Rights And Liabilities Of Surety 1r6c4l

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. 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 Page 1 of 10

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 limits 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. 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 Page 2 of 10

right against creditor. Surety has got rights against debtor. 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. 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 Page 3 of 10

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. 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 Page 4 of 10

owes some money to the creditor also. 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. 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 Page 5 of 10

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 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. 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 Page 6 of 10

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. 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. 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 of contract. Page 7 of 10

When we say the variance in 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 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 the A and C is a person who is a surety to the B, for the loan which is sanctioned to the 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. As I mention 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. Page 8 of 10

Let us take an example, A has been sanction the loan of rupees 10,000/- by the B and C is a person who has given the surety. Later on B says to the 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. 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 and condition. And if without the consultant 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. 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 Page 9 of 10

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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