Contract of Guarantee - Unit 2 PDF

Contract of Guarantee – Unit 2 - Abhishek Sharma Contract of Guarantee Black laws dictionary defines the tern guarantee as the assurance that a legal contract will be duly enforced. Contract of guarantee mostly required in cases when a party required a loan. The guar...

Contract of Guarantee – Unit 2 - Abhishek Sharma Contract of Guarantee Black laws dictionary defines the tern guarantee as the assurance that a legal contract will be duly enforced. Contract of guarantee mostly required in cases when a party required a loan. The guarantor in such contracts assures the creditor that the person in need may be trusted and in case of any default, he shall undertake the responsibility to pay. Section 126-147 deal with the contract of guarantee Section 126. “Contract of guarantee”.—A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. Illustration: If A gives an undertaking stating that if 300 are lent to C by B and C does not pay, A will pay back the money, it will be a contract of guarantee. Parties to the contract of Guarantee The Contract of Guarantee involves three distinct parties. 1. Principal Debtor - The person for whom the guarantee is given. This is the individual or entity primarily responsible for fulfilling the obligation (like repaying a loan or performing a duty). 2. Creditor - The person or entity to whom the obligation is owed and who receives the guarantee. 3. Surety - The person who gives the guarantee, promising to discharge the liability of the principal debtor if they fail to do so. Example- Mohan takes loan of Rs. 5 lakh from the UCO Bank. Sohan promises to UCO Bank that if Mohan fails to rupee the loan timely then he will pay. This is a contract of guarantee and Mohan is Principal debtor, UCO Bank is creditor and Sohan is surety.  Independent liability different from guarantee There must be a conditional promise to be liable on the default of the principal debtor. A liability which is incurred independently of a "default" is not within the definition of guarantee.' For example if two friends went to a shop and one of them said to the shopkeeper "Let him have the goods, 'I will be your pay master' or 'I will see you paid'." This would have been an undertaking as for himself and is not a guarantee." This principle was applied in Taylor v Lee'' decided in the US: Facts: A landlord and his tenant went to the plaintiff's store. The landlord said to the plaintiff: Mr Parker will be on our land this year, and you will sell him anything he wants, and I will see it paid. This was held to be an original promise, and not a collateral promise to be liable for the default of another and, therefore, not a guarantee  Number of Contracts In a contract of guarantee, there are three distinct contracts that form the foundation of the agreement. 1. Contract Between Creditor and Principal Debtor - This is the primary or original contract. The principal debtor agrees to fulfill an obligation (e.g., repay a loan, deliver goods, etc.) to the creditor. 2. Contract Between Creditor and Surety: This is the secondary contract. The surety promises the creditor that they will fulfill the debtor's obligation if the debtor defaults. 3. Contract Between Surety and Principal Debtor. This is an implied contract (not always formalized in writing). The principal debtor is obligated to indemnify or reimburse the surety for any payment or performance made on their behalf to the creditor.  Essential Features of Guarantee 1. Writing not necessary - Section 126 expressly declares that a guarantee may be either oral or written. But in England under the provisions of the Statute of Frauds a guarantee is not enforceable unless it is "in writing and signed by the party to be charged" 2. There should be a Principal debt - The purpose of a guarantee being to secure the payment of a debt, the existence of a recoverable debt is necessary. It is of the essence of a guarantee that there should be someone liable as a principal debtor and the surety undertakes to be liable on his default. If there is no principal debt, there can be no valid guarantee. Guarantee for void debt This was first held in the Scottish case of Swan v Bank of Scotland The payment of the overdraft of a banker's customer was guaranteed by the defendant. The overdrafts were contrary to a statute, which not only imposed penalty upon the parties to such drafts but also made them void. The customer having defaulted, the surety was sued for the loss. But he was held not liable. The court said that If no debt is due, if the banker is forbidden from having any claim against his customer, there is no liability incurred by the co-obligers" But sometimes a guarantee even for a void debt may be held enforceable. Where, for example, the directors of a company guaranteed their company's loan which was void as being ultra vires, the directors were nevertheless held liable.  The reason "may be that the voidness of a contract to guarantee the debt of a company acting ultra vires is different in its consequence from the voidness brought about by the express and emphatic language of a statute". A similar problem arises when the debt of a minor has been guaranteed. The debt being void, is the surety liable? The Court of King's Bench considered the question in Coutts & Co v Browne Lecky^" and held that no liability should be incurred by the surety. The head note to the report says: "A loan, by way of overdraft made by a bank to an infant being void under Section 1, of the Infants' Relief Act, 1874, the guarantors of the loan, where the fact of infancy is known to all parties, cannot be made liable in an action on the guarantee." In India it has been held in the case of Kashiba Bin Narsapa Nikade v Narshiv Shripat that where a minor's debt has been knowingly guaranteed, the surety should be held liable as a principal debtor himself  3. Consideration- Like every other contract, a contract of guarantee should also be supported by some consideration. A guarantee without consideration is void. But there need be no direct consideration between the surety and the creditor. S. 127 Consideration for guarantee.—Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee Illustrations - (a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is a sufficient consideration for C’s promise. (b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that, if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise. (c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.  4. Consent of the surety should not have been obtained by misrepresentation or concealment - S. 142. Guarantee obtained by misrepresentation, invalid.—Any guarantee obtained by means of misrepresentation made by the creditor or with his knowledge and assent, concerning a material part of the transaction, is invalid. S. 143. Guarantee obtained by concealment, invalid.—Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid. Illustration - A engages B as clerk to collect money for him. B fails to account for some of his receipts, and A in consequence calls upon him to furnish security for his duly accounting. C gives his guarantee for B’s duly accounting. A does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is invalid. London General Omnibus Co v Holloway - The defendant was invited to give a guarantee for the fidelity of a servant. The employer had earlier dismissed him for dishonesty, but did not disclose this fact to the surety. The servant committed another embezzlement. The surety was held not liable. Distinction between contract of indemnity and guarantee Indemnity and guarantee have this common feature that both are devices for providing protection against a probable loss. But still there are a lot of difference between the same 1. Number of Parties - In a contract of indemnity there are only two parties, namely, the indemnifier and the indemnity-holder. But there are three parties to a guarantee, the creditor, the principal debtor and the surety. It is a tripartite arrangement 2. Number of Contract -In an indemnity there is only one contract, that is, the contract of indemnity against loss between the indemnity-holder and the indemnifier. But in a guarantee there are three contracts, namely, a contract of loan between the principal debtor and the creditor; a contract of guarantee between the creditor and the surety and finally an implied contract of indemnity between the principal debtor and the surety.  3. Contingency - The liability under a contract of indemnity is contingent in the sense that it may or may not arise." Under a guarantee, on the other hand, the liability is subsisting in the sense that once a guarantee has been acted upon, the liability of the surety automatically arises, though it remains in sus pended animation till the principal debtor commits default. 4.Nature of Liability- The undertaking in a guarantee is secondary, in an indemnity it is original. The purpose of a guarantee is to support the primary liability of a third person. In an indemnity, there being no third person, the indemnifier's liability is in itself "primary". 5. Right of Recovery -In a contract of guarantee, after the surety had discharged his liability and paid to the creditor, he steps into the shoe of creditor and he can realize the payment by him from the principal debtor. In a contract of indemnity, the loss falls on the indemnifier and therefore, after the indemnifier had indemnified the indemnity holder, he cannot recover the amount from anybody.  Types of Guarantee 1. Specific Guarantee - A guarantee given for a single, specific transaction or debt.(Section 126 of the Indian Contract Act, 1872) The liability of the surety ends once the specific obligation or transaction is fulfilled. Example - A person guarantees the repayment of a ₹50,000 loan taken by another. Once this loan is repaid, the surety’s obligation is discharged. 2. Continuing Guarantee: A guarantee that extends to a series of transactions or a continuing obligation between the principal debtor and the creditor. (Section 129 of the Indian Contract Act, 1872). A guarantee of this kind is intended to cover a number of transactions over a period of time Example: A person guarantees payment for all future goods supplied on credit to a business. The guarantee remains in effect for all transactions until revoked.  Illustrations - (a) A, in consideration that B will employ C in collecting the rent of B’s zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by C of those rents. This is a continuing guarantee. 3. Limited Guarantee - A limited guarantee restricts the surety's liability to a specified amount, purpose, or time period Example: A person guarantees up to ₹5,00,000 for the loan taken by another person. The surety is not liable for any amount exceeding ₹5,00,000. (b) A guarantees payment to B, a tea-dealer, to the amount of £100, for any tea he may from time to time supply to C. B supplies C with tea to above the value of £100, and C pays B for it. Afterwards, B supplies C with tea to the value of £200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of £100. (c) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does riot pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.  Revocation of Continuing Guarantee 130.Revocation of continuing guarantee.