Introduction. A contract of guarantee under the Indian Contract Act, 1872 involves three parties: the creditor, principal debtor, and surety. The surety undertakes to discharge the liability of the debtor in case of default. To protect the surety from unfair burden, the Act grants several rights and provides various modes of discharge. These ensure fairness and balance in the tripartite relationship.
Rights of the Surety
The surety enjoys extensive rights against the principal debtor, creditor, and co-sureties. These rights safeguard the surety from excessive liability and ensure reimbursement after payment.
1. Rights Against the Principal Debtor
- Right of Subrogation (Section 140): Upon paying the debt, the surety steps into the shoes of the creditor and acquires all rights the creditor had against the debtor.
- Right to Indemnity (Section 145): The surety is entitled to recover from the debtor all sums rightfully paid, including interest and costs.
- Right to Securities: After payment, the surety becomes entitled to all securities held by the creditor, whether known or unknown to the surety.
2. Rights Against the Creditor
- Right to Benefit of Securities (Section 141): The creditor must not impair, lose, or release securities; otherwise the surety is discharged to that extent.
- Right to Require Creditor to Sue Principal Debtor: After maturity, the surety may require the creditor to sue the debtor. If the creditor neglects, the surety is discharged.
- Right to Set-Off: The surety may use any right of set-off available to the debtor against the creditor.
3. Rights Against Co-Sureties
- Right of Contribution (Section 146): Co-sureties are liable to contribute equally in the absence of contract to the contrary.
- Different Amounts (Section 147): If they agreed for different amounts, they contribute in proportion to their undertakings.
Modes of Discharge of Surety
A surety may be discharged from liability either by an act of the parties or by operation of law. The following are the recognised modes:
1. Discharge by Revocation
(a) Revocation for Future Transactions: In continuing guarantees, the surety may revoke guarantee for future advances by giving notice (Section 130).
(b) Death of Surety: Death automatically revokes the continuing guarantee for future transactions unless contract provides otherwise.
2. Discharge by Variance in Terms of Contract (Section 133)
If the creditor and debtor alter the terms of the original contract without the surety’s consent, the surety is discharged for subsequent transactions.
Illustration: Increasing debtor’s credit limit without informing the surety discharges the surety.
3. Discharge by Release of Principal Debtor (Section 134)
If the creditor releases the principal debtor, the surety is also discharged, as the surety’s liability is co-extensive.
4. Discharge by Creditor’s Act or Omission (Section 139)
When the creditor does any act that impairs the surety’s remedy against the debtor, the surety is discharged.
Example: Creditor negligently returns securities to debtor.
5. Discharge by Loss of Securities (Section 141)
If the creditor loses or parts with securities without the surety’s consent, the surety is discharged to the extent of value of such securities.
6. Discharge by Composition, Extension of Time, or Promise Not to Sue (Section 135)
If the creditor makes a composition, agrees to give more time, or promises not to sue the debtor without the surety’s consent, the surety is discharged.
7. Discharge by Invalid or Void Contract
If the original contract between debtor and creditor is void or voidable, the surety cannot be held liable.
Extended Explanation
The law emphasises fairness to the surety because the surety’s liability is collateral and arises primarily for the benefit of the creditor. Any act of the creditor that increases the risk or reduces available remedies discharges the surety. Similarly, granting equal rights such as subrogation and contribution ensures that the surety does not suffer loss for helping the debtor.
Conclusion: A surety enjoys well-defined rights against the creditor, debtor, and co-sureties. These rights guarantee reimbursement and protection. A surety may be discharged through revocation, variance, release of debtor, loss of securities, or creditor’s conduct. These principles maintain balance and justice in the law of guarantee.