Surety / Guarantee under Indian Contract Law
Description: In Indian Contract Law, a contract of guarantee (Sections 126–147, Indian Contract Act, 1872) is an agreement where a surety promises to discharge the liability of a principal debtor if the debtor defaults. The surety’s liability is secondary but legally enforceable.
📖 Definition and Parties
- Section 126: A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.
- Parties involved:
- Surety: The person who gives the guarantee.
- Principal Debtor: The person whose default is guaranteed.
- Creditor: The person to whom the guarantee is given.
Example: If A lends ₹10,000 to B, and C promises to repay if B defaults, C is the surety, B is the principal debtor, and A is the creditor.
⚖️ Essentials of a Valid Guarantee
- Tripartite Agreement: Consent of all three parties.
- Existence of a Debt or Liability: The debtor must owe a legally enforceable obligation.
- Consideration (Section 127): Any act or promise for the benefit of the principal debtor is sufficient consideration for the surety.
- Free Consent: No misrepresentation or concealment of material facts.
- Form: Can be oral or written.
- Lawful Object: Must not be against public policy or unlawful.
🔑 Nature of Surety’s Liability
- Co-extensive with Principal Debtor (Section 128): The surety is liable to the same extent as the debtor unless otherwise agreed.
- Secondary Liability: Surety’s liability arises only when the principal debtor defaults.
- Continuing Guarantee (Section 129): Extends to a series of transactions until revoked.
- Revocation: By notice (Section 130), by death of surety (Section 131), or by discharge under law.
🛡️ Rights of the Surety
- Against Principal Debtor:
- Right of Subrogation (Section 140): After paying the creditor, surety steps into creditor’s shoes.
- Right of Indemnity (Section 145): Surety can recover from debtor all sums paid under the guarantee.
- Against Creditor:
- Right to securities held by creditor (Section 141).
- If creditor loses securities without surety’s consent, surety is discharged to that extent.
- Against Co-sureties (Sections 146–147):
- Equal contribution unless otherwise agreed.
- Co-sureties share liability proportionately.
🚪 Discharge of Surety’s Liability
- By Revocation: Notice or death.
- By Conduct of Creditor: Variance in contract terms without surety’s consent (Section 133), release of principal debtor (Section 134), creditor’s act impairing surety’s remedy (Section 139).
- By Invalidity: Misrepresentation (Section 142) or concealment of material facts (Section 143).
- By Performance: When the principal debtor fulfills the obligation.
📌 Distinction: Guarantee vs. Indemnity
| Aspect | Guarantee | Indemnity |
|---|---|---|
| Parties | 3 (surety, debtor, creditor) | 2 (indemnifier, indemnified) |
| Liability | Secondary | Primary |
| Purpose | To secure creditor against debtor’s default | To protect against loss |
| Example | C guarantees B’s loan to A | X promises to indemnify Y against loss from a contract |
🏛️ Key Case Laws
- State of M.P. v. Kaluram (1967): Surety’s liability is strict and co-extensive.
- Bank of Bihar v. Damodar Prasad (1969): Creditor need not exhaust remedies against debtor before suing surety.
- Amrit Lal Goverdhan Lalan v. State Bank of Travancore (1968): Surety entitled to benefit of securities held by creditor.
✅ Summary
A contract of guarantee under Indian law provides creditors with additional security. The surety’s liability is co-extensive with the debtor, but the law balances this by granting the surety strong rights of indemnity, subrogation, and contribution.
Co-extensive liability illustrated: