of Guarantee, the iability of surety is

in a Contract
contingent but subsisting. nar
(5)
made for the

of loss.
5) A Contact of
Indemnity is
reimbursement Gontinu
actions
Se

Guarantee is made to prOvide

A Contract of
security to the cre ditor against his advance. neceSSary revoke
T

a con

Topic - IV tions
Diffe rent Kinds of Guarantee Cred

The guarantee may be classified under the follo Wing heade. 1.

(1) Retrospective Guarantee_. Sure

A guarantee which liab
is given for an existing debt or obliga
Tion is called
retrospective guarantee. A guarantee given for an
existing debt is void for want of llu
consideration. A,
(2) Prospective Guarantee
A
guarantee which is given for a future debt Sup
called prospective guarantee. or
Such a obligation is and

(3)
guarantee shaH be valid. ture
Fidelity Guarantee ant
A
of a guarantee which is given for the good the
person employed in a conduct or
antee. particular office is called honesty liat
fidelity guar of

(4)
A
Specific Guarantee Of
Specific or simple
single transaction or debt.
guarantee is one
which extends to a of

C
10
 (5)

ContinuingGuarantee defines
Section 129 of the
ontinung guarantee is
Act
one which
a
continuing guarantee A
actions. extends to a series oftrans

The genera!
rule is that a
guarantee once giVen annot be
revoked. However, by virtue of sections 130
and 131 of the Act,
a continuing
guarantee may be revoked as to the future transac
tions. A continuing gurantee may be revoked by notice to the
creditor' or on the death of surety'

1. Revocation by Notice
A continuing guarantee may be revoked at any time by the
Surety as to future transactions by a notice to the creditor. The
liability for previous transactions will continue.

llustration
A, agrees to supply sugar to B for a period of 12 months on credit.
C guarantees payment to A to the extent of Rs. 1,00,000 /-. A
supplied sugar worth Rs. 60,000/- to B within a period of 3 months
and B has paid Rs. 50,000/-. C can revoke his guarantee for fu
ture transactions by giving a notice to A. If he revokes the guar
antee, he Would be liable to the extent of Rs. 10,000/- which is

the balance price of sugar already supplied. He would not be

liable for any transactíon between A and B after the revocation
of the guarantee.

Offord v. Davies (1862) 6 LT 579

discounting
X gaVe a guarantee.to Z for twelve months for
revoked before
of bilbs by Y not eXceeding 600 pounds. This was
continued to dis
any bill was discounted. But the plaintiff (Z)
was done in time. The
COunt. The revocation Was effective as it
11
 discharged from thee liability.
was
CoUrt hetd that the surety

St Croix (1919) 35 TLR 432

Wingfield v. De Servant a
guaranteed thepaymnent of rent by his
A ErSon empiOu
guarantee as soon as the Servant eri nis
revoked the
court heid that he was not iiable for renfs which be
ment. The
ame iue after the revocation.

Mad 211)
Hargpal Agarwai v. State Bank of India (AR - 1956
The directors of a company guaranteed the payment of the

company's overdrafts and subsequently resigned their office

They issued a notice to the Bank and revoked the guarantee
The court heid that the liability of the directors would be con
fined to the amount due up to the date of their resignation.

2. Revocation by Death
Death of surety operates as a revocation of a continuing
Guarantee as regards future transactions. It applies oniy when
there is no contract to the Contrary. lf there is an
express agree
meni that the death of surety WIi! nt operate as
revocation. the
mere notice of the death is not Sutticient and the
estate of the
deceased wil! cOntinue to be liable for future transactions.

12
Topic- V
The Rights and Liabilities of a Surety or
Guarantor
Or

'Surety is a favo ured debtor'. Comrnment.

