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SURETY - Rights and Liabilities, Discharge

The Indian Contract Act, 1872 outlines the rights, liabilities, and discharge conditions for sureties in guarantee contracts. Key rights include the ability to revoke guarantees, protection from material alterations, and rights after fulfilling the principal debtor's obligations, while liabilities are generally co-extensive with the principal debtor's. Sureties can be discharged under various circumstances, such as revocation, death, material alteration of contracts, or actions by creditors that impair their remedies.

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20 views3 pages

SURETY - Rights and Liabilities, Discharge

The Indian Contract Act, 1872 outlines the rights, liabilities, and discharge conditions for sureties in guarantee contracts. Key rights include the ability to revoke guarantees, protection from material alterations, and rights after fulfilling the principal debtor's obligations, while liabilities are generally co-extensive with the principal debtor's. Sureties can be discharged under various circumstances, such as revocation, death, material alteration of contracts, or actions by creditors that impair their remedies.

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nagaraju.kasetty
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The Surety's Two Sides of the Coin: Rights, Liabilities, and Discharge (The Indian

Contract Act, 1872)

The Indian Contract Act, 1872 (ICA) sheds light on the role of a surety in a contract of guarantee. While
providing security for another party's obligation can be beneficial, it also comes with certain rights and
liabilities.
Let's delve into these aspects in detail, along with the conditions under which a surety can be discharged
from their obligations:

Key Rights of the Surety (Section 130-141):

1. Right to Revoke Guarantee (Continuing Guarantees): For continuing guarantees covering a


series of transactions, the surety has the right to revoke their guarantee with a notice to the
creditor. This applies only to future transactions, not past ones already guaranteed (Section 130).
2. Freedom from Material Alteration of Contract: If there's a significant change in the main
contract between the creditor and debtor without the surety's consent, the surety can be
discharged from their liability (Section 133).
3. Benefit of Discharge of Principal Debtor: If the principal debtor fulfills their obligation (pays the
debt or completes the task), or is discharged from their liability for some reason (e.g., by the
creditor's act), the surety is automatically discharged as well (Section 137).
4. Protection from Creditor's Acts Prejudicial to Surety: Any act or omission by the creditor that
hinders the surety's eventual recovery from the principal debtor can discharge the surety
(Section 139).
5. Rights after Fulfilling Principal Debtor's Obligation: If the surety has to fulfill the principal
debtor's obligation (pay the debt), they acquire certain important rights:
 Right to Subrogation: The surety can be "subrogated" to the rights of the creditor. This means
they can "step into the shoes" of the creditor and recover the amount paid from the principal
debtor (Section 140).
 Right to Indemnity: The surety has the right to claim reimbursement from the principal debtor
for any amount paid to the creditor, including interest and expenses incurred (Section 141).
 Securities Held by Creditor: If the creditor held any securities (e.g., collateral) from the principal
debtor, the surety, upon fulfilling the obligation, has the right to benefit from those securities to
recover their payment (Section 141).

Famous Case Laws Highlighting Surety's Rights:

Mahant Ram Nath vs. U Ba Yi & Ors [AIR 1922 Rang 141]: This case upholds the surety's right to
subrogation after they discharge the debt owed by the principal debtor.
National Thermal Power Corporation Ltd. v Upadhya (AIR 2006 SC 1888): This case showcased how
a material alteration of the main contract (delays caused by government department) can discharge the
surety's liability.

State Bank of India vs Dharam Kumar (1998): This case highlighted the consequences of the creditor
altering the loan agreement with the principal debtor without informing the guarantor. The court ruled that
this alteration could potentially discharge the guarantor's liability, demonstrating the surety's right to be
informed about changes.

Guarantor's Defenses: Are there any defenses available to a surety when the creditor tries to enforce
the guarantee contract? Defenses like fraud, misrepresentation, or concealment of material facts by the
creditor, which could potentially affect
Liabilities of the Surety (Section 128):

1. Co-extensive Liability (Generally): The surety's primary liability is co-extensive with that of the
principal debtor (Section 128). This means they are liable to the creditor for the same amount as
the principal debtor owes, subject to the terms of the guarantee contract.
2. Secondary Liability: The surety's guarantee is a secondary obligation. The creditor must first
pursue the principal debtor for payment before holding the surety liable.
3. Independent Contract (Generally): A guarantee contract is generally considered independent of
the main contract between the creditor and debtor. This means that even if the main contract is
invalid for some reason, the guarantee contract might still be enforceable. However, there can be
exceptions depending on the specific circumstances.
4. Strict Compliance with Guarantee Terms: The surety's liability is limited to the exact terms of
the guarantee contract.
Famous Case Laws Highlighting Surety's Liabilities:
National Thermal Power Corporation Ltd. v Upadhya (AIR 2006 SC 1888): This case
showcased the concept of a material alteration discharging the surety's liability.
State Bank of India vs Dharam Kumar (1998): This case emphasized the independent nature of
a guarantee contract. Even if the main loan agreement was altered without the guarantor's
knowledge, the guarantee contract could still be valid (depending on the specific circumstances).

Discharge of the Surety (Section 130-141):

The surety can be discharged from their obligations under various circumstances:

01. Revocation by Surety (Continuing Guarantee)- [Section-130]: A surety can revoke their
guarantee for future transactions under a continuing guarantee by giving a notice to the creditor.
CASE REF= Sita Ram Gupta Vs. Punjab National Bank…

02. Death of Surety (Continuing Guarantee) [Section-131]: In the case of a continuing guarantee
(applicable to a series of transactions), the death of the surety discharges their liability for future
transactions, but not for past defaults.
03. Material Alteration of the Contract-[Section-133]: If the creditor significantly changes the terms of the
original contract with the principal debtor without the surety's consent, the surety may be discharged from
their obligation. Case Ref = Bonar Vs. Macdonald

Case Reference:
National Thermal Power Corporation Ltd. vs. M/s Gammon India Ltd. & Ors [2014 (6)
SCC 1]: This case highlights how a material alteration of the contract without the surety's
consent can discharge their liability.

04. By Release or Discharge of the Principal Debtor-[Section-134]: If the principal debtor is released, or
by any act or omission of the creditor, the legal consequence of the surety's liability ceases to exist. **NO
dicscharge after the decree is passed..
05. When creditor compounds with, gives time to, or agrees not to sue the principal debtor [Section-
135] Case Ref = Mahanth Singh Vs. U Ba Yi
06. By creditor’s act or omission impairing surety’s eventual remedy [Section-139]. Case Ref = Nirmal
Singh Kukreja Vs. Suraj Gupta.State of M.P vs Kaluram.
07. By Loss of the Security by the Creditor [Section-141]… Discharge of Principal Debtor without
creditor’s fault does not discharge the surety. Substitution of Surety without written approval of the
creditor, the surety is not discharged.

Important Considerations:
 The specific rights and liabilities of the surety, and the conditions for their discharge, will depend on the
exact wording of the guarantee contract.

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