surety has suffered from some loss or if he has been
damaged because of the non fulfilment of the words or non fulfilment
of his promise and the surety has received some dent or he has
suffered from some loss so making good to the loss, the contract of
indemnity will be applying here will apply here and surety has got a
right to get indemnity against the debtor. He will be compensated by
the debtor. Right to be relief from the liability, is another right
available to the surety. Surety can go to the debtor and can say to him
that he should fulfil or he should perform the contract and that is on
the due date he should make the payment to the creditor. These are
the rights of surety against debtor.

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 5. RIGHTS OF A SURETY AGAINST CREDITOR

Now we move on to discuss the rights of the surety against creditor,

because there is a contract between the creditor and the surety also.
So when surety has got a right against the debtor he has got certain
rights against the creditor also. The first and the foremost right is that
he can claim certain securities from the creditor. At the time of
entering into the contract of guarantee, if debtor has given certain
securities to the creditor to get the loan he has pledge certain things
with the creditor.

Though pledge words which I am using I will explain it, elaborate it

when we will talk about the contract of bailment and the pledge. But
here the pledge means for the security of the loan if the debtor has
kept certain securities with the creditor and when surety is making a
payment to the creditor, creditor at the time of getting the payment
when he is getting the payment the automatically, it gives a rise to the
sureties right and that is surety can say to the creditor that those
securities which were kept with him is to be released now because he
is getting the complete loan so his right is to claim those securities
which were kept by the debtor with the creditor at the time of getting
the loan. Because creditor is being compensated or creditor is being
given the full payment by the surety and surety have got a right to get
back those securities. Right to set off, right to set off is another right
available with the surety against creditor, set off says the counter
claim. In the contract of guarantee if the debtor has or debtor owes
some money to the creditor also.

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Though creditors have give money to the debtor but debtor also owes
some money to the creditor. In that case at the time of making the
payment the surety has got a right to claim the set off. Let us take an
example, A is a person he has borrowed rupees 5,000/- from the B and
C has given the surety in this contract. But A is also in demand or A
also owes some money of rupees one thousand from the B, meaning
thereby when the loan was granted by the B to the A rupees 5,000/-
were given to him. But A also owes some money to the B that is A also
wants some money or A has given the loan to the B of rupees 1,000/-
and suppose on the due date A becomes a defaulter. Now surety has to
make the payment now in this case the surety has got a right to set off
that is the surety at the time of making the payment of 1,000/- rupees
will ask the creditor that he should deduct the rupees 1,000/- out of
that payment. This is known as the right to set off.

Another right available with the surety against creditor is that he can
share the reduction. Here the meaning of share of reduction is that
after getting the loan if the debtor becomes insolvent. We presume it
that again and again I would not like to explain that contract, that how
contract took place and how the contract was entered into, we
presume that all the essentials were present in the contract and loan
was sanctioned. Now directly I am coming to the point that guarantee
was given in a contract by the C, A has got the loan B has sanctioned
the loan, C has given the guarantee. And in this case, suppose A
becomes an insolvent and as you know when a person become
insolvent his property goes in the hands of official receiver and
assigner.

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When the property of the A went into the hands or goes in the hands of
the official receiver assignee and list of the creditor is prepared. In the
list of the creditor the name of the B will stand and B will receive
something in proportion from the assets of the A. Now surety at the
time of making the payment to the creditor will ask to the creditor
that whatever the amount he has received according to the proportion
of the distribution of the assets of the A, that amount should also be
deducted. So this is known as right to share reduction.

For example, A was given the loan by the B of rupees 10,000/-, C who
is a surety in a contract gave a guarantee. A became insolvent and
when his property and assets was realised, when it was distributed by
the official receiver and assignee, B got 1,000/- rupees. Now surety
who is C in this case when he will make a payment to the B of rupees
10,000/-will ask the B to deduct the rupees 1,000/- which he have
received from the official receiver and assignee. This right is the right
available with the surety and it is known as a right to share reduction.

6. RIGHTS OF A SURETY AGAINST CO-SURETIES

Now, we move on to discuss the right of the surety against co sureties.

When we say co sureties it means in a contract of guarantee there are
more than one surety. Sometime in the contract, it happens that one
person does not want to take the complete liability in terms of the
surety in a contract. There has to be a more than or sometime there
are more than one surety in that case what are rights available with
the surety. Right of the surety in this case will be that he has got a
right to contribute.
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Rights of contribution stands for that suppose on the due date or in a
contract of guarantee one surety is making the complete payment on
behalf of the other co sureties. Then, he has got a right to claim the
contribution from the other co sureties.
Let us take an example. A is a person and he has been sanction the
loan by the B of rupees 10,000/- the guarantee was given by the C and
D. They have decided to share the equal amount of rupees 5,000/-
each. If the A become a defaulter on a due date, let us extend this
example and presume that A on a due date becomes a defaulter and he
doesn‟t make the payment to the B of rupees 10,000/- and suppose in
this case C makes the full payment to the B and that is of rupees
10,000/- than C has got a right against the D to recover the 5,000/-
rupees. Here the D has to give the contribution which he agreed to
give in the contract of guarantee and that is rupees 5,000/- will be
given by the D to the C because C has made the full payment so C has
got a right against another co surety that is D.