—A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor. Illustrations: (a) A, in consideration of B’s discounting, at A’s request, bills of exchange for C, guarantees to B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards, at the end of three months, A revokes the guarantee. This revocation discharges A from all liability to B for any subsequent discount. But A is liable to B for the 2,000 rupees, on default of C. (b) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity. A is liable upon his guarantee. Once the guarantee is revoked, the surety is no longer liable for new transactions, but they must fulfill their commitment for any past obligations. 131.Revocation of continuing guarantee by surety’s death.—The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.  Surety Liability S. 128. Surety’s liability.—The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract. Illustration - A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest and charges which may have become due on it. Maharaja of Benares v Har Narain Singh, - Under the agreement in this case, and even otherwise, the surety is liable not only for the principal amount but for interest on the principal amount and charges incurred in enforcing the liability. The court held that the trial court erred in decreeing the suit against the surety for only the principal amount excluding interest and costs. Where the principal debtor acknowledges liability and this has the effect of extending the period of limitation against him the surety also becomes affected by it. (Section 18 of limitation Act)  Where the overdrafts of a company were guaranteed by the company's directors and the banker had recovered a part of the loan by disposing of certain goods belonging to the company, the Madras High Court held that the liability of the surety had gone down accordingly. Conditional Liability - Where there is a condition precedent to the surety's liability, he will not be liable unless that condition is first fulfilled. A partial recognition of this principle is to be found in Section 144 which says: Where a person gives a guarantee upon a contract that creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join. National Provincial Bank of England v Brackenbury. - The defendant signed a guarantee which on the face of it was intended to be a joint and several guarantee of three other persons with him. One of them did not sign. There being no agreement between the bank and the co-guarantors to dispense with his signature, the defendant was held not liable  Proceeding against surety without exhausting remedies against debtor. Where the liability is otherwise unconditional, the court cannot of its own introduce a condition into it. This was pointed out by the Supreme Court in Bank of Bihar Ltd v Damodar Prasad. The defendant guaranteed a bank's loan. A default having taken place, the defendant was sued. The trial court decreed that the bank shall enforce the guarantee in question only after having exhausted its remedies against the principal debtor. The Patna High Court confirmed the decree. But the Supreme Court overruled it. The court said: "The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. Is the creditor to ask for imprisonment of the principal? Is he bound to discover at his peril all the properties of the principal and sell them; if he cannot, does he lose his remedy against the surety? Has he to file an insolvency petition against the principal?  Action against principal debtor alone The creditor can proceed against the principal debtor alone. His suit cannot be rejected on the ground that he has not joined the guarantor as a defendant to the suit Suit against surety alone A suit against the surety without even impleading the principal debtor has been held to be maintainable. In this case, the creditor, in his affidavit, had shown sufficient reasons for not proceeding against the principal debtor. S. 132. Liability of two persons, primarily liable, not affected by arrangement between them that one shall be surety in other's default.—Where two persons contract with a third person to undertake a certain liability, and also contract with each other that one of them shall be liable onlyon the default of the other,the third person not being a party to such contract, the liability of each of such two persons to the third person under the first contract is not affected by the existence of the second contract, although such third person may have been aware of its existence. Illustration – A and B make a joint and Several note to C. A makes it, infact, as surety for B, and C, knows this at the time when the note is made. The fact that A, to the knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon the note  132. Liability of two persons, primarily liable, not affected by arrangement between them that one shall be surety on other’s default.— Where two persons contract with a third person to undertake a certain liability, and also contract with each other that one of them shall be liable only on the default of the other, the third person not being a party to such contract, the liability of each of such two persons to the third person under the first contract is not affected by the existence of the second contract, although such third person may have been aware of its existence. Illustration - A and B make a joint and several promissory note to C. A makes it, in fact, as surety for B, and C knows this at the time when the note is made. The fact that A, to the knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon the note. The section is based upon the principle that the liability of persons who are primarily liable as joint-debtors is not affected by any arrangement between them as to the order of their liability. A creditor is not affected by any private arrangement entered into as between his two debtors that one will be the surety of the other even if the creditor knows of this arrangement Unless there is a specific agreement between the surety and the creditor to the effect that the principal debtor alone would be liable in the first instance, the creditor can proceed against the surety to the same extent as if he were himself the principal debtor.  DISCHARGE OF SURETY FROM LIABILITY A surety is said to be discharged from liability when his liability comes to an end. The Act recognizes the following modes of discharge: 1. By revocation [S. 130] Ordinarily a guarantee is not revocable when once it is acted upon. But Section 130 provides for revocation of continuing guarantees. S. 130. Revocation of continuing guarantee.—A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor. The employment of a servant is one transaction. A guarantee for his good behavior is not a continuing one and is not revocable as long as he continues in the job. At any rate the employer is entitled to such notice as will enable him to determine the employment without liability. Nor is such a guarantee determined by the surety's death unless there is an agreement to the contrary.  2. By death of surety [S. 131] - A continuing guarantee is also determined by the death of the surety unless there is a contract to the contrary. Once again, the termination becomes effective only for the future transaction. S. 131. Revocation of continuing guarantee by surety's death.—The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions. 3. By variance [S. 133] - A surety is held discharged when, without his consent, the creditor makes any change in the nature or terms of his contract with the principal debtor." S. 133. Discharge of surety by variance in terms of contract.—Any variance, made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance Where the payment of rent was guaranteed, and the rent was increased without the consent of the surety; where the position of a partner in a firm was guaranteed and the business of the firm was extended without knowledge of the surety, the sureties were held to be discharged. Illustrations (a) A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C contract, without A’s consent, that B’s salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss.  (b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability under his guarantee, though the misconduct of B is in respect of a duty not affected by the later Act. (c) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s becoming surety to C for B’s duly accounting for moneys received by him as such clerk. Afterwards, without A’s knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary. A is not liable for subsequent misconduct of B. (d) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil supplied by C to B on credit. Afterwards B becomes embarrassed, and, without the knowledge of A, B and C contract that C shall continue to supply B with oil for ready money, and that the payments shall be applied to the then, existing debts between B and C. A is not liable on his guarantee for any goods supplied after: this new arrangement. (e) C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C pays the 5,000 rupees to B on the 1st January. A is discharged from his liability, as the contract has been varied, inasmuch as C might sue  One of the questions that concerns the courts is that where a variation is not substantial or material, or is beneficial to the surety, will he be discharged? M.S. Anirudhan v Thomco's Bank Ltd. - The defendant guaranteed the repayment of a loan of Rs 20,000 given by the plaintiff bank to the principal debtor. The guarantee paper showed the loan to be Rs 25,000. The bank refused to accept. The principal then reduced the amount to Rs20,000 and without intimation to the surety gave it to the bank which was then accepted. The principal debtor failed to pay and the bank sued the surety. The question was whether the alteration had discharged him It was held by a majority that the surety was not discharged. Kapur J and Hidayatullah J (afterwards CJ) were of this view, but Sarkar J dissented. Hidayatullah j (afterwards CJ) considered the authorities.  Advance authorization of alteration An authority given by the surety in advance enabling the creditor and the principal debtor to make any alteration in the terms and conditions of the transaction guaranteed would be contrary to the provision of Section 133 and, therefore, of no effect. This means that a blanket, pre-emptive consent by the surety for any future changes in the agreement cannot override the provisions of the law. The surety must be actively consulted and give real-time consent to any significant changes in the agreement between the creditor and the principal debtor. Consent to an alteration in the contract between the creditor and the principal debtor may be given either before (prior) the proposed alteration or after (subsequent) the alteration has been made. However, this consent must be tied to a specific alteration, not a vague or generalized authorization. For example, if the creditor intends to extend the repayment period for the principal debtor and the surety consents to this before it is finalized, the surety remains liable.  4. Release or discharge of principal debtor [S. 134] 134.Discharge of surety by release or discharge of principal debtor.—The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. The section provides for two kinds of discharge from liability In the first place, if the creditor makes any contract with the principal debtor by which the latter is released, the surety is discharged. Where, for example, the creditor accepts a compromise and releases the principal debtor, the surety is likewise released. Illustrations (a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to them his property in consideration of their releasing him from their demands. Here B is released from his debt by the contract with C, and A is discharged from his suretyship.  Effect of Debt Relief Acts.—Where the liability of the principal debtor is reduced under the provisions of a statute, an important question arises whether the liability of the surety is also diminished thereby. the Nagpur High Court held that the intention of the statute is to relieve the principal debtor and not the surety. But a Full Bench of the Madras High Court, applying the provisions of the Madras Agriculturists' Debt Relief Act, 1938 held that "the surety is liable only for the reduced amount". Application of insolvency laws - The Supreme Court has laid down that though under Section 134 the surety is discharged by release or discharge of the principal debtor, a dis charge which the principal debtor may secure by reason of winding up or insolvency does not absolve the surety of his liability. (ii) Act or omission - The second ground of discharge provided in Section 134 is that when the creditor does "any act or omission the legal consequence of which is the discharge of the principal debtor", the surety would also be discharged from his liability. Illustrations - (b) A contracts with B to grow a crop of indigo on A’s land and to deliver it to B at a fixed rate, and C guarantees A’s performance of this contract. B diverts a stream of water which is necessary for the irrigation of A’s land and thereby prevents him from raising the indigo. C is no longer liable on his guarantee. (c) A contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber. C is discharged from his suretyship.  5. Composition, extension of time and promise not to sue [S. 135] 135. Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor.—A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract. Composition - If the creditor makes a composition with the principal debtor, without consulting the surety, the latter is discharged. Composition inevitably involves variation of the original contract, and, therefore, the surety is discharged. Promise to give time - When the time for the payment of the guaranteed debt comes, the surety has the right to require the principal debtor to pay off the debt. Accordingly, it is one of the duties of the creditor towards the surety not to allow the principal debtor more time for payment Promise not to sue - If the creditor under an agreement with the principal debtor promises not to sue him, the surety is discharged. "The main reason is that a surety is entitled at any time to require the creditor to call upon the principal debtor to pay offthe debt" when it is due and this right is positively violated when the creditor promises not to sue the principal debtor.  S. 136. Surety not discharged when agreement made with third person to give time to principal debtor.—Where a contract to give time to the principal debtor is made by the creditor with a third person, and not with the principal debtor, the surety is not discharged. Illustration - C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to give time to B. Ais not discharged. S. 137. Creditor's forbearance to sue does not discharge surety. —Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety. Illustration- B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from his suretyship. 6. By impairing surety's remedy [S. 139] S. 139. Discharge of surety by creditor's act or omission impairing surety's eventual remedy.—If the creditor does any act which is inconsistent with the right of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.  Illustrations (a) B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain stages. A becomes surety to C for B's due performance of the contract. C, without the knowledge of A, prepays to B the last two instalments. A is discharged by this prepayment. (b) C lends money to B on the security of a joint and several promissory note made in C’s favour by B, and by A as surety for B, together with a bill of sale of B’s furniture, which gives power to C to sell the furniture, and apply the proceeds in discharge of the note. Subsequently, C sells the furniture, but, owing to his misconduct and wilful negligence, only a small price is realized. A is discharged from liability on the note. (c) A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B promises on his part that he will, at least once a month, see M make up the cash. B omits to see this done as promised, and M embezzles. A is not liable to B on his guarantee. A surety is entitled, after paying off the creditor, to his indemnity from the principal debtor. If the creditor's act or omission deprives the surety of the benefit of this remedy, the surety is discharged.  Thus, where the integrity of a cashier is guaranteed and the employer undertakes to check his work once in a month but neglects to do so, the cashier embezzles, the surety is not liable. The same duty requires the creditor to preserve the securities, if any, which he has against the principal debtor. If he loses or parts with the securities, the surety is discharged to that extent. Another suitable illustration is Darwen & Fearce, re:, The principal debtor was a shareholder in a company. His shares were partly paid and the payment of the unpaid balance was guaranteed by the surety. The shareholder defaulted in the payment of calls and the company forfeited his shares. By reason of the forfeiture the shares became the property of the company. If they had not been forfeited they would have belonged to the surety on payment of the outstanding calls. Thus, the forfeiture deprived the surety of his right to the shares and he was accordingly discharged. A bank granted a loan on the security of the stock in godown. The loan was also guaranteed by a surety. The goods were lost from the godown on account of the negligence of bank officials. The surety was discharged to the extent of the value of the stock so lost.  