Or

Discuss the Nature and Extent of Surety's

Liability
The Surety is person who agrees to perform the promise
given by the principal debtor or to discharge the liability of the
principal debtor in case of defauit on the part of the principal
debtor. Section 128 of the Indian Contract Act enumerates the
nature and extent of surety's liability. The liability of surety is
secondary. It means that surety's liability arises only on the de
fauit of the principal debtor. So before the default of the princi
pal debtor, if the surety becomes insolvent, the creditor cannot
proceed against the surety's assignee in insolvency. But once

the liability arises it is co-extensive with that of the principal

debtor. It indicates that the creditor can proceed against the
surety or the principal debtor at his option. The surety is liable
as if he were the principal debtor. Notice of default of the princi
pal debtor is not at all a condition precedent for proceeding
against a surety. It is the duty of the surety to see the prompt
payment of debt.

The quantum of obligation of a surety is the same as that of

the principal debtor unless otherwise provided. The liability of a
surety can neither be more nor less than that of the principa!
debtor, though by a special agreement, it may be made less than
that of the principal debtor, but never greater.

13
 Example
auieOB to stand
P gives a loan of Rs. 4000 io Q. as a
Tor repayment to the extent of is, 2600.
Ofails to pay the Suret,
amount. R is iabie oniy to the exient ot
Rs. 2500. whol
first
Further, a creditor is not bound to proceed
principa! debtor before suing the surety, unless against the
otherwise pro.
vided. He can sue the surety without suing the principal
debtor.
In Bank of Bihar V. Damodar' Prasad (AIR 1969
the defendant was a guarantor for a bank loan,
SC 297),
The
debtor defaulted payment. Thereupon the bank sued principal
pal debtor and guarantor. The lower court decreed
the princi-
the suit. HoW-
EVET the court decreed that the bank
shall entorce the guarantea
Ony after exhausting remedies against the principal debtor. The
Supreme Court held that solvency of the
principal
Sufficient ground for restraining execution of the debtor is not a
ihe surety.
it is the duty of the decree against
surety to pay the
decretal amount.
On such payment he wil be
and he can proceed subrogated to the
rights of the creditor
against the
ment, the surety has no right to principal debtor. Before pay
ask him to pursue his dictate terms to the creditor and
remedies first against the principal
debtor.
In State Bank of india
V.
SCC 159, the court held Indexport Registered (1992) °
that the surety may be
without a demand against him, and proceeded againsi
against th¹ principal debtor. It is without first proceedlng
not
before proceeding against the necessary
surety, to
for the creditor,
principal
debtor to pay, or to sue request the
him, aflthough Solvent.
pressly stipulated unless this i$ e
(mentioned) in the contract
Though the liability of a surety is said to be Co-extensive
14
 t*b +hat of the principal debtor, he is at the same time a favoured

Ssr it is not Open to tne Creditor to Calf upon the surety to

under the Contract of guarantee unless the cr editor has per-

pay
the contract.
formed his part of
paV. he is
debi hich he iS obliged to
When a s urety pays a the
and rights of the creditor against
subrogated to the ciaims all the
surety, on pay ment, is entitled to
principal debtor. The debtor. A
creditor has against the principal
securities which the be indemnified by the
right to
section 145, a
surety has, under paiid under the guaran
amount he has rightfully
debior for the get contri
discharges a debt is entitled to
who
tee. The surety are two or more
sure
the co-sureities when there
bution from
ties.
with
surety's liability is co-extensive
Therefore, though the number of rights
the principal debtor, he is given a
that of debtor.
can rightly be called a favoured
whereby he
which make him a
rights of a surety.
The foliowing are the
favoured debtor

fuifiliment of Condition
1. Liability arises only on
Precedent
gives a guar
virtue of section 144 of the Act if a person
By ii unti!
that a reditOr shall not act upon
antee upon a contract guararntee is
person has joined in it as a Co-surety, the
another
join.
if that other person does not
not valid

of Engiand v. Brackenbury
In Nationa Provinciai Bank
signed a guarantee which on
(1906) 22 TLR 797, the defendant
ioint and several guarantee of
the face of it,was intended to be a
15
 with hìm. One of them did
persons not sign.
three other the bank and the
was no agreement
dispense with his
between
signature, the defendant was held c0-9uarantnot oTrher
under the guarantee. iable
Graham & Co. v. Southgate Sands
In James
ER 344 CA, the
plaintiff suppiied timber to a company. (1985)
The
2 All

defaultedpayment. The plaintiff

agreed to com-
suspend the
pany
claim and proceedings against the company for a period of one

consideration of the guarantee given by the directors.