Another right of surety is right to share the benefit of securities as we

mention when we were having, we were discussing the rights of the
surety against creditor, we mention that sometime the securities were
kept by the debtor with creditor and the creditor is bound to return
those securities to the surety when he is being compensated by the
surety. Suppose there are more than one surety in the case, Than
whatever the securities the sureties are getting they have got a right
to share those securities in an equal amount or in equal ratio or in the
agreed ratio. For example, „A‟ at the time of getting the loan of
rupees 10,000/-, kept the securities of rupees 2,000/- with B. And C
and D have given the guarantee.
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Now on the due date A becomes a defaulter and C and D has made the
payment of rupees 10,000/- to the B and has got the securities of
2,000/- rupees. Now, in this case the co sureties will distribute those
securities of 2,000/- amount themselves in either in equal ratio or
whatever the ratio they had decided. So with this, we end our
discussion on the rights of securities and I sum up by saying the surety
has got a right against debtor, the surety has got a right against
creditor and surety has got a right against the co sureties.

7. WHEN SURETY IS DISCHARGED FROM LIABILITY

Now we move on to discuss a very sensitive point or a very sensitive

issue in the contract of guarantee. And we will take up what are the
points or what are the situations when surety is completely discharged
from the liability.

The position of the surety is a very delicate in the contract of

guarantee. Therefore, the law says there are certain circumstances in
which the surety will be completely free from his liability and the first
and foremost point is that surety will be free from the responsibility by
giving a notice to the creditor. Now this right is available with the
surety only in case of continuing guarantee. And in my previous
discussion, I mention that continuous guarantee is a guarantee which is
given for series of transaction. Now, surety can revocate his liability by
giving a notice of revocation to the creditor. Another point when the
surety will be free from responsibility is by death of the surety.

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As you know death itself is a notice, so surety will be free if he dies,
but he will be free from the transaction or from the liability, which
occur after his death, the another point when the surety will be free
from the liability is the variance in terms of contract.

When we say the variance in terms of contract means, if debtor and

the creditor after entering into a contract change the contract without
the consent of the surety, I would like to emphasise this point by
saying again and again that surety‟s liability is very delicate in the
contract of guarantee. If anything is done by the debtor and the
creditor in the contract of guarantee and without the consent of the
surety, please underline this point without the consent of the surety,
surety will be free from responsibility. Now in this contract, when I
was mentioning there are variance in the contract of guarantee,
debtor and the creditor enters into the contract and the surety has
given the guarantee and without the knowledge of the surety, without
the consent of the surety if later on they change the terms and
condition of the contract, surety will be free from responsibility.

For example, A and B enter into the contract A is a debtor B is a

creditor, enters into a contract in which the B is giving the loan of
rupees 10,000/- to A and C is a person who is a surety to the B, for the
loan which is sanctioned to A. Later on A and B convert the rupees
10,000/- into rupees 1 lakhs or they make an agreement in which
without the knowledge of the surety, they do not inform the surety
and enters into a contract and make it one lakh rupees, they add one
more zero in front of the 10,000/- rupees and without the knowledge
of the surety, the surety will be free from responsibility.
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As I mentioned without the consent if anything is taking place between
debtor and the creditor, surety will be free from the responsibility.
And another point when the surety will be free from the responsibility
is when creditor discharges the debtor from the liability. If he releases
the debtor from the liability, the liability of the surety will arise at the
default of the debtor and if the creditor says to the debtor that he is
free from liability, then surety will be automatically will be free from
the liability. Because the creditor has not gone to the debtor and he
has not made a default he has released him, the surety will be
automatically free from the liability. Another point is the point of
composition. It says that if the debtor and the creditor enter into a
composition, composition meaning thereby they enter into the
contract change the main contract and make an amicable settlement
between the two. And that too without the consent of the surety,
surety will be free from the liability.

Let us take an example, A has been sanction the loan of rupees

10,000/- by B and C is a person who has given the surety. Later on B
says to A, that you don‟t pay me the 10,000/- rupees, pay me only
2,000/- rupees and here the surety has not given the consent or his
consent was not sort, surety will be free from the liability. Another
point which is related is that by impairing surety‟s remedy. Impairing
surety‟s remedy means if creditor does something which diminishes the
right of the surety, which reduces right of the surety, in that case
surety will also be free from the liability. Surety is discharged from the
liability when creditor looses the securities kept with him by the
debtor.

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Sometime in the contract of guarantee, it happens that debtor keeps
certain securities with the creditor at the time of getting the loan and
surety has got the knowledge of that, on the due date, if the debtor
becomes a defaulter, then surety will be free from the responsibility,
if creditor looses those securities.
Let us take an example, A is debtor and has got the loan from the B of
rupees 10,000/- at the time of getting the loan he has kept the
securities of rupees 2000/- with the creditor and on a due date, if the
debtor become a defaulter and C who is a surety in this contract
returns the money to the creditor, in that case he can demand those
securities which were kept by the debtor with him. But if on the due
date, at the time of getting payment from the surety, creditor says
that he has lost the securities, say in this case when the loan was given
of rupees 10,000/-. A has kept the securities of rupees 2,000/- now
creditor says that he has lost the securities of rupees 2,000/- without
the consent of the surety, if he loses it, then surety will be free from
his responsibility.

Another point is when the surety will be free from the responsibility is
when creditor gives more time to the debtor. Now giving a more time
is included in the contract in which the debtor and the creditor has
made a variance in terms and condition. And if without the consent of
the surety, the time was extended, the surety will be free from
responsibility. And in the last, the surety was kept in the dark and he
was concealed about certain points, the surety was not aware about
certain facts which were very prominent in the contract of guarantee
and the contract was entered into by the debtor and the creditor.

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They enter into the contract with the each other by misrepresenting
the fact to the surety, and then surety will also be free. Surety will be
free from responsibility if there is a misrepresentations in the contract
of guarantee, surety will be free from the responsibility if there is
concealment of certain facts.

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