Right of Surety against Debtor A surety has certain rights against the debtor, creditor and co-sureties. Rights against principal debtor 1. Right of subrogation [S. 140] - S. 140. Rights of surety on payment or performance.—Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. The surety steps into the shoes of the creditor. The creditor had the right to sue the principal debtor. "If the liability of the surety is coextensive with that of the principal debtor, his right is not less coextensive with that of the creditor after he satisfies the creditor's debt. This may not always be to the advantage of the surety. Where the principal debtor becomes insolvent, the surety cannot ask the creditor first to pursue his remedy against the principal debtor. The Supreme Court has pointed out that even then the surety should pay.  Under the right of subrogation the surety may get certain rights even before payment. The Calcutta High Court examined this possibility in a case where the surety found, that the amount having become due, the principal debtor was disposing of his personal properties one after the other lest the surety, after paying, may seize them and sought a temporary injunction to prevent the principal debtor from doing so. The court in the case of Mamata Ghose v United Industrial Bank Ltd held that if in any suit it is proved that the defendant threatens, or is about to remove or dispose of his property with intent to defraud his creditors, the court may grant a temporary injunction to restrain such act or to give such other order for the purpose of staying or preventing the removal or disposition of the property. 2. Right to indemnity [S. 145] S. 145. Implied promise to indemnify surety. — In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully.  Illustrations (a) B indebted to C, and A is surety for the debt. C demands payment from A, and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt. {b) C lends B a sum of money, and A, at the request of B, accepts a bill of exchange drawn by B upon A to secure the amount. C, the holder of the bill, demands payment of it from A, and, on A's refusal to pay, sues him upon the bill. A, not having reasonable grounds for so doing, defends the suit, and has to pay the amount of the bill and costs. He can recover from B the amount of the bill, but not the sum paid for costs, as there was no real ground for defending the action. (c) A guarantees to C, to the extent of 2000 rupees, payment for rice to be supplied by C to B. C supplies to B rice to a less amount than 2000 rupees, but obtains from A payment of the sum of 2000 rupees in respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied  Right of surety against Creditor 1. Right to securities [S. 141] S. 141. Surety's right to benefit of creditor's securities. — A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts, with such security, the surety is discharged to the extent of the value of the security. (a)C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture. (b)C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance from A. C afterwards takes B’s goods in execution under the decree, and then, without the knowledge of A, withdraws the execution. A is discharged. (c)A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives up the further security. A is not discharged. "It is the duty of the creditor to keep the securities intact; not to give them up.  Where certain bills of exchange were given by way of collateral security and they being dishonoured, the creditor made them useless by not doing anything within the period of limitation, the surety was discharged to the extent of their value; If the securities are burdened with further advances it will not affect the rights of the surety. In Forbes v Jackson - The principal debtor borrowed £200 on mortgaging his leasehold premises and a policy of life insurance, the defendant joining as a surety. The principal debtor borrowed further sums from the creditor on the same securities, the surety knowing nothing about it. The principal debtor failed to pay. The surety paid off £200 and interest and claimed both the securities. The creditor demanded payment of the further advances also. But it was held- that the surety's right to the securities was not affected by the further advances and, therefore, he was entitled to both the securities. when the surety has guaranteed only a part of the debt and consequently even when he has paid all that he was liable for, the creditor's claim against the principal debtor is not yet fully satisfied. Who will get the security  The Bombay High Court considered the question in Goverdhandas Goculdas Tejpal v. Bank of Bengal - Certain mortgages were given to a bank as security for debts amounting to Rs 3,15,000. The plaintiff, who was a surety in part, paid Rs 1,25,000 and claimed that he was entitled to that extent to stand in the place of the Bank and to receive a share of the proceeds of the said securities proportioned to the sum which he had paid. Farran J considered the English authorities and following them, said: "A surety who has paid the debt, which he has guaranteed, has a right to the securities held by the creditors, because as between the principal debtor and surety the debtor