A Contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of any default by him. In a Contract of Guarantee, there are three parties involved; Surety, who provides the guarantee; the person for whom the guarantee is given is called the principal debtor; finally, the person to whom the guarantee is given called the creditor. The Surety has various rights in a contract of guarantee, they can be classified into 3 groups:
- Rights against the Principal Debtor.
- Rights against the creditor.
- Rights against the co-sureties.
- Rights of the Surety against the Principal Debtor include-
- Right of Subrogation (Section 140)
- Right of Indemnity (Section 145)
- Right of Subrogation: Section 140 of the Indian Contract Act 1872, talks about the rights of the surety on the payment or the performance of a contract of Guarantee. It says that that where the guaranteed debt has become due, or the principal debtor has defaulted, the surety, upon the payment or the performance of all that he is liable for, is entitled with all the rights which the creditor had against the principal debtor. In the case of Babu Rao Ramchandra Rao v Babu Manaklal Nehmal, (AIR 1938 Nag 413), it was held that, if the liability of the surety is coextensive with that of the principal debtor, his right, therefore, would not be less coextensive with that of the creditor once he satisfies the creditor’s debt.
- Right of Indemnity: Section 145 of the Indian Contract Act 1872, talks about the implied promise to indemnify the surety. In every Contract of Guarantee, there is an implied promise by the principal debtor to indemnify the Surety all the costs which he/she has rightfully paid to the creditor under the contract, but no sums which he may have paid wrongfully. In the case of Shri Bisiowakarma Furniture Workshop v Santanu Sarkar, (2006) 5 AIR Kant (NOC) 762 (Jha) AIR 2006 Jhar 89, the surety paid off the creditor, allowed to recover his indemnity which included the interest too, from the principal. The principal’s plea that he had agreed to pay without any such claim could not be proved by him.
- Some other rights which the surety has against the principal debtor include the right to give notice to the principal debtor to settle all his debts with the creditor if the latter comes to the Surety for the money Similarly, the surety also has the right to ask for relief wherein from the date of the guarantee, the surety can also bring pressure on the principal debtor in connection with the settlement of the debts.
- Rights of the Surety against the Creditor include:
- Right to securities (Section 141)
- Right of set-off.
- Right to securities: Section 141 of the Indian Contract Act,1872 talks about the right of the surety to benefit of creditor’s securities. It explains that the surety is entitled to benefit of all the securities which the creditor has against the principal debtor at the time when the contract of suretyship was entered. Here, it does not matter whether the surety knew of the existence of the securities or not; also, if the Creditor loses, without the consent of the surety, the surety is thereby discharged of the extent of the value of the security. For example, A who is the surety for B, makes a bond jointly with B to C, for securing a loan from C. Later, C obtains from B a further security for the same debt. Subsequently, C gives up the security. Here, in this case, A is not discharged. In the case of Industrial Finance Corp. of India Ltd v Cannanore Spg & Wvg Mills Ltd, (2002) 5 SCC 54: AIR 2002 SC 1841: (2002) 110 Comp Cas 685, the court observed that on paying off the creditor, the surety steps into his shoes and gets the right to have the securities of the creditor, which he has against the principal debtor.
- Right to set off: In a particular situation, in which the Creditor sues the surety, the surety may have the benefit of the set-off, if any, that the principal debtor had against the creditor. This means that the surety has the entitlement to use the defenses of the debtor against the creditor. For example, A is the surety, B is the principal debtor, and C the Creditor. So, if C owes A something, or if C has in his possession something belonging to B, for which C could have counter-claimed, the surety can also put up for his claim on that thing. Other than that, the Surety can also claim a right against the third parties who have derived the principal debtor’s title from the creditor. In the case of Wolmershausen v Gullick, (1893) 2 Ch 514, it was understood that if in the case that the creditor of a contract of guarantee, sold the goods of his principal debtor, and the surety of the contract paid the dues, he was held to have become entitled to the unpaid seller’s lien against the buyer.
- In some cases, there is a debt that has been guaranteed by more people, they are called co-sureties. Some of their rights against each other are:
- Effect of releasing a surety (Section 138)
- Right to contribution.
- Effect of Releasing a Surety: Section 138 of the Indian Contract Act,1872, talks about the discharge of a surety by the co-sureties. It explains that where there are co-sureties in a contract of guarantee, a release of one of the sureties by the creditor does not discharge the others; neither does it free the surety who has been released from his responsibilities to the other sureties. In Sri Chand v Jagdish Parshad Kishan Chand, AIR 1966 SC 1427, it was held that the creditor may release any of the co-sureties in the contract from the liability upon his will. However, he will be liable to the other co-sureties in case of a default.
- Right to Contribution: Sections 146 and 147 of the Indian Contract Act,1872 explain the co-surety’s right to contribution. Section 146 includes the co-surety’s liability to contribute equally. Where there are 2 or more co-sureties for the same debt, jointly or severally, they are liable between themselves to pay an equal share of the whole debt, or the remaining part which may be left unpaid by the principal debtor. While Section 147 explains the liability of co-sureties bound in different sums. This is also known as the “Doctrine of Contribution.” This means that co-sureties if are bound in different sums, are liable to pay equally as far as the limits of their respective obligations permit. In the case of SBI Vs Prem Dass, (AIR 1998 Del 49), a bank loan was guaranteed by more than one guarantor, they were held jointly and severally liable to pay the principal debt; this means that where there were several sureties for the same debt and the principal debtor has committed a default, each surety is liable to contribute equally to the extent of the default. If even one of them has been forced to pay more than his share, he can recover the money from the other co-sureties, as was held in the case of Shirley v Burdett, (1911) 2 Ch 418.
- Hence there are some rights available to the Surety to safeguard himself from the liabilities which may be imposed on him by the Creditor in case the principal debtor defaults on his payment.