year in
pay the claim jointly and
The three directors agreed to
after one year, if the company
detaults payment. The severally
went into liquidation. The plaintiff instituted suit
against the au company
antors. During trial it was realised that signature of one of +
CO-guarantors was forged. The court held that the guarantee o
not valid and binding on other guarantors.

I) Right to Subrogation
When the principal debtor fails to pay the debt or discharge
his liability, the creditor can demand the surety to pay off
the
debt or discharge the liability. If the surety makes
the payment
of the debt or discharges the liability, he
will be entitled to sub
rogation. Subrogation means substitution in the place of
A surety who has paid the debt of
another.
the principal debtor will step
into the shoes of the creditor and
can claim all the rights of a
creditor against his principal debtor.

Section 140 of the Contract Act recognises the right of sub

rogation of surety. Section 1 40 reads as follows :
Where a
quaranteed debt has become due, or default of the
to perform a principa! debtor
guaranteed duty has taken place, the surety, upon
performance of all that he is iabie for, is invested with allthe payment
of
rights which
16
*he creditor had against the
principal debtor."

in order to claim subrogation the folowing conditions shoU

be satisfied.

(1)The principal debtor should have defaulted payment of

guaranteed debt or performance of a guarantee duiy.

(2)The surety should have paid the guaranteed debt or per

formed the duty.

If the above two conditions are satisfied the surety will be

invested with all those rights which were available to the credi
tor against the principal debtor.

Right to Securities (Right against Creditor)

A surety who has paid the debts of the principal debtor is
entitled to every security which the creditor has against the prin
cipal debtor. This is available irrespective of the fact that whether
the surety knows of the existence of such security or not. If the
creditor loses the security or if he parts with such security the
Surety is discharged to the extent of the value of the security.

Section 141 of the Act deals with Surety's right to benefit of

creditor's securities Section 141 reads as follows :
every security which the
"A surety is entitled to the benefit of
at the time when the
creditor has against the principal debtor
whether the surety knows
cOntract of suretyship is entered into,
or not; and, if the creditor loses,
of the existence of such security
surety, parts with such security,
or without the consent of the
extent of the value of the secu
the surety is discharged to the
rity."

17
 invoke
required
conditions to section 141
The
following are the
of the Act.
have paid the
debt of the principal
should
(1) A surety
security which
the creditor
debtor.
should be some has
(2) There
the time when the contract of Sure-
debtor at
against the principal
tyship is entered into. security may or may not
k
existence of such
(3) The
known to the surety.

conditions are satisfied the surety who has

If all the above
debtor can claim all those securj.
paid the debt of the principal
against the principal
Ties which were available to the creditor
debtor.
If the creditor loses or without the consent of the surety parts
with such security, the surety wil be discharged to the extent of
the value of the security.

Example
A borrowed from B an amount of Rs. 5000/- after pledging some
gold ornaments worth Rs. 3000/-. At the same time, C stood as
a surety for the entire debt of Rs. 5000/-, Subsequent!y, B has
returned the go!d ornaments to A without consent of C. A failed
to pay back the money. B claimed the amount from C. c is dis
charged to the extent of value of the gold which was parted by
creditor. Thus Bcan claim only Rs. 2000/- from c.

