Rights of Surety in a Contract of Guarantee
Rights of Surety in a Contract of Guarantee
1. Introduction
A contract of guarantee is a tripartite agreement where the surety promises to discharge the liability of the principal debtor if the latter defaults. The surety’s position is unique because their liability is secondary and contingent upon the default of the principal debtor.
The rights of surety are meant to protect them from undue loss and ensure fairness in enforcing the guarantee.
2. Definition of Surety
A surety is a person who assures the creditor that the principal debtor will fulfill their obligation.
If the principal debtor fails, the surety becomes liable to pay or perform.
3. Rights of Surety
The rights of a surety are mainly derived from the Indian Contract Act, 1872 (Sections 128 to 147) and judicial precedents.
3.1 Right to be Discharged upon Variation of Contract
If the terms of the contract between the creditor and principal debtor are materially altered without the surety’s consent, the surety is discharged.
This is because the surety guarantees the original contract and any change increases their risk without their agreement.
Case Law:
Union of India v. Raman Iron Foundry (AIR 1974 SC 1590)
The Supreme Court held that any material alteration without surety's consent discharges the surety.
3.2 Right to Benefit of Creditor’s Securities
The surety has the right to claim benefit from securities held by the creditor for the principal debtor's debt.
The creditor cannot recover from the surety without first exhausting securities.
Case Law:
Bank of India v. Jagdish Singh (AIR 1969 SC 162)
The Court held the creditor must first realize securities before suing surety.
3.3 Right to Subrogation
Once the surety pays the creditor, they step into the shoes of the creditor.
The surety can exercise all rights, remedies, securities, or guarantees that the creditor had against the principal debtor.
Case Law:
Pandurang v. Rambhau AIR 1917 Bom 170
The surety is entitled to be subrogated to the rights of the creditor after discharge of debt.
3.4 Right to Indemnity from Principal Debtor
The surety can recover the amount paid from the principal debtor.
This right arises because the surety discharges the debtor’s liability.
Case Law:
Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway Petroleums (2003) 3 SCC 569
The surety has the right of indemnity against the principal debtor.
3.5 Right to Receive Notice of Default
The surety must be given notice of default by the principal debtor.
Failure to provide notice can discharge the surety from liability.
Case Law:
K. Gopal Iyer v. R. Krishnamurthy AIR 1964 SC 993
The surety’s liability depends on timely notice of default.
3.6 Right to Benefit of Time or Extension Granted to Principal Debtor
If the creditor grants time or indulgence to the principal debtor without the surety’s consent, the surety is discharged.
Such extension alters the surety’s risk.
Case Law:
Tara Chand v. Deenanath AIR 1954 SC 549
Extension of time without surety's consent discharges surety.
3.7 Right to Require Creditor to Proceed Against Principal Debtor First
The creditor must exhaust remedies against the principal debtor first before suing the surety, especially if securities exist.
This protects surety from premature litigation.
4. Summary of Rights
| Right | Explanation |
|---|---|
| Discharge on alteration | Discharged if contract terms changed without consent |
| Benefit of securities | Can claim benefit of securities held by creditor |
| Subrogation | Can exercise creditor's rights after payment |
| Indemnity from principal debtor | Can recover paid amount from principal debtor |
| Notice of default | Must be given notice of default |
| Benefit of time/extension | Discharged if creditor extends time without consent |
| Require creditor to sue debtor first | Creditor must exhaust remedies against debtor before surety |
5. Conclusion
The rights of surety serve as essential protections for individuals who guarantee the obligations of others. These rights ensure the surety is not unfairly burdened or exposed to unexpected risks beyond the original contract. They also balance the interests of the creditor, principal debtor, and surety, promoting fairness and clarity in guarantee contracts.
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