A Detailed Guide To Rights Of Surety

The Rights of Surety play a pivotal role in contracts of guarantee under the Indian Contract Act of 1872. These provisions safeguard the interests of the surety, ensuring they are not unfairly burdened beyond their legal obligation. A surety acts as a guarantor for the principal debtor, stepping in to fulfill the debtor’s obligations in case of default. However, this responsibility comes with specific rights that protect the surety’s position and enable them to seek recourse against the principal debtor or co-sureties.

In this article, we delve into the legal framework governing the rights of surety, explore the various rights enshrined under the Indian Contract Act, and analyze their practical implications with relevant case laws.

Key Legal Provisions Governing The Rights Of A Surety

Sections 126 to 147 of the Indian Contract Act of 1872 rule the rights and liabilities of a surety. These passes define the surety's responsibility and the certain rights available to them.

Rights Of A Surety

The rights of a surety can be classified into the following categories:

Right of Subrogation

Once the surety steps in and pays the debtor's debt, you are subrogated into the creditor’s shoes. The surety can then exercise all of the rights the creditor had over the principal debtor and is entitled to all the assets the principal debtor owned.

Legal Basis

Under the Indian Contract Act, Section 140, the surety is entitled to all the rights of the creditor as long as the debt does not discharge him.

Practical Example

Surety may repay the debt owed by a debtor, recovering repayment from the debtor as the creditor might have done.

Also Read : What Is Contract Of Guarantee?

Indemnity From The Principal Debtor

Under the guarantee, a surety has the right to recover from the principal debtor any amount he has paid to the creditor under the guarantee.

Legal Basis

Section 145 of the Indian Contract Act provides that the surety is liable in case of any contract between the surety and the principal with regard; otherwise, the principal debtor is bound to indemnify the surety.

Practical Example

In the event the surety settles a debt of $10,000 on behalf of the debtor, the debtor owes the surety that amount.

Right To Securities Held By the Creditor

The surety gets all securities or collateral the creditor holds from the principal debtor when the surety pays the creditor.

Legal Basis

Under Section 141 of the Indian Contract Act, the surety shall have the benefit of any security applied by a creditor, whether or not the surety knew of the same.

Practical Example

If the creditor holds a piece of collateral, the surety is entitled to the right of compensation over the property after honoring the obligation.

Right To Be Discharged

The surety has the right to be discharged from their liability under specific circumstances, such as:

• Variance in Contract Terms: By the surety being released from the contract for consideration without such surety’s consent, the surety may be discharged.
• Release of Security: If the debtor’s property is freed without the surety’s knowledge or consent by the creditor holding the securities against the debtor.
• Fraud or Misrepresentation: Yet if it was obtained by fraud or misrepresentation.

Legal Basis

The Indian Contract Act contains in sections 130 and 133 circumstances under which surety can be discharged.

Right To Contribution From Co-Sureties

There are two situations regarding multiple sureties. If there are multiple sureties, only one surety is paid to the extent of his liability over the liability paid by the co-sureties, and only when their contributions may not cover the balance, the remaining co-sureties must pay proportionately, and the surety who pays more than his liability can seek contribution from the co-sureties.

Legal Basis

The liability of co-sureties is to be equal, unless the contrary is expressly provided in the contract by Section 146 of the Indian Contract Act.

Practical Example

Three sureties who guarantee a debt of ₹30,000 may recover ₹10,000 each against the other two sureties if one surety pays the whole amount.

Right To Refuse Liability Beyond The Contract

The surety’s liability amounts only to the extent that it has contracted to be bound and can be no greater. That means they can’t be expected to take on any obligations except what is written in the agreement.

Legal Basis

Section 128 of the Indian Contract Act states that the liability of a surety is co-extensive with that of the principal debtor so far as regards the extent of the contract.

Limitations On The Rights Of A Surety

While the law provides extensive rights to the surety, there are certain limitations:

• Creditor’s Actions: Accordingly, the sureties’ rights may be affected if the creditor acts negligently.
• Waiver: If the surety does waive those rights in the contract, they cannot do so and later claim them.
• Time-Barred Claims: If a surety doesn’t file within the time that the law requires, its claim may be limited.

Judicial Precedents To Rights Of Surety

A few case laws are as follows:

State Of Madhya Pradesh vs. Kaluram (1966)

Here the auctioning of fallen trees was taken up by a forest officer of Madhya Pradesh. The highest bidder Jagatram won the auction. Jagatram had agreed to make payments in installments with the Madhya Pradesh government. Nathuram and Kaluram were sureties that would pay if Jagatram failed to pay.

The first installment was made by Jagatram, and he did not pay the second one. This resulted in the sureties having to pay the remaining payment. But the Supreme Court ruled that the authorities had blundered.

Jagatram was able to extract the trees from the forest and pocket the rest of the money. This error was the creditor's fault, so the sureties could not be charged with the remaining amount.

Associated Industries Pvt. Ltd. vs. Rajappan (1990)

In the case of Rajappan vs. Associated Industries Pvt Ltd (1990), a guarantee agreement was entered. The first defendant (at the time the guarantor) left the contract unsigned; later the non-guarantor (second defendant) agreed to sign. When the debtor failed to repay the debt, the creditor asked the guarantor to pay the amount. The guarantor refused, saying that he had never signed the agreement.

In the case of the Kerala High Court, the guarantor was found liable because implied consent was sufficient. The main point of this case is that lack of signature does not discharge liability unless it is shown that there was no express consent.

Conclusion

Understanding the rights of a surety under the Indian Contract Act of 1872 is essential for ensuring fair and just outcomes in contractual relationships. The surety holds several critical rights, such as the right of subrogation, indemnity, and discharge, aimed at protecting their position from unjust obligations. However, these rights are not without limitations, and certain conditions, like creditor negligence or waiver, may affect their enforceability. A thorough comprehension of these provisions helps ensure that sureties are treated fairly while safeguarding the interests of both creditors and debtors.

FAQs

A few FAQs based on rights of surety are as follows:

Q1. How does the right of subrogation work for a surety?

Under the Indian Contract Act, Section 140, a surety gains the rights of the creditor after paying off the debtor’s obligation, allowing them to recover payments from the principal debtor.

Q2. Can a surety be discharged from liability?

Yes, sureties can be discharged under certain conditions such as variations in contract terms, release of security without consent, or fraud/misrepresentation by the creditor.

Q5. What happens if there are multiple sureties?

In case of multiple sureties, they have a right to seek contribution from each other if one surety pays more than their proportionate share of the debt.