Rights of Surety

May 3, 2009 in General / Interesting Right of Subrogation: (Sec 140) Right of a surety against principal debtor: Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all he is liable for, is invested with all the rights which the creditor had against the principal debtor. A surety is thus, upon the payment of the guaranteed sum or on performance of a guaranteed duty, subrogated or invested with all the rights which the creditor had against the principal debtor. This arises on payment of the whole sum due or performance of the entire duty. Surety steps into the shoes of the creditor. Surety may now sue the principal debtor in as much as the creditor had the right to sue the principal debtor. Section 140 embodies the general rule of equity expounded by Sir Samuel Romilly as counsel and accepted by the Court of Chancery. The surety will be entitled to every remedy which the creditor has against the principal debtor, to enforce every security and all means of payment, to stand in the place of the creditor; not only through the medium of contract, but even by means of securities entered into without the knowledge of the surety having a right to have those securities transferred to him, though there was no stipulation for that; and to avail himself of all those securities against the debtor. This right of a surety also stands, not upon a principle of natural justice. Right to benefit of creditors securities (Sec 141) Right of surety against the creditor: A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of surety ship is entered into, whether the surety knows of the existence of such security or not. We have seen above while discussing discharge of surety that if the creditor loses or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. This right of surety arises on payment by him of the whole of the debt due to the creditor. Surety is entitled to be subrogated to all the rights and benefits of securities with the creditor which he has against the principal debtor. His right extends to securities of which he is not aware. He is also entitled to securities received by the creditor before or after the contract of surety ship. If the creditor loses, or without the consent of the surety, parts with such security the surety is discharged to the extent of the value of the security. If the securities are burdened with further advances, if will not affect the rights of the surety. Rights to indemnity (Sec 145) Right of surety against the principal debtor: In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. The surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully. Illustrations: 1. B is indebted to C and A is surety for the debt. C demands payment from A and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt. 2. C lends B a sum of money, and A at the request of B accepts a bill of exchange drawn by B

upon A to secure the amount. C, the holder of the bill, demands payment of it from A, and on As refusal to pay, sues him upon the bill. A, not having reasonable grounds for so doing, defends the suit, and has to pay the amount of the bill and costs. He can recover the amount of the bill, but not the sum paid for costs, as there was no real ground for defending the action. 3. A guarantees to C to the extent of Rs 2,000 payment for rice to be supplied to B rice of a less amount that Rs 2,000 but obtains from A payment of the sum of Rs 2,000 in respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied. Surety has a right to be exonerated by the principal debtor where his liability has become absolute. Surety is entitled to recover from the principal debtor actual sum rightfully due from him. For this, in every contract of guarantee, there is an implied promise by the principal debtor to indemnity the surety. In case surety pays less than what is due from the principal debtor, he is entitled to receive the sum actually paid by him.

more at http://www.citeman.com/5420-rights-of-surety/#ixzz18ZQlQtbc
INDEMNITY AND GUARANTEE Contract of Indemnity A contract by which one party promises to save the other from loss caused to him by the conduct of the promisee himself or by the conduct of any other person is called a contract of indemnity Section 124 the person who undertakes or agrees to undertake to compensate the loss is called the indemnifier the person whose loss is to be made good is called the indemnity holder Right of Indemnity holder All costs he may be compelled to pay in any such suit But the indemnity holder can recover such cost only if he had acted prudently and did not contravene the orders of the indemnifier

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This section is from the book "American Commercial Law Series ", by Alfred W. Bays. Also available from Amazon: American commercial law series.

Guaranty And Suretyship. Part 4

Sec. 169. Various Causes Discharging The Surety
(1) By discharge of principal's debt. When the debt of the principal is discharged, the surety's obligation also falls. As a general rule, anything which discharges the principal's debt, as payment, of course also discharges the surety's obligation. The surety is answerable for the debt of another and when that debt is gone, the surety's obligation is necessarily gone also. (2) By alteration of the written instrument.