is under an obligation to indemnify the surety. The equity between the creditor and the surety is that the creditor shall not do anything to deprive the surety of that right. But the creditor's right to hold his securities is paramount to the surety's claim upon such securities, which only arises when the creditor's claim against such securities has been satisfied." The Madras High Court has differed not only from this opinion in the case of Parvateneni Bhushayya v Potluri Suryanarayana - The Imperial Bank advanced three different loans to a person with three different sureties for each loan. The principal debtor did not repay the loans in time and, therefore, the bank obtained mortgage of his property. Ultimately the bank had to file suits and three different decrees were obtained against the principal debtor and the surety on each loan. The first two sureties paid off the decrees for which they were sureties but the third did not. The question on these facts was whether the first two sureties who had paid off their obligations were entitled to a proportionate share in the mortgage, while a part of the bank's claim against the principal was still unsatisfied. Krishnaswami Ayyanger J held that they were so entitled. He said: "Section 140... expressly says that the surety upon payment of all that he is liable for is invested, that is, immediately invested, with all the rights which the creditor had against the principal debtor. The condition laid down by the section for this right to arise is the payment by the surety of all that he is liable for, and not the payment of all that may be due to the creditor who holds the securities.  2. Right to share reduction - The right to share in reduction refers to the surety's entitlement to benefit from any reduction in the creditor's loss due to payments recovered from the principal debtor. This ensures that the surety is not unfairly burdened with the debt when the creditor has partially recovered their losses through other means, such as bankruptcy proceedings. This right may be illustrated by the case of Hobson v Bass: J gave a guarantee to B in the following words: "I hereby guarantee to you the payment of all goods you may supply to E.H., but so as my liability to you under this or any other guarantee shall not at any time exceed the sum of £250." E gave a similar guarantee. B supplied goods to E.H., to the amount of £657. E.H. became bankrupt. B proved the whole sum in the insolvency of E.H. and then called on the guarantors who paid him £250 each. Subsequently B received from the receiver a sum of 2s, and. Id... in the pound on £657. It was held that each of the guarantors was entitled to a part of the dividend bearing to the whole the same proportion as £250 to 657.  3. Right of set-off If the creditor sues the surety, the surety may have the benefit of the setoff, if any, that the principal debtor had against the creditor. The right of set-off allows the surety to use any claims or defenses that the principal debtor could have used against the creditor. Essentially, the surety can "step into the shoes" of the debtor and raise any counterclaims or defences that the debtor might have had if the creditor sues the surety. For example, if A, the principal debtor, borrows ₹1,00,000 from B, the creditor, and C guarantees the repayment as a surety, but A has delivered goods worth ₹20,000 to B, which B has not yet paid for, the surety can claim the right of set-off. When B sues C for the full loan amount of ₹1,00,000, C can argue that A’s liability should be reduced by ₹20,000, as B owes this amount to A for the unpaid goods. Therefore, the surety’s liability would only extend to the remaining ₹80,000.  Right of surety against co-surety Right to contribution [Ss. 146-147] S. 146. Co-sureties liable to contribute equally.—Where two or more persons are co- sureties for the same debt or duty, either jointly or severally, and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor. Illustrations - (a) A,B and C as sureties to D, for the sum of 3000 rupees lent to E. E makes default in payment. A,B and C are liable, as between themselves, to pay 1000 rupees each. (b) A, B and C are sureties to D for the sum of 1000 rupees lent to E, and there is a contract between A, B and C that A is to be responsible to the extent of one-quarter, B to the extent of one-quarter, and C to the extent of one-half. E makes default in payment. As between the sureties, A is liable to pay 250 rupees, B 250 rupees and C 500 rupees. Where there are 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.  S. 147. Liability of co-sureties bound in different sums.— Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit. Illustrations [a] A,B and C as sureties for D, enter into three several bonds each in a different penalty, namely, in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for D's duly accounting to E. D makes default to the extent of 30,000 rupees. A,B and C are liable to pay 10,000 rupees. {b) A,B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 10,000 rupees, Bin that of 20,000 rupees, C in that of 40,000 rupees conditioned for D's duly accounting to E.D makes default to the extent of 40,000 rupees. A is liable to pay 10,000 rupees, and Sand C15,000 rupees each. (c) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for D's duly accounting to E. D makes default to the extent of 70,000 rupees. A,B and C have to pay each the full penalty of his bond. 138.Release of one co-surety does not discharge others.—Where there are co-sureties, a release by the creditor of one of them does not discharge the others; neither does it free the surety so released from his responsibility to the other sureties