In Section 141 of the Act, it is specifically mentioned that

the right is referring to the time at which the suretyship was made.
in Forbes v. Jackson (1882) Ch D 615, it was held that the surety
was entitled even for securities given after the suretyship. The
18
cipal
V) Right_ to Sot-off rd
has Count9rCIabm
Ure títled to claim any sotoff or
-ountor ciair wich thky ptipi
debtr rnay havo ayainst th0 droditor
be
V) Bight to get indemnity (Aight against Principal
By virtue of
Dsbtor)
section 145 of tho Contract Act, ii a contract of
as guarantee there is an implied promiso by thg principal debtor to
ri indemnify the surety. The urety is ontitiod fo rocOVor tho um
he was rightfully paid under the
al guarantoo. The suroty i nof
entitled to recover the Sum he has paid wrongfully.

S
Example
B isindebted to C, and A is a surety for the debt. C do rnarnds
of
payment from A, and on hís refusal suGs hím for the arnount. A
defends the suit, having reasonable grounds for doing s0, but he
is Compelled to pay the amount of the debt with costs. He can
recover fro m B the armount paid by him for coste as wll as the
principal debt.

VI) Right to Claim contribution (Right against Co-Surety)

Two or mOre personS may be c0-Sureties for thg sam debt.

Then they may be undertakírng to be liable either jointiy or sov

one of
erally. The creditor is at iberty to proceed against any
the sureties for the whole debt. One who pays
nore than his sharG
co-Sureties. Between the
is entítíed for contríbution from other
burden and benefit".
Co-sureties, "there is to be equality of the

co-sureties to cor
Section 146 recognises the liability of
foliows.
tribute equally. Section reads as
19
"Where two or more persons are
co-SuretieS for he same
duty, either jointly or severally,
and
whether under the debt o
different contracts, and whether with or without the k Same
of each other, the co-sureties, in the
the contrary, are liable as between thems
equal share of the whole debt,
absence
or of that
selves,
of any
to pay
knowleachractedge
cont to
part of it which an
unpaid by the principal debtor." remain
The following are the essential Conditions for
tion 146 of the Act. invoking sec-
(1) There should be a guaranteed debt or
duty.
(2) The guarantee should have
been given by tWO or more
persOns.
(3) The guarantee might
have been given under the
Contract or different contracts. same
(4) The
guarantee might have been given by each
with or without knowledge of the surety
existence of co-guarantee.
Ifall the above
any contract to the conditions are satisfied, in the absence of
of the wholle contrary, they are liable to pay an
debt or of that part of it equal share
the principa debtor. which remains unpaid by

Example-1
A, B and C
are sureties to D for a sum of
makes a default in Rs.3000 lent to E. E
payment.
1000/- each. If A alone pays the
A, B and G
are liable to pay R.
tota amount of Rs.
can claim equal 3000. he
contribution from B and C.

Example -2
A. B and Caresureties to D for the Sum of Rs. 1000 /-
lent to E.
There is a contract between A, B and Gthat A is to
responsible
20
Same
debt ot to the extent of
one-guarter. B to the extent of one - quarte!
C to the extent of
wiedge
tract to
one- half. E makes default. As between the
co-Sureties A is liable to pay Rs.250/- BRS. 250/- and G
500/-, HS.
each
an
remain Release of Co-Surety
The Creditor may release one of the
Co-Sureties. That wil!
not discharge the other co-sureties fro m
their liability. The surety
gsec so released wil! continue to be
liable to the other sureties. He
wil! be liable to contribute to the other
co-sureties when they
become liable to pay.
more Section 138 of the Act recognises the above principle.
Sec
tion reads as follows
Same *Where there are co-sureties, a release by the creditor ofone of
them does
not discharge others; neither does it free the surety so
released from his
urety responsibility to the other sureties.

Bound in Different Sums

e of Co-sureties who are bound in different sums are liable to
hare pay equally as far as the limits of their respective obligations
d by permit. Therefore, the liability when apportioned equally will be
subiected to the maximum each one has guaranteed.

Example - 1
A, B and Cas sureties for D, enter into three several bonds,
E. E
each in a different penalty, namely A in the penalty of Rs. 10,000,
R.
Bin that of Rs. 20,000 and C in that of Rs. 40,000, conditioned
he
for D's duly accounting to E. D makes default to the extent of

Rs. 30,000. A, B and Care each liable to pay RS. 10,000.