If the instrument on which the surety is bound is purposely altered in a material part, he is discharged. The general rule is that any purposeful alterations of the written instrument (the bond, or note, etc.), on which the surety is liable, in a material part, without the surety's consent, discharges the surety, even though the change operates to his benefit, as in case of reducing the amount of a bond. When sued upon such an instrument he can reply that it is not the instrument he signed. Any change is material which changes the time or place of payment, amount of debt, nature of obligation, medium of payment, number of co-sureties, etc. If the surety by leaving blank spaces makes alteration easy, he will be liable to any person innocently acting thereon. (3) By death of principal. The death of the principal before credit extended or before default, operates to release the surety. If the principal dies after the debt has arisen, or in case of a bond or similar obligation, after he has made default thereon, then the death in no way affects the surety's liability because it occurs after his liability has arisen; but the death of the principal before any debt or default obviously releases the surety. (4) By death of surety. The surety's death operates to discharge the liability on continuing guaranties, but on the absolute undertakings of suretyship the death of the surety, even before breach, does not release the surety's estate. In cases of continuing guaranty, the death of the guarantor stops the liability for subsequent indebtedness. In cases of absolute suretyship, as on a note or a bond, the death of the surety does not operate to extinguish the liability, but the estate is bound even for defaults arising after the surety's death, and also, the heirs are bound in so far as the estate of the principal comes to their hands. (5) By extension of time to principal debtor. If the creditor extends definitely and upon consideration the time of payment, without the surety's consent, the surety is released unless the creditor expressly saves his rights against the surety. The surety can maintain that his contract has been changed and himself released if the creditor without his consent gives a definite enforceable extension of time to the principal debtor. Thus if S is surety on a note signed by D as principal to the order of C, and C when the note is due extends D's time another year in a definite way so that C can enforce the extension, S is released. This does not mean that a mere delay on C's part to prosecute suit will have this effect. There must be an extension for a definite time, upon an enforceable agreement, because, a mere promise not to sue at once or for a little while, is not enforceable, and though carried out amounts to nothing in the way of releasing the surety. The principal may, however, avoid this consequence by expressly stipulating at the time that the surety is not to be released, even though he does this without the knowledge or consent of the surety. Such a reservation must be express. The creditor must, in effect, say, "Hereby expressly reserving all rights against the surety," or "It is hereby understood and stipulated that the rights against the surety are hereby reserved." (6) By failure of the creditor or obligee to sue or use diligence against the principal debtor.

The mere failure of the creditor or obligee to use diligence to enforce his rights against the principal debtor does not release the surety, unless there is a local statute to that effect. By the common law, it is established that the mere delay on the part of the creditor to sue the debtor within a reasonable time will not discharge the surety. The surety's remedy in such a case is to pay the debt and then sue the principal debtor for the reimbursement. Under the statute of some states, the laws provide that a surety or guarantor may notify the creditor after the debt is due to begin suit against the debtor, and in that case the surety is released unless the creditor proceeds within a reasonable time. Of course the creditor in such a case could also sue the surety with the principal debtor. (7) By release of principal debtor. The surety is released if the creditor released the principal debtor, unless the creditor expressly reserves his right against the surety. The surety is released by a release of the principal debtor, unless at the time, the rights against the principal debtor are expressly saved. The same reasoning governs here which governs the subject-matter of section 36. (8) By relinquishment of security by creditor. In so far as the creditor relinquishes security, the surety is released. We have seen how the surety on payment of the debt is entitled to be subrogated to the remedies and titles of the creditor. Where the creditor has security from the debtor and voluntarily releases it to him, the surety will be released to the extent of the value of the security. (9) By failure of obligee to report defaults, etc. Where the principal obligor makes default, and this is known to the obligee, he must report to the surety, otherwise the surety will be discharged. The subject we now discuss has its most frequent application in the case of fidelity bonds given by employes. If the employer learns of a default on the part of the employe, he must report it, otherwise the surety will be discharged. Thus A employs B and requires a bond. B gives bond signed by himself and the C Surety Company. B afterwards breaks the condition of the bond by stealing some money with which under his contract he is entrusted. A learns of the matter but decides to retain B, and does not report the default to the C Surety Company. The C Surety Company is discharged in case of subsequent default. (10) By change of duties or enlargement of liability. Where the obligee enlarges the liability of the main obligor or materially changes his duties, the surety is released. If the contract of the surety by its terms covers a possible liability in respect to nonperformance of certain duties, or the misappropriation of certain funds, the change of the duties of the employe without the consent of the surety will discharge the surety. But this does not mean that a growth of the employer's business, whereby the employe has more to do or more money to handle, will affect the bond; but it means that where there are certain duties of a general nature whose performance is sought to be covered by the bond, that a change of those duties, especially such as make possible a greater appropriation of funds by the employe, will release the surety for subsequent defaults.

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Description
This section is from the book "American Commercial Law Series ", by Alfred W. Bays. Also available from Amazon: American commercial law series.

Guaranty And Suretyship. Part 3

Sec. 166. Re-Imbursement And Exoneration Of Surety Or Guarantor
The right of re-imbursement is the right of the surety to be re-imbursed for payments made by him; the right of exoneration is the right to have the court to order the debtor to pay in order that the surety need not. In case of suretyship and guaranty, the principal debtor is of course the real debtor. The burden should ultimately rest on him. The surety or guarantor has simply loaned his credit, even as in the case of surety companies there has been compensation for doing so. Example. P and S, as principal and surety, sign a penal bond. S is held liable on this bond. S may sue P for reimbursement frequently; of course, P is insolvent is such cases. S's lack of remedy in such case is merely a misfortune of fact, not a deficiency of law. Courts of equity will take jurisdiction at the suit of the surety to compel a debtor to pay his debt where it is shown that the principal has assets subject to the indebtedness, and can be made to pay. This is called the right of exoneration.

Sec. 167. Subrogation

Subrogation is the right of the surety upon paying the debt to have and make use of all the remedies which the creditor had against the principal debtor. Where the surety pays the debt to the creditor or obligee, the creditor or obligee has no longer any need of his various remedies against the principal debtor and these remedies accrue to the surety. The right of the surety to avail himself of the remedies of the creditor is called the right of subrogation. It is often said that he is entitled " to stand in the shoes " of the principal debtor. The right of subrogation is an equitable doctrine and enforceable only when it accomplishes justice. It arises independent of contract (though it may also arise out of contract) and is a creature of the courts of equity for purposes of justice. The doctrine applies to give the surety the right to enforce mortgages, judgments and to apply the securities of the debtor. Where the creditor's debt is secured by mortgage and the surety pays the debt he is entitled to foreclose the mortgage against the principal debtor. Where the surety was debtor, now, having paid the debt, he becomes creditor, and is entitled in equity to foreclose the mortgage. The mortgage debt is not in equity considered as having been paid in the sense that the remedy is thereby gone; but rather as assigned to the surety. Where the creditor has a judgment against the principal debtor, the surety pays the debt, he is entitled by filing his bill in a court of equity to avail himself of the rights which one would have to whom the judgment had been assigned. He is said to be subrogated to the rights of the judgment creditor.

Where the creditor has in his hands securities from the principal debtor, the surety upon paying the debt is entitled to these for the purposes of his security. Subrogation is enforced by filing a bill in a court of equity setting up the facts and praying the court to give the surety the right and remedies of the principal debtor. A surety may secure his protection by having assignments made to him or to trustees for him at the time of paying the debt. Or he may find it necessary to file his bill in a Court of Equity because of the unwillingness of the parties to clothe him with or to admit his rights.

Sec. 168. Contribution

The right of contribution is the right of a surety to have the cosureties bear their part of the burden when he has borne more than his part. Where there are several sureties for the same debt or obligation, each surety is liable for the whole debt as far as the creditor or obligee is concerned. But as among themselves, co-sureties ought to bear the burden equally, or in proportion to their undertaking. The right of surety to have his co-sureties reimburse him when he has paid more than his share, is called the right of contribution. This assumes, of course, that the principal is insolvent and cannot be made to reimburse the surety. The right of contribution accrues when the surety has actually borne more than his share of the burden. Not until the surety has borne more than his share of the burden does he have any right to insist upon contribution by the others. He must actually have paid more than his proportionate part. The amount each surety must contribute is determined by the number of responsible sureties. The amount each surety is liable to contribute is governed by the number of sureties. Contribution is enforceable in courts of law or courts of equity. In courts of law a surety can compel his co-sureties only to pay the amount as determined by the actual number of sureties, whether any of them are insolvent or not, or in the jurisdiction or not; in courts of equity, however, the surety may have the amount of contribution measured according to the actual number of solvent and accessible sureties. By releasing the principal, giving him a definite extension of time or surrendering security in his hands, a surety may lose in whole or part his right to contribution. The surety must be careful not to jeopardize the interests of his principal, or he will lose his right of contribution. If he pays the debt and then releases the principal from his liability to him, or if he gives the principal a definite, enforceable extension of time, he loses his right of contribution. So if he has security in his hands, belonging to the principal and surrenders it to the principal, he loses his right to contribution to the extent of the value of the security surrendered.

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DISCHARGE OF SURETY

A surety is said to be discharge when

his liability comes to an end.