Example -2
E.
A, B and C, as sureties for D, enter into three several bonds
ble
21
each in a different penaity, namely, Ain the penalty of
Rs
Bin that of Rs, 20,000 and C in that of Rs.
40,000, 10,000
for D's duly accounting to E.
40,000 rupees.
15,000 each.
Dmakes default to the
Ais liable to pay Rs. 10,000 and B
and
Condiextenttioned
Example-3
A, B and C, as
sureties for D enter into0 three several
each in a different
Bin that of Rs 20
penalty, namely Ain the penaity of Rs. bonds.
for D's duly
,000 and C in that of Rs. 40,000, 10,000
accounting
TupeeS seventy thousand.
to É. D
makes defauit to the
A, B and G have to extent ofconditioned
penalty of his bond. pay each the full

Compared iswith English Law

There a
OSureties difference in English
law of
guaranteeing
bound to contribute different sums. In contribution among
in the English law
proportion in which they have they are
Suppose A and B
are two
agreed
agrees to be liable to the sureties for the
tent of Rs. extent of
15,000. makes default to
D Rs. 10,000 liability of D, A
and
According
also will
to the ndian law A the extent of
will have to RS.
B to the ex

have
have to pay
Rs. pay Rs. 15,000
to pay Rs. 7500. 7500 and B
5,000 and B will According
to
have to pay English aw A will
vii) Right to be 10,000.
charged
A
Discharged
from liability ?) (When_ will a
Suretybe dis
surety may be
lowing circumstances. discharged from his
(A) liability under the
Variance
By virtue made without surety's consent
fol
of
Section 133 any
22
variance made without the
surety' S consent, in the terms of the contract between the prin
cipa! debior and the creditor, discharges the surety as to trarS
actions subsequent to the variation.

Anirudhan V. Thomncos Bank (1963) 1 SCR 63

The Supreme Court held that unsubstantial alterations will not
discharge the surety. There the guarantee was for a loan of Rs.
20000. The guarantee note showed it as Rs. 25000. The bank
refused to accept it. Then the debtor corrected the amount as
Rs. 20000 and the note was handed over to the bank. On failure
of the principal debtor the bank sued the surety. The surety ar
gued that the guarantee note was altered without his consent
and thus he is discharged. The Court held that the surety was
liable. The document was not altered while it was in the posses
sion of the bank. lt was done by the principal debtor who was
acting as the agent of the surety.

Examples
1) The guarantee is for supply of goods for 18 months credit. lt
is varied to 12 months without the consent of surety. The surety

wil! be discharged as to transactions subsequent to the varia

tion.

rent. The rent

2) The guarantee was regarding due payment of
surety will be dis
was increased without Surety's consent. The
variation.
charged as to transaction subsequent to the

Khatun Bibi v. Abdullah (1880) 3 All 9

A' guaranteed the pay ment of rent by 'B' under a lease
rent. It was held
granted from C'. Subsequently C enhanced that
respect of the ar
that A was discharged from his suretyship in
rears of rent that accrued subsequent to such variance.
23
Greet V. Seth & Seth (1887 All WN 136
The creditor on default of payment took a promisSory
from the principal debtor without reference to the surety. note
Court held that the surety was discharged.
The
(B) Release or Discharge of PrincipalDebtor
By virtue of Section 134 of the Act the surety will be di
Charged from his liability under the following circumstances.

(i) If the principal debtor is released by acontract betweer

the
Creditor and principal debtor, the surety will
(ii) discharged.
T the legal consequence of any act or
omission of the
Greditor releases the principal debtor, the
surety wil! be dis
charged.
Example-1
A
gave a
guarantee to C for
goods to be supplied by C to B. C
Supplied goods to B.
Afterwards B contracted with C to assign to
him the
property of B of
lease of B would result in releasing B from the liability. The re
discharge
of A.