Discharge of surety

B Y REVOCATION

1. B

Y NOTICE(SEC.130)

a specific guarantee cannot be revoked by the surety if the liability has already accrued. a continuing guarantee may at any time be revoked by the surety as to future transaction by the notice to the creditor. B ut the surety remains liable for transaction already entered into. For e.g. A guarantee to B , to the extent of rs.10000

that C shall pay all the bills that B shall drawn upon him. B draws upon c. c accepts the bills. A gives notice of revocation. C dishonors the bills at maturity. A is liable upon his guarantee.

2 .by

death(sec.131)

the death of the surety operates in the absence of any contract to the contrary as a revocation of a continuing guarantee so far as future transactions . The deceased surety s estate will not be liable for any transaction entered into between the creditor and the principal debtor after the death of surety , even if the creditor has no notice of death.

3.by novation(sec.6 2

novation means substitution of a new contract of guarantee for an old one either between the same parties or between one of the old parties and a new party , the consideration for the new contract being the mutual discharge of the old contract. The original contract of guarantee in such a case comes to an end

B y the conduct of the creditor

1. B y variance in terms of contract(sec133)

A surety is liable for what he has undertaken in the

contract. When the terms of the contract between the principal debtor and the creditor are varied without the surety s consent , the surety is discharged as to the transactions subsequent to the variance. For e.g. c contracts to lend p rs.5000 on 1 st march. S

guarantees repayment . C pays the amount to p on1st January. S is discharged from his liability , as the terms of the contract have been varied.

release or discharge of principal debtor(sec.134)

2 .by

The surety is discharged by any contract between the

creditor and the principal debtor , by which the principal debtor is released , or by any act or omission of the creditor , the legal consequences of which is discharged of the principal debtor. B ut the surety is not discharged by operation of law. For e.g. A contract with B price to build a

for a fixed

house for b within a stipulated time , b supplying the necessary timber. C guarantees a s performance of the contract . B omits to supply the timber. C is discharged from his suretyship.

3.by creditor compounding with the principal debtor(sec135)

a contract between the creditor and the principal debtor , by which the creditor makes a composition with , or promises to give time to , or not to sue the principal debtor discharges the surety unless the surety assents to such contract.

For e.g. p purchased a motor car from c under hirepurchase agreement on guarantee of s for the due performance of the agreement . C for the valuable consideration gives p further time for payment of one of the instalments. Held the giving of time to p discharged s from any further liability under the guarantee.

4.by creditor s act or omission impairing surety s eventual remedy(sec139)

if the creditor does any act which is inconsistent with the rights of the surety , or omits to do any act which his duty to the surety requires him to do , and the eventual remedy of the surety himself against the principal debtor is thereby impaired , the surety is discharged.

For e.g. a puts m as apprentice to B and gives a guarantee to B for M s fid elity. B promises on his part that he will , at least once a month see M make up the cash. B omits to see this done , as promised , and M embezzles. A is not liable to
B on his guarantee.

5.by creditor losing security against the principal

debtor(sec141)

if the creditor loses or , without the consent of the surety , parts with the security he has against the principal debtor at the time when the contract of suretyship is entered into , the surety is discharged to the extent of the value of the security. For e.g. c advances to b , 000 on the

his tenant rs 2

guarantee of a. c has also further security for rs 2 000 by a mortgage of b s furniture. C cancels the mortgage. B becomes insolvent and c sues a on his guarantee. A is discharged to the extent of the value of the security.

B y invalidation of contract

1. by misrepresentation(sec.14 2

where a creditor misrepresents to the surety regarding the material facts , the guarantee is invalid and therefore the surety is discharged

2 .B

y concealment(sec.143)

when a creditor obtains guarantee by concealing or keeping silent over the materials facts , the surety is discharged as the guarantee is invalid. For e.g. C engage p as a clerk to collect money for him.

P fails to account for some of his receipts and c , in consequences , calls upon him to furnish security for his duly accounting. S gives his guarantee for p s duly accounting. C does not acquaint s with p s previous contract . P afterwards makes default. The guarantee is invalid

3. B y failure of co-surety to join(sec.144)

where a person gives a guarantee upon a contract that a creditor shall not act upon it until another person has joined in it as co-surety the guarantee is not valid if that person does not join. For e.g. s 2 signed a guarantee given to a bank

which on the face of it was intended to be joint and several guarantee of s1 ,s 2 ,s3 and s4. s4 did not sign and afterwards died. The bank did not agree with s1 ,s 2 and s3 to dispense with s4 s signatures. Held s 2 was not liable.

4. by failure of consideration

where in a contract of guarantee there is a failure of consideration as between the creditor and the principal debtor , the surety is discharged.

Discharge of Surety
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