Example-2
A
contracted with Bfor a fixed price to build a
a
stipulated time. B house for B within
agreed to
supply necessary timber. C guar
anteed A's performance of the
timber. C is discharged contract. B omitted to supply the
from his suretyship.
(C) Compoundingwith the Principal Debtor
By virtue of Section
135 of the Act a surety. will be
dis
charged under the following
circumstances.
(1) If by a contract between the
creditor and principal
24
 debtor, the Creditor makes a COm position with the principa!
debtOr, the srety wil! be discharaed uniess thne surety
to such contract.
asserto

(2) If by a COntract betwe en the Creditor and principai

debtor, the creditor promises to give time to ma ke payment,
the surety wil! be discharged unless the surety assents to such
cOntract.

(3) If by a contract between the creditor and principai

debtor, the creditor promises that he wili not sue the Princi
pal Debtor, the surety will be discharged unless the surety as
sents to such contract.

Croydon Gas Co. V, Dickinson (1876) 2 CPD 46

The principal debtor was to make payment for gas supplied
within fourteen days and one occasion he failed to pay within
the time. Thereupon the supplier (creditor) took apromissory note
from him without consent of the surety. This amounted to exten
sion of .time and the surety was discharged.

Amritlal V. State Bank of Travancore (AIR 1969 SC 1 432)

X borrowed from the Bank an amount of Rs. 1,00,000 and
hypothecated the goods in trade. A was a surety. The agree
ment between the principal debtor and the creditor provided that
the borrower shall be responsible for the quality and quantity of
state
goods hypothecated and also for the correctness of the
the
ments and returns furnished to the bank, the lender. When
short
quantity of goods actually in stock was verified there was a
gave
age of goods valued at forty thousand rupees. The bank
time to the borrowers to make up the deficiency.

25
 not tantamount
did surety
bank
t h e
within tract of suretysh
the
of exonerate give time must foss. Ihe expree
act
the t o to
that debtor agreement debtor without sense. It applie
held
Court the the
an agreement
The time to 135 creditor and the property at
giving of Section ld
to the 135. Under betweenthe the fore, ost or p
section suhstitution of
contract prin. surety, the su
be a
valid surety in time to the parted.
f the give and
ssent contract to person, not
a third
section 136 with a surety.
of creditor State Bank o
By virtue the discharge the
made by not
cipal debtor A bank
debtor, will
principal the part of
with the forbearance, on godown and
other
mere enforce any gence of the
section 137
By virtue of debtor or to
the creditor to sue the principal charge the surety. the surety W
against him does not dis lost due to t
remedy

Example BCan sue A

from B in 2000.
A borrowed on a Promissory Note Sue A
2002. Bdid not
surety in
within three years. Cbecame a prinCIpal
as the
cee years and a suit was barred so far
liability
debtor (A) is concerned. This did not put an end to the
from the daie
tne surety because the creditor has three vears
of guarantee to sue the surety. The fact that the creditor al
towed his claim to become time barred as against the principal
debtor will not discharge the surety.

(D) Impairing the Surety's Remedy

By virtue of section 139 of the Act, if the
creditor does any
act which is inconsistent with the
rights of the surety and the
eventual remedy of the surety against the principal debtor is
im
paired, the surety is discharged.

(E) Loss of Security

Loss of security held by the creditor at the time of the con
26
nount tract of suretyship wil! discharge the
ithin surety to the extent of such
ioss. The expression security is not used in a
must limited technical
hout sense. It applies to all the rights
which the creditor has against
the property at the date of contract. If the creditor has,
there
fore, lost or parted with the security without the
consent of the
rin Surety, the surety is discharged to the extent of the value so
not parted.

State Bank of Saurashtra V. C.R Raja (1980) 4 SCC516

of A bank loan was given on the security of the stock in a
godoWn and the guarantee given by a surety. Due to the negli
er
gence of the bank officials the goods were lost. It was held that
the surety was discharged to the extent of the value of the stocK
lost due to the negligence of the creditor.

A
A